Funder Influence, Not Control: Settlement Decisions in the Model Contract

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As Professor Sebok rightly flagged, how much control a funder receives in the financing deal has champerty implications. If assigning claims is barred by New York statute (at least to some extent), what constitutes assigning claims? We believe that NY Courts are likely to view claim assignment not simply as a formal matter hinging on a contract’s invocation of assignment language, but rather are likely to look for “de facto” assignment created by the transfer of control of the litigation. As a result, the model contract is careful not to transfer control of the litigation to the funder, at least as we understand the term ’control.’

If giving funder control of the litigation leads to a champerty result, then giving the funder control of settlement is the biggest champerty risk a contract could run. After all, how could someone claim “control” of a litigation unless they could control the litigation’s resolution? As a result, the model does not give the funder control of settlement decisions. In taking that position, we are perhaps conservative, as the NYC Bar Association believes a plaintiff can agree to transfer settlement control to the funder. That formal opinion, however, avoids engaging in a champerty analysis.

We define control of the settlement decision as a contractual requirement that the plaintiff get the funder’s consent before making or accepting a settlement offer. Accordingly, the model does not involve funder consent. However, the model does enable the funder to influence settlement decisionmaking. Such influence is appropriate given the type of funder we envision–a specialized firm that can and wants to take an active role in the litigation and has the litigation expertise to justify such role. Indeed we believe active funders can use their expertise to make significant non-cash contributions, just as VC funders can.

To give funders influence but not control, the model essentially gives the funder notice and an opportunity to be heard before the plaintiff makes settlement decisions. Specifically, the model says:

3.1.5 Funder Participation in Settlement Decisionmaking:

(a) Plaintiff will immediately notify Funder upon receiving a settlement offer, providing the Funder with the complete details of the offer in such notice. Plaintiff will not respond to the settlement offer until after giving good faith consideration to the Funder’s analysis of the offer, provided that the Funder communicates its analysis within [x] days of receiving notice of the offer.

(b) Plaintiff will not make a settlement offer without first notifying the Funder of the proposed offer, including its complete details, and giving good faith consideration to Funder’s analysis, provided that the Funder communicates its analysis within [x] days of receiving the proposed offer.

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