- As litigation funding becomes more commonplace, courts are having to determine how a wide variety of laws apply to litigation funding agreements.
- The U.S. Court of Appeals for the Third Circuit recently provided guidance to attorneys and funders on when a litigation funding loan may constitute a "debt" under the Fair Debt Collection Practices Act (FDCPA).
- The opinion holds that while a client's obligations may constitute a debt under the FDCPA, an attorney's obligations do not.
As litigation funding becomes more commonplace, courts are having to determine how a wide variety of laws apply to litigation funding agreements. Until now, courts have primarily focused on two issues: 1) whether or when communications with the funder may be protected by attorney-client or work product privilege, and 2) whether the agreement is enforceable in the face of potential statutory or common law defenses such as champerty, maintenance, barratry and usury. The U.S. Court of Appeals for the Third Circuit recently provided guidance to attorneys and funders on when a litigation funding loan may constitute a "debt" under the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692, et seq.
Practitioners who are following the development of litigation funding jurisprudence likely recognize the name Boling. Beginning in 2014, cases regarding the enforceability of the litigation funding agreement that Christopher Boling had entered into with a funder were initiated in the Western District of Kentucky (Boling's home district) and New Jersey (the forum and law designated in the litigation funding agreement). After years of litigation, the Sixth Circuit held in 2019 that the district court did not err in disregarding the forum selection and choice of law provisions of the litigation funding agreement into which Boling had entered. 1 The application of Kentucky law ultimately rendered the agreement unenforceable, which would not have been the result if the New Jersey choice of law term had been applied.
It would seem like a final determination that the agreement is unenforceable should be the end of the story, but it was not. After the Western District of Kentucky determined that Boling's litigation funding agreement was unenforceable and the appeal was pending, the funder's attorneys (Callagy Law) brought a breach of contract action against Boling's attorney, Michael Breen, based upon his execution of an acknowledgment of the litigation funding agreement. In response, Breen filed a lawsuit in the District of New Jersey alleging that Callagy Law had violated the FDCPA. The District of New Jersey dismissed Breen's claim because his obligations under the litigation funding agreement did not constitute a "debt" as defined in the FDCPA, and Breen appealed.
The Third Circuit's Opinion
On April 5, 2021, the Third Circuit issued its decision in Breen v. Callagy Law PC, No. 20-1445, ---- Fed. App'x ---- (3d Cir. April 5, 2021). The opinion analyzes what litigation funding obligations may constitute a "debt" under the FDCPA and holds that while a client's obligations may constitute a debt under the FDCPA, an attorney's obligations do not.
The Third Circuit reasoned that the FDCPA's definition of "debt" is controlling. The FDCPA defines debt as an actual or alleged obligation to pay money to a creditor when the obligation arises out of a transaction primarily intended for personal, family or household purposes. Breen argued that Christopher Boling and his wife, Holly, entered into the litigation funding agreement in order to pay living and medical expenses while Christopher Boling's personal injury suit was pending. The court agreed, without reaching a determination, that "the Bolings' obligations may be a 'debt' under the FDCPA."
The court did hold, however, that the Bolings' lawyer's obligations did not constitute a debt under the FDCPA. Breen's obligations under the agreement (if any) did not arise for his own personal, family or household purposes. Rather, his obligations arose in connection with his representation of the Bolings in a professional capacity, and "it is well established that debts incurred for commercial, business or professional purposes do not qualify as FDCPA debts.'" (alterations and quotations omitted).
There are two main types of litigation funding arrangements: 1) client-directed, in which the funder enters into an agreement with the client (as in the Boling case), and 2) lawyer-directed, in which the funder enters into an agreement with the lawyer or law firm. Within the first category of client-directed litigation funding agreements, one can differentiate between funding arrangements that are effectively consumer loans and funding agreements that are for the sole or principal purpose of funding litigation. Just as the risks and considerations of the parties differ between these types of arrangements, so too do the takeaways from the Breen case.
For parties to client-directed funding agreements, the Breen case offers two points for consideration depending upon the purpose of the client-directed funding. First, if the funding is intended for living or medical expenses, then funders and the lawyers who represent them need to think about the FDCPA. Though the Sixth Circuit did not actually hold that client-directed funding used for living and medical purposes is a "debt" under the FDCPA, the court did put lawyers and litigants on notice that the client-recipient of the funds may have an FDCPA claim if the funder's collections procedures otherwise violate the FDCPA.
Second, if the client-directed funding is intended only to pay the client-recipient's attorneys' fees and the other costs of litigation, then the funding is likely not a "debt" under the FDCPA. Funders who enter into such agreements and the attorneys representing them should consider, however, whether it would be beneficial to specifically state in their agreements that the funding is being used only to pay the costs of the litigation, and thus remove any argument that the client-recipient ultimately used the funds for personal reasons.
For parties to lawyer-directed funding agreements, the Breen case likely does not change anything. Law firms, as corporations and/or businesses, are not "consumers" under the FDCPA, and even in the case of individual lawyers such as Breen, lawyer-directed funding is intended for commercial and professional costs associated with running a law firm while engaging in (generally lengthy and complex) litigation on behalf of contingent-fee clients or clients who are unable or unwilling to pay full litigation costs during the pendency of the action. Thus, it is not a FDCPA "debt."
1 Note that Boling v. Prospect Funding Holdings, LLC, does not stand for the proposition that forum selection and choice of law clauses in litigation funding agreements are assumed unenforceable. There are specific circumstances in the Boling case that the Western District of Kentucky and Sixth Circuit relied upon in reaching their determinations, which the authors would be happy to discuss with you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.