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staff reporter Young’s e-mail address is [email protected]. The business of litigation finance is battered but upright after taking a beating in two courtrooms in the last year. In June, the Ohio Supreme Court resuscitated the common law doctrine of champerty to outlaw the offering of cash payments to plaintiffs in exchange for a piece of their verdict or settlement. And a federal court in North Carolina awarded more than $500,000 to a law firm that claimed that litigation financiers interfered with the attorney-client relationship. It’s uncertain what impact those courtroom setbacks will have on the industry’s bottom line. Although the industry operates under a legal cloud, it appears to be tolerated in most jurisdictions. Litigation financiers typically offer cash advances to plaintiffs who might be out of work because of an injury or otherwise unable to meet their daily living expenses. The financiers get back their advance, not to mention a usually quite substantial premium, only if the suit leads to a settlement or an award. Paul Bond, an attorney who will be joining the Philadelphia office of Dechert in the fall, and who wrote a 2002 article about litigation finance in the University of Pennsylvania Law Review, said its continued existence shows nothing more than a failure to enforce laws against it. Surveying the same landscape, Andrew T. Savage, the CEO and general counsel of the Massachusetts-based litigation finance firm LawFunds LLC, said the practice is legal in most jurisdictions. Ohio ruling The Ohio Supreme Court ruled on June 11 that Roberta Rancman, the plaintiff in a personal injury suit that ultimately brought her a settlement of $100,000, need not honor a contract that required her to pay nearly $20,000 to Nevada-based Future Settlement Funding Corp. and an Ohio broker, Interim Settlement Funding Corp. Litigation finance was a form of champerty, the court ruled. It even relieved Rancman of the obligation to return $8,800 advanced to her by the two companies. Rancman v. Interim Settlement Funding Corp., No. 2001-2154. The court defined champerty as a payment by a nonparty who “undertakes to further [a party's] interest in a suit in exchange for a part of the litigated matter.” The prohibition against the practice historically was meant to “prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation,” the court noted. Ignored for years because attorneys are prohibited from engaging in champerty by ethics rules, it needed dusting off because nonlawyers are in the business, the court said. The court reasoned that a plaintiff bankrolled by a lender has an incentive to reject modest, but reasonable, settlement offers. At worst, she risks a total loss in the courts, in which case she owes nothing and can even keep the amount advanced. Savage said that the decision may not even prevent out-of-state financiers and brokers from doing business with Ohio residents. He explained that contracts could be written with clauses specifying that disputes would be governed by the laws of a state more hospitable to litigation finance. “I would be uncomfortable doing business in Ohio if I were incorporated in the state, but Ohio has fairly liberal choice of law rules,” Savage said. On the other hand, in Accrued Financial Services Inc. v. Prime Retail Finance Inc., 298 F.3d 291, the 4th U.S. Circuit Court of Appeals ruled last year that the same public policy considerations that led the state of Maryland to outlaw practices like champerty would also prompt the state to deny the benefit of its choice-of-law rules to a contract that incorporates those practices. According to Bond, in most states litigation finance contracts are illegal and unenforceable. Litigation financiers have been able to operate in many of those states, he said, because the laws have fallen into disuse. “Judicial neglect of champerty stems in part from confusion about exactly what constitutes champerty,” Bond said. “That confusion, in turn, is partly explained by the fact that practices once thought to be champertous, such as lawyer’s contingency fees, are now permitted,” he said. North Carolina setback The second recent setback came last July, when a federal jury in Asheville, N.C., found Future Settlement Funding Corp. (one of the defendants in the Rancman case), Resolution Settlement Corp. and five individuals affiliated with the companies liable for wrongful interference with a contract and for unfair and deceptive trade practices. Although the law firm’s complaint asserted that litigation finance is illegal in North Carolina, the thrust of its argument wasn’t that the practice is inherently wrong, but that the financiers had engaged in underhanded practices. One of the individuals, Perry Walton, founded Nevada-based Future Settlement after his career in the personal finance business came to an end with a 1997 conviction for extortionate collection of debt, as reported in the Wall Street Journal in 2000. Walton, who ran a series of seminars on how to set up a litigation finance brokerage, boasted in 2001 to the New Jersey Law Journal, a sister paper of The National Law Journal, “Pretty much everybody who got their start in the industry got it from me.” The jury awarded $150,000 in damages to the Matthews, N.C., law firm of Weaver, Bennett & Bland. U.S. District Judge Lacy H. Thornburg tripled part of the award, as required by North Carolina law, and added $171,225 in attorney fees, bringing the total to $521,225. The defendants have appealed the case to the 4th U.S. Circuit Court of Appeal. Weaver, Bennett & Bland v. Speedy Bucks, No. 1:00CV249. The law firm alleged that Walton and his associates at the companies made a secret deal with a firm client that made it impossible for the case to settle and for the firm to collect its contingency fee. In 1999, attorney Michael David Bland represented a woman named Leslie Price in her suit seeking damages from George Shinn, owner of the Hornets, a National Basketball Association franchise then located in Charlotte, N.C., for an alleged sexual assault. It was only after a jury returned a verdict for Shinn, leaving Bland’s firm with no return under its contingency-fee arrangement, that Bland discovered that the Nevada companies and a local broker had entered into a contract with Price, despite Bland’s earlier warnings that such contracts were illegal under state law, according to the complaint in the federal case. The law firm’s complaint alleged that Price’s obligation to pay $600,000 on her $200,000 advance-if the litigation went in her favor-led her to reject reasonable settlement offers from Shinn. Bland’s attorney, Forrest A. Ferrell of Hickory, N.C.’s Sigmon, Clark, Mackie, Hanvey & Ferrell, said that the trial judge who presided over the Price-Shinn battle, Costa M. Pleicones, now a justice on the South Carolina Supreme Court, testified at the federal trial that Shinn had put an offer on the table in the range of $600,000 to $700,000. Walton could not be reached for comment. One of his former partners, Bruce Benson, who also was found liable in the North Carolina case, said Walton is no longer in the litigation finance business and said he did not know where he was. Help for litigants Savage said litigation finance helps many litigants of modest means overcome the delaying tactics of wealthy defendants such as insurance companies. In his view, the Weaver case is an anomaly. “Reputable firms insist on working directly with plaintiffs’ attorneys,” he said. Harold Braxton, the owner of the Miami-based litigation finance firm Fast Funds, agreed that the industry’s legal troubles have often been the fault of unscrupulous dealers and are not inherent to the industry. “We deal with people who are in desperate straits and some take advantage of that, and they should be weeded out of the industry,” he said. Braxton has taken what he calls “baby steps” toward the formation of an industry association. Savage claimed that a 2001 decision by the 4th Circuit, Baltimore Scrap Corp. v. David J. Joseph Co., 237 F.3d 394, shows that litigation finance is protected by the Constitution. “The First Amendment freedoms of petitioning and of association,” the court said, “protect groups who for whatever reason want to contribute to a lawsuit openly or to stand apart from public view while another party files a lawsuit.” Bond acknowledged that litigation finance can help deserving Davids in their battles against deep-pocketed Goliaths. But he worries that the financiers themselves will become Goliaths who can bankroll frivolous lawsuits against more vulnerable defendants. As litigation finance encourages more lawsuits, it may also result in too much deterrence of certain kinds of risky activities, since legislative judgments about the appropriate levels of damages were made in a less litigious time, he asserted. One possible system Nonetheless, Bond said a litigation finance system closely regulated by the states could be of benefit even to defendants. He proposes a system under which: Plaintiffs would have to agree to more informal, less expensive procedures in exchange for permission to sell a stake in their lawsuits. Financiers would bid on cases at a public auction. Defendants could put an end to cases by matching the highest bid. Professor Anthony J. Sebok of Brooklyn Law School said that while the Ohio Supreme Court may have correctly applied the law of champerty, its public policy reasons for reviving the prohibition did not make sense. A “properly regulated” industry could serve the public interest, he said. Young’s e-mail address is [email protected].

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