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Setting the record straight on litigation funding rulings in Pennsylvania

  • Case law & ethics
October 23, 2019
Andrew Cohen

We all know the adage that hard cases make bad law. But the Pennsylvania courts have succumbed recently.

As every lawyer knows, champerty is a dying doctrine: “The consistent trend across the country is toward limiting, not expanding, champerty’s reach.”[1]

That is true in Pennsylvania too.

In December 2015, Judge Bissoon of the Western District of Pennsylvania issued a decision in Obermayer, Rebmann, Maxwell & Hippell LLP v. West enforcing a litigation funding agreement against claims of champerty and usury and finding West liable for the amount owed under the funding agreement to his funder, Fast Trak.

However, in a “hard case” ruling, in September 2016, the Pennsylvania Superior Court affirmed summary judgment in WFIC, LLC v. Labarre, deciding (apparently sua sponte) that the underlying contingency agreement was champertous. The Court was reacting to an agreement under which the attorney, McKissock, and the client, PDI, agreed that the lawyer’s contingency would increase from the previously negotiated 7.5 percent to one third of the award, and that McKissock would pay the litigation funders out of the contingency, taking priority over his own payment. The court, evidently disapproving of this eleventh-hour approach and indeed the entire peculiar transaction, applied the archaic champerty doctrine:

The Litigation Fund Investors are completely unrelated parties who had no legitimate interest in the Bayer Litigation. The Litigation Fund Investors loaned their own money simply to aid in the cost of the litigation, and in return, were promised to be paid “principal, interest, and incentive” out of the proceeds of the litigation.[2]

But was Pennsylvania really bucking the national trend, or was the Superior Court just reacting sua sponte to some facts that it did not like? We think nothing has changed in Pennsylvania: First, observe that the WFIC court fudged the champerty analysis in a couple of ways. PAFCO, one of the alleged champertors, was not necessarily an unrelated party (a key element of a champerty definition) – it was a senior secured creditor of PDI.

Unlike in Frank v. Tewinkle, 45 A.3d 434 (Pa. Super. Ct. 2012), here the alleged champertor did not take assignment of the claim or take over prosecution of the suit, and merely financed the attorneys litigating the case. Had the Superior Court done a deeper analysis, it may well have found the doctrine of champerty not to apply. More important, the WFIC court applied Pennsylvania law, while the West court applied New York law, pursuant to the funding agreement. As others have noted, there is no reason for funders to use Pennsylvania law to govern their funding contracts, as long as there is some substantial relationship with another, friendlier, jurisdiction. Schifano v. Schifano, 471 A.2d 839, 843 n.5 (Pa. 1984).

There is no reason for lawyers or clients to avoid financing litigation in Pennsylvania. The Superior Court may have had a knee-jerk reaction to a hard case, but carefully written contracts with trustworthy and experienced partners should provide more than sufficient reassurance.

[1] Del Webb Communities, Inc. v. Partington, 652 F.3d 1145, 1156 (9th Cir. 2011).

[2] WFIC, LLC v. Labarre, No. 1985 EDA 2015, Slip Op. at 11 (Pa. Super. Ct. Sept. 13, 2016).