Litigation financing companies operate in many states of the USA and provide their financing services to clients.
As the industry is still in its nascent stage, there are no meaningful laws and rules enacted by the federal authorities to ensure uniformity in all state practices concerning lawsuit funding arrangements. Some states have passed laws to register within their jurisdiction. Whereas other states have no statutory regulations, and the courts of law are evaluating the legality of the lawsuit funding based on the existing legal doctrines.
The courts of Minnesota have been adjudicating cases involving litigation financing on numerous occasions. In one of the cases, Minnesota, Supreme Court considered the application of the doctrine of champerty to litigation funding. The Supreme Court held that private litigation finance did not violate the law against the champerty and passed a judgment in favor of litigation finance companies. Now, the Supreme Court is considering whether the financing agreement in the case ” Maslowski v. Prospect Funding Partners, LLC, et al. v. James Schwebel, Esq., et al.” violates Minnesota’s usury statute.
According to the case facts, Pamela Maslowski met with a car accident in 2012 and entered into a non-recourse lawsuit financing arrangement to fund her personal injury lawsuit in exchange for money upfront.
The litigation funder paid Maslowski nearly $7,500 and obtained an interest (including capital) of up to $25,000 dollars in proceeds from the lawsuit. In this arrangement, Maslowski not only agreed to share future settlement proceeds but also agreed to repay the funder the repurchase rate, which amounted to the money she was lent plus 60% interest annually, in case of a successful conclusion of the case. Most importantly, unlike banks, she would not have to pay anything back if she did not win the case, made no monthly payments, and did not have a credit or income check.
In addition, Maslowski further agreed to hire a new or additional attorney in consultation with her lending agreement, and the new attorney will be bound to sign a contract to remit funds from any judgment to the lender.
The agreement contains a “liquidated damage provision,” which provides ramifications of a breach of contract. It held that Maslowski would pay the settlement lender twice the purchase amount in case of contract violation. The personal injury lawsuit was settled in 2015 for $70,000. After the conclusion of the suit, Maslowski sought to avoid the litigation-financing agreement with the funder.
The settlement lending company approached the courts of law to enforce the contract with Maslowski, but the district court and the Court of Appeal passed a judgment in favor of Maslowski and held that the litigation funding agreement was not enforceable as it violates the common law prohibition against champerty.
The case landed in the Minnesota Supreme Court, which reversed the decisions of the Court of Appeal and abolished the doctrine of champerty in Minnesota. The decision of the honorable supreme court was considered a positive development for the future of lawsuit financing companies as it held non-recourse agreements enforceable within its jurisdiction.
After the reversal of a decision by the Supreme Court, the case was remanded to the District Court. In this, Maslowski raised another challenge to the litigation financing agreement and held that the contract is not enforceable on the grounds of being usurious. After taking into consideration the arguments of both sides, the District Court held that the liquidated damages provision and repurchase rate were unconscionable and unenforceable.
The Court of Appeal agreed with the decision of the District Court. With respect to the liquidated damages provision, the Court of Appeal found that “the threat of an absolute obligation to repay 200% of the entire purchase amount immediately upon breach” has been added to ensure the performance of the contract and not to compensate prospects.
The Court of Appeal reiterated that the provision of the contract to notify the under before engaging any lawyer interferes with his right to counsel and amounts to undue influence of the suit.
As far as the “repurchase rate” is concerned, the Court of Appeal confirmed the lower court’s finding that, despite the terms of the contract that it is not a loan but a sale transaction, the true nature of the agreement is that of a loan and not a mere sale transaction. Hence, the usury statute and the 8% cap on interest under the law are applicable to the contract.
The decision of the Court of Appeal is challenged in the Minnesota Supreme Court. The question is whether the Supreme Court will uphold the applicability of the Minnesota usury statute to litigation-financing agreements or reject it. As far as the precedents of other state courts are concerned, there is no uniformity, and different courts have treated the subject differently.
In Anglo-Dutch Petroleum Intern. Inc. v. Haskell, the Texas Court of Appeals held that litigation funding is not usurious. In contrast, the Michigan court has struck down lawsuit funding unenforceable where the interest charged exceeded that of a permissible limit set by the Michigan usury statute.