Champerty could have new life in Minnesota

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Unless you’re a personal injury lawyer, you might not know the term champerty. It refers to an illegal agreement in which someone with no prior interest in a lawsuit finances it with an eye on sharing the disputed payout if the suit succeeds.

And thanks to a Minnesota Supreme Court decision published last week, overturning a longstanding legal doctrine, champerty may no longer be illegal.

The case in question resulted from an appeal by Prospect Funding Partners, a litigation financing company. What’s a litigation financing company? One that invests in potentially lucrative lawsuits.

The story started in 2012 when Pamela Maslowski was injured in a car accident in Woodbury. She retained the well-known personal injury firm of Schwebel, Goetz & Sieben to represent her for a possible claim against both the driver and owner of the other car involved in the accident.

With that claim pending, Maslowski, needing money for living expenses, contacted Prospect Fundings Holdings, a New York-based company, regarding its litigation financing. On May 21, 2014, Maslowski sold Prospect a right to receive a portion of the proceeds of any settlement that she received from her personal injury suit. She received $6,000 cash up front as an advance.

In exchange, the amount Maslowski owed Prospect increased by 30 percent every six months, starting from a baseline of the $6,000 plus fees, with a cap at $25,245. If she didn’t receive a settlement, she owed Prospect nothing. The contract also provided that Maslowski’s obligation to Prospect would not exceed the amount of her settlement.

A little more than a year later, Prospect contacted Maslowski to say that she would owe Prospect $14,108 if her personal injury claim settled and she made payment to Prospect before the following Sept. 22. Maslowski’s attorney told Prospect that he believed that the litigation financing agreement was unenforceable.

Maslowski settled her personal injury suit in July 2015. When she did not pay Prospect according to the terms of their agreement, Prospect filed suit in New York against her and her lawyer’s firm for breach of contract and other related claims.

Maslowski served a complaint for declaratory relief on Prospect the following month, seeking a ruling from the Hennepin County District Court that the New York forum-selection clause was invalid. Two years were spent litigating over the proper forum until the appellate division of the New York Supreme Court and the Minnesota Court of Appeals held that the New York action should have been dismissed because the choice-of-forum provision was “unreasonable and should not be enforced.” The Minnesota appellate court said that any litigation over the agreement should take place in Minnesota.

The Minnesota Court of Appeals ruled that the district court did not abuse its discretion by refusing to enforce the forum-selection clause in the parties’ agreement based on Minnesota’s “local interest against champerty.” Prospect appealed.

At hand for the Minnesota Supreme Court was the common-law prohibition against champerty — whether the contract between Prospect and Maslowski was void as against public policy, or whether the common-law doctrine that champertous agreements are unenforceable should be abolished.

The high court went with the latter. Though it noted that English statutes and common law prohibited third parties from taking a financial interest in litigation, the court said that the prohibition against champerty in the United States has not been consistent.

The court considered a 1932 Minnesota decision, Hackett v. Hammel. In that case, Hackett advanced $705 to help Hammel in the prosecution of the case in accordance with the terms of a contract that promised Hackett “ten times the amount so advanced” if Hammel won the suit. The Minnesota Supreme Court voided that agreement.

The difference between Hackett and Maslowski? “We are unpersuaded by Maslowski’s argument that concern for tort victims requires us to maintain an ancient prohibition,” wrote Justice Natalie E. Hudson in her opinion.

What made the law against champerty “ancient”? In the eyes of the court, Prospect correctly noted that contingent fee agreements “arguably affect a plaintiff’s calculation regarding settlement … because they reduce the plaintiff’s ultimate recovery.”

Courts, the Minnesota Supreme Court said, should carefully review uncounseled agreements, especially those between parties of “unequal bargaining power or agreements involving an unsophisticated party.” The proper course, said the court, was to ensure “litigation financiers do not attempt to control the course of the underlying litigation.”

The case was sent back to the Minnesota Court of Appeals for further proceedings.

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