Champerty Still Valid Defense in Kentucky, So Litigation Funding Agreements Are Void, Says Court

Champerty Still Valid Defense in Kentucky, So Litigation Funding Agreements Are Void, Says Court

A series of litigation funding agreements were champertous and therefore void under Kentucky law, a federal court has ruled.

In Boling v. Prospect Funding Holdings, Civil Action No. 1:14-CV-0008-1-00081-GNS-HBB, 2017 U.S. Dist. LEXIS 48098 (W.D. Ky. Mar. 30, 2017), the federal district court reviewed the claims of an individual who had entered into a series of litigation funding agreements and later challenged the agreements, arguing that they were unenforceable due to Kentucky’s public policy against champerty and prohibition against usury.

The federal district court agreed, first saying that the “defense of champerty is still viable under Kentucky law” and noting how litigation funding agreements can undermine state public policy in favor of settlement of litigation.  Said the court:

[T]he ill effects of a contract that gives a stranger a contingent interest in the outcome of litigation go well beyond encouraging people to sue or direct control of the litigation.  Such contracts should continue to be suspect because they create a disincentive to settle and because public policy does not encourage strangers profiting from the litigation of others. . . .

“These types of funding arrangements can permit third parties to influence the settlement decision-making process by removing or diluting control of the tort victim,” said the court.  “Litigation funding also potentially discourages settlement because an injured party may be disinclined to accept a reasonable settlement offer where a large portion of the proceeds would go to the firm providing the loan” and a claimant “could feel compelled to try the case and ultimately run the risk of receiving no recovery for his or her injuries.”

The court held that the litigation funding agreements violate Kentucky public policy and the statute prohibiting champerty and are void.  Furthermore, the court also held that the agreements violate Kentucky’s usury laws.  The agreements provide “for an interest rate of 4.99% per month, which is compounded every month to yield an annual effective interest rate of nearly 80%” and thus the the interest rate violates the Kentucky usury statute.

The court also pointed out that the Kentucky usury statute is not limited to loans., since the interest rate cap “explicitly applies to ‘any contract or other obligation . . . .'”  Kentucky Revised Statute 360.010(1).

The full opinion is available here.


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