October 07, 2022

Minnesota Supreme Court Takes on Litigation Financing for Second Time in Single Suit

For the second time in a single litigation (Maslowski v. Prospect Funding Partners, LLC, et al. v. James Schwebel, Esq., et al.), the Minnesota Supreme Court will consider the propriety and permissible scope of private litigation-financing of tort claims in Minnesota. The Minnesota Supreme Court previously determined on appeal in this litigation that private litigation financing does not violate the law against champerty. Now, the Minnesota Supreme Court will consider whether the litigation financing agreement violates Minnesota’s usury statute. 

The facts of the case are straightforward. After a car accident in 2012, Pamela Maslowski entered a litigation-financing agreement to fund her personal injury lawsuit. The litigation funder paid Maslowski nearly $7,500 and obtained an interest of up to $25,000 in proceeds resulting from the lawsuit. In addition to sharing any future proceeds, Maslowski agreed to repay the funder the "repurchase rate," which amounted to the purchase price plus 60% interest, applied annually, in the event she successfully recovered. Id. at 452–53. Maslowski further agreed that she would only hire new or additional attorneys if she first notified the funder in writing and required the new attorney to sign an agreement to remit funds from any judgment to the funder. Id. The agreement included a "liquidated damages" provision which would require Maslowski to pay the funder "twice the purchase amount," if Maslowski breached any part of the agreement. After settling her personal injury suit in 2015 for $70,000, Maslowski sought to avoid the litigation-financing agreement with the funder. Id. at 455. 

In June 2020, the Minnesota Supreme Court first considered the litigation financing arrangement in this case. It reversed the Court of Appeals' decision which had found that the litigation funding agreement at issue violated the common law prohibition against champerty. The Minnesota Supreme Court thereby abolished the doctrine of champerty in Minnesota. 

The case was remanded to the District Court, and Maslowski raised another challenge to the litigation financing agreement — this time arguing that it was usurious. The District Court concluded that the liquidated damages provision and "repurchase rate" were unconscionable and unenforceable. The Court of Appeals affirmed. With respect to the liquidated damages provision, the Court of Appeals found that "the threat of an absolute obligation to repay 200% of the entire purchase amount immediately upon breach" amounted to an impermissible penalty "designed to secure performance," rather than compensate Prospect. Id. at 455. More importantly, the Court of Appeals found the provision interfered with Maslowski's ability to have the legal counsel of her choice: "[i]n essence, the agreement imposes a $14,850 penalty upon Maslowski for not providing prior written notice of her intent to change attorneys, or for hiring an attorney who will not sign the acknowledgements Prospect requires." Id. at 457. The influence over Maslowski's choice of counsel, coupled with contractual language that required Maslowski to make "reasonable efforts not to enter into any settlement . . . that would restrict Prospect's contractual rights" under the litigation-financing agreement, amounted to an impermissible attempt to exercise control over the underlying suit. Id.

As to the "repurchase rate," the Court of Appeals likewise confirmed the lower court’s finding that, despite including language that the litigation-financing agreement was "not a loan secured by collateral" and stating it should be treated "as a sale transaction and not as a loan for all purposes," the "true character of the transaction" was that of a loan. Therefore, the usury statute and the 8% cap on interest under the statute applied. Id. at 458–59

It is unclear whether the Minnesota Supreme Court will uphold the applicability of Minnesota's usury statute to litigation-financing agreements, or reject it, as it did with the doctrine of champerty. Courts outside Minnesota have reached varying conclusions. For example, in Anglo-Dutch Petroleum Intern., Inc. v. Haskell, the Texas Court of Appeals determined that a litigation financing agreement was, as a matter of law, not usurious. 193 S.W.3d 87, 96 (Tex. Ct. App. 2006). The Texas Court determined there was no absolute obligation to repay the amount, because the obligation to repay was contingent on the claimholder's successful recovery on her claim. Id. Citing Anglo-Dutch Petroleum, the Supreme Court of Georgia has reached the same result. See Ruth v. Cherokee Funding, LLC, 820 S.E.2d 704 (Ga. 2018). Michigan, however, has struck down litigation financing agreements as unenforceable where the interest charged exceeded that permitted by Michigan's usury statute. See Lawsuit Financial, LLC v. Curry, 683 N.W.2d 233 (Mich. Ct. App. 2004). The Michigan Court of Appeals, however, did not analyze the issue of whether the obligation to repay was in fact contingent; although language in the contract made repayment technically contingent on recovery, the claimholder did not sign the contract until he had already received a favorable judgment, and all that remained to be litigated was a motion for remittitur and a determination of damages.

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