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Applying Champerty Principles in Litigation Funding Dispute, Pennsylvania Court Rules that Agreement Is Invalid

If investors provide monies to fund litigation and were to be paid out of the “principal, interest, and incentive” out of the proceeds of the litigation fund, could payment to those investors be enforced via an attorneys’ “charging lien” that entitles an attorney to a security interest in litigation proceeds relating to the attorney’s legal work?

No, as enforcement of such an agreement would be contrary to the public policy as reflected by the principles of champerty, according to a Pennsylvania Superior Court, which this month, in the case of WFIC v. Labarre, No. 1985 EDA 2015, 2016 PA Super 209 (Pa. Super. Ct. Sept. 13, 2016), affirmed a decision of the Court of Common Pleas.

The dispute arose from litigation funding arrangements involving a $100 million claim against Bayer Corporation, relating to allegations that Bayer machinery had malfunctioned, resulting in the insolvency of Polymer Dynamics, Inc. (PDI).  PDI obtained a $12.5 million verdict, and, dissatisfied, appealed the award; “PDI did not have the financial resources to continue the lengthy litigation and thus solicited investors willing to advance money into a litigation fund (i.e., the Litigation Fund Investors] . . . in exchange for promissory notes.”  Subsequently, “[a]fter extensive litigation”, the trial court ruled that there was no  perfected security interest in the proceeds of the litigation, notwithstanding the attorneys’ charging lien.

The Superior Court affirmed.  The court considered the argument that a fee agreement created an entitlement to a security interest in the Bayer Litigation proceeds.  The Court noted that the trial court said it was “wary of allowing an attorney charging lien to proceed in this fashion as it is contrary [to] public public”, that “[a]ttorney charging liens are enforced to ensure that attorneys are paid for work performed, not for creditors to secure priority,” and that “[p]otentially, if allowed to proceed, attorneys could create charging liens to defraud creditors out of rightfully secured priority positions.”  The Superior Court agreed that the agreement was unenforceable: “we conclude that the 2008 Fee Agreement is champertous and, therefore, invalid.”  According to the Court, the agreement met the elements of champerty:

Champerty may be defined as the 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.  Maintenance is an 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.  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.

* * *

The requisite elements of champerty have all clearly been met in the present case.  The Litigation Fund Investors are completely unrelated parties who had no legitimate interest in the Bayer Litigation.  The Litigation Fund Investors 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.  See 2008 Fee Agreement (emphasis added).  ‘Under Pennsylvania law, if an assignment is champertous, it is invalid.’ . . . .  Accordingly, we are constrained to conclude that the 2008 Fee Agreement is invalid . . . .

WFIC v. Labarre, 2016 PA Super 209.

The full opinion is available here.

 

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