Minnesota Supreme Court abolishes common law champerty, upholds litigation finance agreement
Today, the list of states that no longer recognize the medieval doctrine of champerty has grown by one. In a thorough opinion delivered in Maslowski v. Prospect Funding Partners LLC, et al., the Minnesota Supreme Court upheld enforcement of a litigation funding agreement and officially abolished the common-law doctrine of champerty in the state.
The matter reached the Court after Maslowski failed to abide by the terms of a non-recourse litigation funding agreement she signed with Prospect Funding Partners to help her pursue a personal injury lawsuit. Although Maslowski ultimately recovered money in a legal settlement for her injury claims, she failed to repay Prospect, arguing instead that the contract was champertous because it was an agreement to divide litigation proceeds with a party unrelated to the lawsuit and thus void as a matter of public policy in Minnesota. Both the trial court and the intermediate appellate court agreed.
In overruling both, the Minnesota Supreme Court recognized that the lower courts correctly applied precedent—and further recognized that the applicable precedent is both outdated and ill-fitting for today’s legal market. In conducting a historical review of the centuries-old doctrine of champerty, the Court concluded that it has outlived its utility: “Our review of changes in the legal profession and in society convinces us that the ancient prohibition against champerty is no longer necessary.”
The Court noted multiple changes in the legal profession since it last upheld champerty in 1939: the state adopted a code of legal ethics and rules of civil procedure, both of which serve as checks on the filing of frivolous lawsuits; other common-law prohibitions relating to champerty concerns, such as the prohibition on contingency fee arrangements, have also been overturned; and overall attitudes toward both assignment of claims and litigation in general have shifted. With respect to the last point, the Court specifically recognized that, where litigation finance arrangements were once viewed with suspicion as promoting “officious intermeddlers,” the benefits are becoming more widely recognized and accepted: “Businesses often seek financing to mitigate the risks associated with litigation and maintain cash flow for their operations,” and, like contingency fees, such arrangements “may increase access to justice for both individuals and organizations.”
Maslowski argued that the ethics code and rules of civil procedure were insufficient, that litigation finance agreements could strip tort victims of recovery, and that such agreements could discourage settlement. In rejecting all three arguments, the Court repeatedly recognized the value of litigation finance. Champerty is not needed to protect against litigation-finance promoted frivolous lawsuits, the Court concluded, as it is “unlikely that companies like Prospect will fund frivolous claims because they only profit from their investment if a plaintiff receives a settlement that exceeds the amount of the advance—an unlikely result in a meritless suit.” Parties—especially “the many sophisticated parties… such as those who seek commercial litigation financing”—do not need champerty to protect their interests. And rather than discouraging settlement, the Court noted that litigation finance can have the opposite effect: “There is…. a well-reasoned argument to the contrary made by scholars.”
Minnesota now joins California, Colorado, and other states where the doctrine of champerty has either never been recognized, or has been formally abolished. For more information on the history of champerty, and how litigation finance works in jurisdictions that still recognize some form of the doctrine, click here.
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