Other People's Money: the Ethics of Litigation Funding - Douglas R. Richmond

• Jurisdiction: United States,Federal
• Publication year: 2005
• Citation: Vol. 56 No. 2

Other People's Money: The Ethics of Litigation Fundingby Douglas R. Richmond^*

I. Introduction

Litigation can be expensive, sometimes incredibly expensive. There are investigators to employ, expert witnesses to compensate, court reporters to pay, documents to photocopy or electronically image, travel expenses, demonstrative evidence to create, and so on. An attorney's time itself is valuable. A party's time is also valuable, and plaintiffs who are disabled as a result of injuries they have sustained may need money to live on.¹ As a result, a wealthy litigant, who can outspend a poorer litigant, is generally at an advantage and may be able to obtain a favorable settlement through attrition.²

This litigation reality is perceived to be a problem by some commentators because justice ought not follow wealth.³ The equalizer in the civil justice system, of course, is the contingent fee method of attorney compensation. While contingent fees address attorney compensation issues, they do not aid a plaintiff s attorney when it comes to funding litigation expenses, nor do they help a plaintiff with the costs of daily living⁴ Litigation funding companies fill this void.' Litigation funding companies may loan money to plaintiffs for living expenses or to attorneys to fund case expenses.⁶ For example, a litigation funding company may agree to loan a plaintiff $10,000 in exchange for the first $25,000 of any settlement or judgment received within a specified time. Alternatively, a litigation funding company might advance money for expenses to an attorney. Upon recovery the attorney will repay the amount funded plus a fee equal to one dollar for every dollar of funding provided. Thus, a litigation funding company that advances $50,000 to a successful attorney will recoup its investment plus a $50,000 fee. All such loans or advances, whether to plaintiffs or attorneys, are nonrecourse. The litigation funding company's recovery is limited to any settlement or judgment obtained, and the company may not seek repayment from the plaintiff's or attorney's other assets.⁷

Litigation funding has emerged as a new financial services industry. Litigation funding companies are best thought of as specialized investors or lenders for several reasons.

First, with respect to plaintiffs, most traditional lenders are unwilling to lend money with only a potential litigation recovery as collateral because such loans are deemed to be too risky.' There is no way to value a plaintiff's claim or lawsuit in the same way that a business can be valued. Additionally, loan officers are usually incapable of assessing the value of a claim or suit. Such evaluations are the domain of experienced trial lawyers and insurance claim adjusters.

Second, regarding financing plaintiffs' attorneys, although some traditional lenders are willing to do so,⁹ many are unwilling to provide funding because of associated economic or financial risks and uncertainties. Additionally, the lender may have no means of valuing a particular attorney's varied cases. Unlike attorneys who derive the majority of their income from hourly billing or flat fees, plaintiffs' attorneys dependent upon contingent fees have no accounts receivable, and therefore cannot tap into many lending resources.¹⁰ In the same vein, it is difficult for a lender to be properly secured when lending to lawyers who derive their income from contingent fees because security interests in their anticipated recoveries are not easily enforceable. Banks that are willing to extend credit to plaintiffs' attorneys often have burdensome application, documentation, reporting, and oversight requirements.

Third, the potential profits for a litigation funding company are handsome. The key to success for funding companies is to employ people with the claim and case evaluation expertise that traditional lenders typically lack or to develop systems or methodologies that are reasonable substitutes for such expertise.

The emergence of litigation funding as a new financial services industry has been marked by judicial distrust." The practice evokes concerns about champerty and maintenance, legal doctrines seldom seen in recent years.¹² Critics of the practice are concerned that litigation financiers will potentially manipulate the parties to whom they make loans¹³ or will act in ways that impair the professional judgment of the attorneys to whom they advance expenses.¹⁴ Lawyers who may need to finance litigation through a litigation funding company, or who must counsel a client who wants to borrow against an anticipated settlement or judgment, must therefore, consider the professional responsibility ramifications of their decisions or advice.

This Article advocates the position that litigation funding as it is commonly employed is ethical. Litigation funding companies do not, by their ordinary practices, create serious professional responsibility problems for attorneys. Any potential professional responsibility traps that litigation funding creates can be easily avoided by carefully drafting the funding agreement.

Looking ahead, Section II discusses the doctrines of champerty, maintenance, barratry, and usury in connection with litigation funding. These doctrines bear on lawyers'professional responsibility because both the Model Rules of Professional Conduct'' and the Model Code of Professional Responsibility" provide that it is professional misconduct for lawyers to engage in conduct that is "prejudicial to the administration of justice."¹⁷ and engaging in unlawful conduct is just such an example of professional misconduct. Additionally, the application of these doctrines may implicate attorneys' duties of competence, communication, and confidentiality. Section III discusses ethics rules that arguably might apply in the litigation funding context, unrelated to concerns about the legal doctrines discussed in Section 11. Again, the conclusion is always the same: with respect to lawyers, litigation funding is ethical.

II. Champerty, maintenance, Barratry, and usury

A. Champerty, Maintenance, and Barratry

The doctrines of "champerty,"'maintenance,''and "barratry"originated in medieval England when claims and rights were not freely assignable.'' At common law, champerty refers to an agreement by which someone having no interest in the subject of an action "undertakes to carry on the suit at his own expense, or to aid in so doing, in consideration of receiving, in the event of success, some part of the land, property, or money recovered or deriving some benefit therefrom,"¹⁹ A person who engages in champerty is called a "champertor," and an agreement amounting to champerty is described as "champertous." Champerty is a form of maintenance, which is defined as ''officious intermeddling in a suit that in no way belongs to one, by maintaining or assisting either party with money or otherwise, to prosecute or defend it."²⁰ Barratry is "the crime or offense of frequently stirring up suits and quarrels between individuals."" Simply summarized, "maintenance is helping another prosecute a suit; champerty is maintaining a suit in return for a financial interest in the outcome; and barratry is a continuing practice of maintenance or champerty.""

The doctrines of champerty and maintenance qualify as obscure, and barratry is seldom seen.²³ Several jurisdictions have done away with the doctrines entirely,²⁴ reasoning that "other well-developed principles of law can more effectively accomplish the goals of preventing speculation in groundless lawsuits and the filing of frivolous suits" than can these dated doctrines.²⁵ Where recognized, champerty and maintenance typically serve as contract defenses.²⁶ Offending contracts are void and unenforceable.²⁷

The fact that a litigant can void a champertous contract is usually of no consequence to its adversary because the doctrines of champerty and maintenance do not bear on the litigant's right to prosecute the associated action." Furthermore, a defendant who is being sued by a plaintiff whose lawsuit is financed by a third-party lacks standing to challenge the associated agreement." Accordingly, a defendant generally cannot seek to void a litigation funding agreement in the name of champerty or maintenance and in this way defeat the plaintiffs suit.³⁰ In a few jurisdictions, however, a defendant who is sued by a champertous plaintiff can derive some advantage by asserting that the plaintiff lacks standing or is not a real party in interest, such that the action should be dismissed.³¹ Whatever the defensive effects of champerty and maintenance, the doctrines are rarely viable offensive weapons.³² They are generally not actionable as torts.³³

Three final points bear mentioning. First, if an agreement is champertous, it necessarily constitutes maintenance because champerty is a form of maintenance.³⁴ The terms champerty and maintenance are essentially interchangeable.³⁵ Second, courts are reluctant to deem agreements champertous or to conclude that they constitute mainte-nance.³⁶ Third, although champerty was originally prohibited, at least in part, to "prevent attorneys from stirring up litigation or from becoming involved in a lawsuit solely for personal economic benefit,"³⁷ attorney contingent fee agreements are generally not champertous.³⁸ The overarching principle, with respect to the last two points, is that champerty and maintenance require the presence of "officiousintermedd-lers" or disinterested people dedicated to "stirring up strife." These descriptions fit few alleged champertors and certainly do not fit most attorneys working for contingent fees.³⁹

1. Litigation Funding Meets Champerty and Maintenance in

Ohio. Litigation funding ran afoul of the champerty and maintenance doctrines in 2003 when the Ohio Supreme Court decided Ran cm an v. Interim Settlement Funding Corp.⁴⁰ Roberta Rancman was injured in an automobile accident. In March 1998 she sued State Farm Insurance Company (''State Farm")...