Judge Stephanos Bibas, of the U.S. Court of Appeals for the Third Circuit, speaking during a panel discussion at the Federalist Society’s 2018 National Lawyers Convention, held at The Mayflower Hotel in Washington, D.C., on Thursday, Nov. 15, 2018. Photo: Diego M. Radzinschi/ALM

The U.S. Court of Appeals for the Third Circuit has upheld the dismissal of a litigation funding company’s suit against a personal injury lawyer who handed over the proceeds of a settlement to his client without repaying the company’s loan.

The appeals court said the District of New Jersey properly dismissed the claim against the plaintiff’s lawyer by Prospect Funding Holdings because a Kentucky court ruled in March 2017 that the lawsuit loan was void and unenforceable in a related case.

Prospect sought to collect more than $340,000 in the case after lending $30,000 to a plaintiff at interest rates of almost 80 percent per year.

The suit stems from a 2008 explosion and fire that left a Kentucky man, Christopher Boling, severely injured. Boling filed suit in the Western District of Kentucky against Blitz USA, maker of a plastic gasoline can that exploded when he carried it near an open flame. While the case was pending, Boling took out two loans from Cambridge Management Group, which were later assigned to Prospect. Prospect then extended two other loans to Boling, for a total of $30,000.

The Blitz USA case was resolved on confidential terms in 2014. Prospect then sought to collect $340,000 from Boling, but he disputed the debt, filing a declaratory judgment suit in the Western District of Kentucky. The Kentucky court agreed with Boling that the four loan contracts were unenforceable, calling them usurious and unlawful attempts to take an interest in someone else’s suit.

Prospect, based in New York, then brought a suit in the District of New Jersey against Boling’s Kentucky personal injury lawyer, Michael Breen. Prospect brought the case as an assignee of rights from Cambridge Management, which is based on Glen Rock, New Jersey.

Prospect argued that Breen breached the acknowledgments portion of the loan contracts, which required him to hold Boling’s recovery in escrow and pay Prospect before paying Boling. Prospect also brought claims of conversion, promissory estoppel, breach of fiduciary duty, and breach of the covenant of good faith and fair dealing against Breen.

U.S. District Judge Kevin McNulty of the District of New Jersey dismissed Prospect’s suit in the entirety based on issue preclusion, using the Kentucky court’s finding that the loan contracts were void and unenforceable.

On appeal, Prospect argued that the Kentucky court mischaracterized the Kentucky judgment. It claimed the Kentucky court invalidated only portions of the loan agreements that were labeled with the word “agreement,” and not the sections signed by Breen, which were labeled “acknowledgement.”

But Third Circuit Judge Stephanos Bibas, joined by Joseph Greenaway Jr. and Patty Shwartz, said the acknowledgments are not separate and distinct from the agreements. The documents, together, compose a single, merged agreement that was invalidated by the Kentucky court, Bibas said. He cited a clause in the deal stating that the agreement, grant of lien and attorney acknowledgment together “constitute the entire agreement of the parties.”

Prospect also argued that the Kentucky judgments do not determine whether Breen is liable under common law. But Bibas wrote that “all of Prospect’s claims are really just repackaged breach-of-contract claims” which rely on the contracts as the source of duty or the property right and assert violations of the contracts as the basis for liability. “Because the contracts are void, these claims fail,” Bibas said.

The lawyer representing Prospect, Michael Confusione of Hegge & Confusione in Mullica Hill, said he was not authorized to comment on the ruling.

Breen was represented by Philip Stern and Andrew Thomasson of Stern Thomasson in Springfield, New Jersey. Stern said he was pleased “the court did not allow [Prospect] to relitigate this case after it was litigated in Kentucky. What they’re saying is no, you had your bite at the apple,” Stern said.