November 19, 2019 Top Story

No Deal: Appeals Court Strikes Champertous Contract

State policy against champerty prevails over choice-of-law provisions

By Katherine M. Devanney

Forum selection clauses and choice-of-law provisions cannot override a state’s policy against champertous contracts, the Minnesota Court of Appeals held for the second time in three years, invalidating on public policy grounds an otherwise valid litigation funding contract.

A motorist injured in an accident sued for damages

A motorist injured in an accident sued for damages

Pexels | Pixabay

The decisions in Maslowski v. Prospect Funding Partners LLC, et al. confirm that champerty and the related defense of maintenance remain powerful tools for invalidating otherwise properly-negotiated contracts. In the wake of Maslowski, ABA Section of Litigation leaders caution that practitioners should evaluate not only the law they have chosen to apply to their agreement, but also that of the state(s) in which the practical effect of their agreement is likely to be felt.

Maslowski I

In March 2012, Minnesota resident Pamela Maslowski was injured in a motor vehicle accident. She sued for damages and entered into a litigation funding agreement that provided her with $6,000 in exchange for an interest in her personal injury action. The agreement included a choice-of-law provision designating New York law to govern the contract, and a forum selection clause providing that all actions arising out of the agreement would be brought in New York.

After it became apparent that the personal injury case was likely to settle, Maslowski brought an action in Minnesota seeking a declaration that the agreement was invalid because it was champertous and unconscionable. The funding company moved to dismiss, arguing that Minnesota was an improper forum under the parties’ contract. Despite the forum selection clause in the agreement, the trial court denied the motion, citing Minnesota’s strong policy against champertous agreements. The funding company appealed.

The Minnesota Court of Appeals affirmed in Maslowski v. Prospect Funding Partners LLC, et al. (Maslowski I), finding that the trial court did not abuse its discretion by refusing to enforce the forum-selection clause because Minnesota—unlike New York—followed the common law prohibition against champertous contracts. Although New York had a statutory prohibition against champertous contracts, its prohibition was narrower than Minnesota’s. As a result, the court noted a public benefit to keeping the case in Minnesota—regardless of the parties’ contractual agreement.

Maslowski II

After the forum selection issue was resolved in Maslowski I, the case continued in Minnesota and the funding company asserted certain counterclaims and third-party claims stemming from Maslowski’s alleged breach of the agreement. The trial court dismissed those claims, declining to enforce the choice-of-law provision and holding that the agreement was “void and unenforceable” as a violation of Minnesota’s prohibition against champerty and maintenance. Again, the funding company appealed.

Noting that Maslowski I had already resolved the appeal in Maslowski’s favor “[a]s a practical matter,” the court of appeals affirmed in Maslowski v. Prospect Funding Partners LLC, et al. (Maslowski II), emphasizing for a second time the conflict between Minnesota and New York champerty law. The appellate court observed that the agreement would not have been struck down under New York law, but could not survive Minnesota’s heightened champerty standard.

The court of appeals highlighted three “key circumstances” in the case—“a contingent recovery, exorbitant interest rate, and a contrived interest in the underlying litigation”—which were enough to violate Minnesota’s prohibition against champerty and maintenance. Because the agreement was champertous under Minnesota law, it was void and unenforceable—regardless of whether the result would have been different under New York law.

Lessons from Maslowski

Because of the state-by-state variation in champerty law, commercial litigators should exercise caution where the laws of multiple jurisdictions may be implicated, urges Bradford S. Babbitt, Hartford, CT, cochair of the Section of Litigation’s Commercial & Business Litigation Committee. “The conflict between the law in Minnesota and New York demonstrates the wide disparity between states on the viability and impact of champerty and maintenance doctrines, and the risks inherent in doing business across state lines, even with a choice-of-law provision.” The court’s refusal to enforce the choice-of-law provisions creates a “risk for litigation funding companies to continue to do business in Minnesota, or in other states with similarly broad definitions of champerty and maintenance,” cautions Babbitt.

Donald R. Pocock, Winston-Salem, NC, cochair of the Section’s Consumer Litigation Committee, agrees that Maslowski provides a “very protective standard for consumer agreements in Minnesota.” While “launching and maintaining litigation is expensive,” especially for consumers, “litigation finance companies have no relationship to a case other than a monetary investment,” Pocock explains. “Litigation funding contracts can often contain very expensive terms that deprive parties of compensation they do obtain,” he adds.

Pocock also sees Maslowski’s holding as having far-reaching potential for consumer litigation practice. “For example, some credit card issuers include choice-of-law clauses in the home state of the card issuer such as Nevada or South Dakota, and their cardholder agreements are drafted specifically with those jurisdictions in mind. Under the logic of Maslowski, choice-of-law clauses could be at risk of not being enforced,” he warns.

 

Katherine M. Devanney is a contributing editor for Litigation News.


Hashtags: #champerty, #MinnesotaCourts, #Consumers

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