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October 6, 2016

PA Superior Court Rules that a Litigation Funding Arrangement is Champertous

Third-party litigation funders have aggressively expanded their business models on an assumption that the venerable doctrines of champerty and maintenance are dead. But a new decision of a Pennsylvania appellate court brushes aside that premise.

In that ruling, the Superior Court of Pennsylvania concluded that a litigation funding arrangement was champertous — and therefore unenforceable: WFIC, LLC v. Labarre, 2016 WL 4769436 (Pa. Super. Sept. 13, 2016).

In that case, an attorney entered into a contingency fee agreement with his client under which a third-party litigation funding (TPLF) company that had loaned money to pursue the litigation matter would be paid out of counsel’s expected fees. When the litigation concluded, creditors got into a dispute about which should have priority in the distribution of available assets, and in the course of sorting that out, the appellate court concluded that the counsel’s agreement to pay the funder out of his fees was invalid and therefore unenforceable.

In its ruling, the appellate court observed that “‘the common law doctrine of champerty remains a viable defense in Pennsylvania.'” The court then proceeded to find that the elements of champerty existed in the TPLF arrangement: “The Litigation Fund Investors are completely unrelated parties who had no legitimate interest in the . . .[l]itigation. 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.” Thus, the court concluded that the TPLF arrangement counsel had established was invalid.

Presumably, this decision will make litigation funders nervous about getting involved in litigation in Pennsylvania or other jurisdictions in which common law champerty/maintenance principles continue to be applied or have not been explicitly rescinded. 

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