United States: Litigation Funding Contract Invalidated As Champertous In Pennsylvania

Last Updated: October 5 2016
Article by James Beck

This post does not involve a drug/device case – or even a tort case − but counsel worried about potentially abusive litigation funding should take a look at WFIC, LLC v. Labarre, ___ A.3d ___, 2016 WL 4769436 (Pa. Super. Sept. 13, 2016), in which a statewide appellate court, in a precedential decision, invalidated a litigation funding agreement as "champertous."

WFIC involved commercial litigation. The underlying litigation is not important, except for its being extensive and expensive, and that the result was a significant verdict (low eight figures) – but not the nine-figure whopper that the plaintiffs had been hoping for. 2016 WL 4769436, at *1.

After entry of judgment, to keep the litigation going during the appeal, the plaintiff's lawyer rejiggered his own fee arrangement so that various litigation funders, who had previously advanced funds, would be paid out the lawyer's contingent fee. Id. The funds from the eventual satisfaction of the affirmed judgment were insufficient to satisfy obligations to the various litigation funders, the expectations of the original plaintiff (WFIC was an assignee of the original plaintiff, id. at *3 n.10), and also provide counsel with a fee. Id. at *2. As a result, various parties sued various parties. Id. at *3. The appeal in question pitted plaintiffs' counsel against the world over whose priorities (if any) in the remaining funds were superior to his under the litigation funding agreement. Id.

The Superior Court didn't decide the priority question. Instead the three-judge panel unanimously declared the litigation funding agreement itself "champertous," and therefore void and unenforceable by anyone. WFIC, 2016 WL 4769436, at *5 ("we conclude that the 2008 Fee Agreement is champertous and, therefore, invalid"). In Pennsylvania, "champerty" is defined as:

[T]he unlawful maintenance of a suit in consideration of some bargain to have a part of the thing in dispute or some profit out of the litigation. . . . An agreement by a stranger to defray the expenses of a suit in which he has no interest or to give substantial support and aid thereto in consideration of a share of the recovery or the proceeds thereof is condemned by the courts as champertous[.]

Id. (emphasis added) (discussion of "maintenance" – essentially the same thing without a written agreement – omitted). "[T]he common law doctrine of champerty remains a viable defense in Pennsylvania." Id.

Champerty in Pennsylvania has three elements:

  1. the party involved must be one who has no legitimate interest in the suit;
  2. the party must expend its own money in prosecuting the suit; and
  3. the party must be entitled by the bargain to share in the proceeds of the suit.

Id. (citations omitted).

"Under Pennsylvania law, if an assignment is champertous, it is invalid." Id. (citation omitted). The court had no trouble finding the litigation funding agreement in question champertous, and therefore void. "The requisite elements of champerty have all clearly been met." Id.

Critical to the result was the court's holding that litigation funding does not create any "legitimate interest" in the litigation being funded. "The [litigation funders] are completely unrelated parties who had no legitimate interest in" the underlying litigation. Id. Rather, they "loaned their own money simply to aid in the cost of the litigation, and in return, were promised to be paid 'principal, interest, and incentive' out of the proceeds of the litigation." Id. (citation omitted). "Accordingly, we are constrained to conclude that the [litigation funding agreement] is invalid." Id.

Now, the litigation funding agreement in WFIC is only one of many types of such agreements, and this one involved a contract about counsel fees, which also bothered the court. Id. at *4 (discussing attorney charging liens). However, the holding that litigation funders are "unrelated parties who had no legitimate interest" in the litigation they funded is potentially quite broad. Other kinds of litigation funding agreements affect settlement/judgment proceeds directly – proceeds that defendants typically pay. Defendants need to protect themselves from possibly being sucked into litigation over invalid funding agreements, and from exposure risks should their payments be dissipated under such agreements, with dissatisfied parties possibly claiming that because the relevant funding agreements were invalid, the defendants should never have made the payments that they did.

When our clients resolve litigation, they want it to stay resolved. We do not know how broadly the "no legitimate interest" holding in WFIC will extend, and, as product liability attorneys, we decline to speculate. However, at minimum, WFIC is one more reason why defendants in litigation should be entitled to discover the terms of litigation funding agreements possibly affecting funds that they may pay, in settlement or judgment.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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