Illinois Court: No Full Faith and Credit for Default Judgment, and Litigation Funding Agreement Was Unenforceable on Champerty Grounds

Illinois Court: No Full Faith and Credit for Default Judgment, and Litigation Funding Agreement Was Unenforceable on Champerty Grounds

An Illinois court need not give full faith and credit to a Minnesota default judgment, and need not give effect to parts of a litigation funding agreement that was unenforceable, on champerty grounds, based on controlling Minnesota law.

That was the ruling of an Illinois appellate court, in Prospect Funding Holdings v. Saulter, No. 1-17-1277, 2018 Ill. App. LEXIS 126 (Ill. App. Ct. Mar. 13, 2018), which involved claims by a litigation funding company against an attorney for a wrongful death claimant – a claimant who had entered into a litigation funding agreement, and who had her attorney sign a letter of direction that was to be used to direct litigation proceeds to the litigation funder, Prospect Funding.

After the wrongful death case was settled and Prospect Funding was unsuccessful in attempting to collect the proceeds, Prospect Funding sued the claimant and her attorney, Salter (an Illinois attorney), in Minnesota court. That court dismissed the case against Salter for lack of personal jurisdiction, and entered a default judgment against the claimant.  Prospect Funding was again unsuccessful in collecting on the default judgment, and then sued Salter in Illinois.  The Illinois court dismissed the lawsuit, and the Illinois Court of Appeals affirmed, saying that “[t]he trial court was not obligated to give full faith and credit to a Minnesota default judgment that was not on the merits and was not directed against Saulter”, that “[t]he purchase agreement and letter of direction were interdependent, and because the purchase agreement is unenforceable under controlling Minnesota law, the letter of direction was also not enforceable.”

The Illinois appellate court said the following:

The full faith and credit clause of the United States Constitution provides that full faith and credit must be given to the judicial proceedings of every other state.  First Wisconsin National Bank of Milwaukee v. Kramer, 202 Ill. App. 3d 1043, 1047 (1990).  The Uniform Enforcement of Foreign Judgments Act (735 ILCS 5/12-650 et seq. (West 2014)) implements the full faith and credit clause and facilitates the interstate enforcement of judgments in any jurisdiction where the judgment debtor is found.  Ace Metal Fabricating Co. v. Arvid C. Walberg & Co. 135 Ill. App. 3d 452, 455 (1985). . . .

Under the full faith and credit clause, if Prospect sought to enforce the default judgment against [the claimant,] Wright-Housen, an Illinois court would be obligated to enforce that judgment.  Here, though, Prospect does not seek to enforce the default judgment; instead, Prospect has filed a separate lawsuit against Saulter, who, having been dismissed from the Minnesota case, was not a party to the default judgment.

Moreover, contrary to Prospect’s assertion, the Minnesota court did not find that the purchase agreement was enforceable and not champertous.  The Minnesota court expressly noted that champerty was an affirmative defense that could only be raised by [the claimant], who was not present.  The court stated, ‘it is unclear whether the doctrine of champerty, assuming it’s still viable in Minnesota, would bar this action.’  This does not constitute a finding on the legality of the agreement and would not be binding on an Illinois court.

On the issue of champerty, the court said that Minnesota law barred enforcement of champertous contracts:

Minnesota follows the common-law rule prohibiting contracts for champerty.  Maslowski v. Prospect Funding Partners LLC, 890 N.W.2d 756, 763 (Minn. Ct. App. 2017) (citing Huber v. Johnson, 70 N.W. 806, 807 (Minn. 1897).  Champerty is defined as ‘”[a]n agreement between a stranger to a lawsuit and a litigant by which the stranger pursues the litigant[‘s] claims as consideration for receiving part of any judgment proceeds.”‘  Johnson v. Wright, 682 N.W.2d 671, 675 (Minn. Ct. App. 2004) (quoting Black’s Law Dictionary 224 (7th ed. 1999)).  Recently, in Prospect Funding Partners, LLC v. Williams, No. 27-CV-13-8745, 2014 Minn. Dist. LEXIS 2 (Dist. Ct. Hennepin County, Minn., May 5, 2014), a trial court in Minnesota reiterated the state’s long-standing prohibition on champertous contracts. The court noted that “the 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.’  Id. at *21.  In addition to the other ‘ill effects,’ including creating a disincentive to settle and permitting strangers to profit from the litigation of others, the court noted that litigation funding agreements permit the funders to lend litigants money without the regulations that cover loans and prohibit usurious interest rates, which was 4.5%, compounded monthly.  The court noted that Minnesota caps interest on loans of less than $100,000 at 8% per year (Minn. Stat. § 334.01 (2014)) and that the interest on the loan would be 54%, well above that limit.

The exact same concerns raised by the Williams court are present in the purchase agreement between Prospect and Wright-Housen.  The agreement not only gives a third party an interest in Wright-Housen’s case, potentially affecting whether and when she decides to settle, it permits Prospect to make an enormous profit off of its loan by charging a usurious 4% interest rate, compounded monthly, without being subjected to any regulations.  The purchase agreement was champertous and thus enforceable under Minnesota law.

The full opinion is here.

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