The Minnesota Supreme Court Overturns Common Law Prohibition Against Champertous Agreements
In Maslowski v. Prospect Funding Partners, et. al, A18-1906 (Minn. June 3, 2020), the Minnesota Supreme Court abolished the common law prohibition against champerty. This landmark decision arose from a 2012 automobile accident, involving Pamela Maslowski. Maslowski sought financing from Prospect Funding Partners, LLC. Prospect advanced Maslowski $6,000 in exchange for a portion of her settlement, including interest. Maslowski and her attorney reviewed the agreement and agreed to all terms. In 2015, Maslowski settled her claim but refused to pay Prospect, claiming the contract was unenforceable
Prospect brought suit in New York against Maslowski and her attorney. After transferring venue to Minnesota, the district court and the Court of Appeals both found the champertous contract was invalid, pursuant to longstanding common law prohibiting such agreements.
The Minnesota Supreme Court reversed and abolished the common-law doctrine against champertous agreements. Champerty is defined as an agreement to divide litigation proceeds between the owner of the litigated claim and a party unrelated to the lawsuit who supports or helps enforce the claim. Champerty was frowned upon for centuries as it was perceived as a way for people to intermeddle with litigation, stir up strife, and disturb the peace. See Huber v. Johnson, 70 N.W. 806 (Minn. 1897). The Minnesota Supreme Court most recently considered the status of champertous agreements in 1932 and held them to be void as a matter of public policy.
The Supreme Court concluded such agreements, similar to the recent acceptance of contingency fees, allow attorneys to take cases the client would not otherwise be able to afford. The Rules of Professional Responsibility and Civil Procedure can address potential abuses of the legal system that necessitated prohibition of champerty to begin with. For example, attorneys still cannot file frivolous claims and the terms cannot be unconscionable.
The Supreme Court issued warnings to be cautious and scrutinize litigation financing agreements to determine whether equity allows enforcement. Courts will consider whether both parties were counseled when entering into litigation financing agreements to ensure the financiers do not attempt to control the underlying litigation.