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Litigation Funding Arrangement Gave Company Too Much Control, Violated North Carolina’s Public Policy Against Champerty, Says Court

A federal court judge last week refused to approve a litigation financing arrangement because it was champertous.

The court in In Re DesignLine Corp., Case No. 13-31943/Case No. 13-91944, 2017 Bankr. LEXIS 182 (Bankr. W.D.N.C. Jan. 20, 2017), said that a bankruptcy trustee’s arrangement with a litigation funding company violated North Carolina’s public policy against champerty because of the control that the funding company had over the litigation.

The case involved a litigation trust that sued former officers and directors in what the judge called “titanic litigation” involving costs that had already become “monumental.”   The trustee’s lawyers were unwilling to continue litigating the matter solely on a contingency basis, so the trustee sought to enter into a litigation funding agreement with a funding company.

The arrangement required that the trustee make regular funding requests to the funding company during the course of the litigation, and seek the company’s input and approval of strategic decisions.  In addition, the agreement would allow the funding company to control the litigation in other ways, such as the requirement to seek the funder’s permission to increase the litigation budget, choose replacement counsel, and ultimately cut off the funding.  The arrangement constituted champerty under North Carolina, concluded Bankruptcy Judge J. Craig Whitley, who rejected the arrangement as a violation of public policy.

 

The full opinion is available here.

 

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