Litigation Funding: The Case for New York to Revise Section 489
Lawsuits are expensive. For those who wish to bring suit but cannot afford the costs, access to the legal system is barred by a hefty entry fee. Fortunately, a practice known as litigation funding makes the legal system more accessible to individuals who cannot afford to bring suit on their own. In effect, a third party firm provides the means for a plaintiff to sue in return for a share of the financial returns if the lawsuit proves successful. [1] Litigation funding provides firms with the option to profit from successful suits, giving them a natural incentive to aid plaintiffs—especially those with meritorious claims. [2] Litigation funding enables financially disadvantaged plaintiffs to start lawsuits based on the merit of their claims rather than their independent wealth or the random magnanimity of crowdfunding. New York Supreme Court Justice Eileen Bransten has acknowledged the advantages of litigation funding, stating that it attaches greater importance to the merit of the lawsuit than which party has “deeper pockets or stronger appetite for protracted litigation.” [3] In order for litigation funding to continue expanding access to the legal system in New York, however, the state must repeal the ancient champerty statute of Judiciary Law Section 489.
Litigation funding is heavily limited by the doctrine of champerty. Champerty, a concept originating in feudal France, is an agreement by which a “third-party pays some or all of the litigation costs in return for a share of the proceeds.” [4] Despite the similarities in their formal definitions, champerty fundamentally differs from litigation funding due to its historical purpose. Historically, champerty was a way for corrupt nobles to profit by backing the credibility of frivolous lawsuit claims in exchange for a large portion of the suit’s recovery. [5] Laws prohibiting champerty were consequently created to protect the justice system from such frivolous claims. [6] Current objections to litigation funding are similar to historical objections to champerty: litigation funding, like champerty, may become a vehicle for firms to overload the justice system with frivolous claims for profit. [7] This concern is understandable; as the availability of funding increases, the volume of litigation will also increase—a natural result of expanded access to the legal system. [8] However, this does not mean that litigation funding will cause a definite increase in frivolous lawsuits. This is because litigation funding firms typically avoid investing in frivolous lawsuits in the first place, as they have a low rate of success and therefore a lower chance of yielding profit. [9] Furthermore, the ability of litigation funding to expand access to the legal system for socially disadvantaged victims should take priority over concerns of potential frivolous lawsuits. New York should therefore abolish its ancient champerty statutes to protect litigation funding.
New York has one of the nation’s broadest restrictions on champerty. [10] The state’s champerty statute, Judiciary Law Section 489, prohibits entities from assigning many forms of funding “for the purpose of bringing an action.” [11] The expansive language of Section 489 ultimately impacts litigation funding due to its definitional similarities with champerty. In Justinian Capital SPC v. WestLB AG (2016), the New York Court of Appeals cited Section 489 to rule that a form of litigation funding was champertous. [12] In this case, non-party Deutsche Pfandbriefbank purchased notes from defendant WestLB that later lost significant value. Seeking to sue WestLB for fraud but fearing backlash from German legislators, Deutsche entered into an agreement with Cayman Islands litigation funding company Justinian Capital, the plaintiff of the case. As part of the agreement, Deutsche would provide the notes to Justinian so that Justinian could sue WestLB in Deutsche’s place. The Court ruled that, because Justinian assigned funds for the purpose of bringing an action, its litigation funding arrangement was champertous under Section 489. [13] This decision set a precedent in New York that broadly discourages litigation funding.
The ruling in Justinian Capital SPC makes a dangerous connection between litigation funding and champerty in Section 489, jeopardizing future litigation funding activity. Even the United Kingdom, whose ancient champerty statutes lie at the very basis of Section 489, prioritized expanding access to the legal system over preventing frivolous lawsuits. [14] In the past few decades, UK champerty laws have transformed significantly through a series of lawsuits culminating in Arkin v. Borchard Lines (2005). In this case, Arkin had filed a previous lawsuit against Borchard Lines with the support of a litigation funding company. Borchard Lines was able to successfully defend their claim, and sought compensation from the litigation funding company to recover their costs. [15] The England and Wales Court of Appeals ruled that the litigation funding company could be responsible for the recovery of Borchard Lines’ costs. [16] Perhaps more importantly, the court also clearly sanctioned litigation funding activity, stating that it “furthered the important public policy objective of facilitating access to justice,” which was “to be encouraged, not discouraged.” [17] The court recognized that champerty laws in the modern era are ironic: rather than serve their original purpose of preventing nobles from exploiting disadvantaged plaintiffs, current champerty laws prevent those same plaintiffs from taking advantage of the legal system.
In June 2020, Minnesota also acknowledged the misalignment between the ancient intentions behind champerty laws and the current legal system by abolishing its prohibition against champerty. In Maslowski v. Prospect Funding Partners LLC, the Minnesota Supreme Court held that while an agreement between Pamela Maslowski and Prospect Funding Partners LLC did violate Minnesota’s champerty prohibitions, the funding agreement no longer infringes upon “public policy as we understand it today.” [18] Concerns over nobles exploiting the poor to profit from frivolous lawsuits are outdated; moreover, the champerty laws to prevent these practices no longer prevent frivolous lawsuits. Litigation funding companies are unlikely to support frivolous claims, and champerty laws only hamper the capacity of litigation funding to expand access to the legal system. [19] Under this rationale, the court repealed the champerty laws, explaining that “as society changes, the common law must also evolve with it.” [20] Clearly, prohibitions against champerty are no longer the best way to protect vulnerable plaintiffs.
In the immortal words of Jeremy Bentham, champerty laws are a “barbarous precaution” born out of a “barbarous age.” [21] To prevent future decisions like Justinian Capital from curbing litigation funding activity, New York should repeal the ancient champerty doctrine embedded in Section 489. Both the United Kingdom—where champerty laws originated—and several U.S. states have already abolished their outdated champerty statutes. It is time for New York to do the same.
[1] Litigation Finance 101, LexShares, online at lexshares.com/litigation-finance-101 (visited July 15, 2020).
[2] Max Radin. “Maintenance by Champerty.” 24 California Law Review 1, 48 (1935).
[3] Litigation Finance 101.
[4] Sherina Petit, International Arbitration Report: Maintenance and Champerty (Norton Rose Fulbright 2016).
[5] Radin, “Maintenance by Champerty.”
[6] David Edmond Neuberger, “From Barretry, Maintenance and Champerty to Litigation Funding: Harbour Litigation Funding First Annual Lecture,” (lecture, Gray’s Inn, London, May 8, 2013).
[7] Jason Lyon, “Revolution in Progress: Third-Party Funding of American Litigation,” 58 UCLA Law Review 3, 39 (2010).
[8] Selling Lawsuits, Buying Trouble: Third-Party Litigation Funding in the United States (U.S. Chamber Institute for Legal Reform 2009).
[9] Shari L. Klevens and Alanna Clair, Litigation Funding in a COVID-19 World, Law.com (2020), online at law.com/dailyreportonline/2020/06/15/litigation-funding-in-a-covid-19-world/ (visited July 15, 2020).
[10] Ari Dobner, “Litigation for Sale,” 144 University of Pennsylvania Law Review 4, 1529 (1996).
[11] New York Judiciary Law Article 15 s 489
[12] Justinian Capital SPC v. WestLB AG, 28 N.Y.3d 160, 166 (N.Y. 2016).
[13] id
[14] Neuberger, “From Barretry, Maintenance and Champerty to Litigation Funding.”
[15] Arkin v. Borchard Lines Ltd. & Ors., 2 Lloyd's Rep 187 (EWCA 2005)
[16] id
[17] id
[18] Maslowski v. Prospect Funding Partners LLC, 890 N.W. 2d 756, 769 (Minn. 2017).
[19] Klevens and Clair, Litigation Funding in a COVID-19 World.
[20] id at 3
[21] Jeremy Bentham, Defence of Usury (Cambridge University Press 2014).