Another year, another leap forward for commercial litigation funding: as we predicted at the end of 2017, the industry’s rapid growth continued unabated in 2018. The year was marked by story after story covering the growth of litigation funds as an attractive alternative investment class – a testament to the proven track record of established litigation funders like Bentham IMF and to the value of litigation funding in a justice system facing rising litigation costs.
It’s clear the market continued to be “long” on litigation funding in 2018. But what about the courts?
Legal questions involving the enforceability of litigation funding agreements and the scope of discovery into claimants’ funding continued to percolate in the courts this past year. While the rulings are still mixed, 2018 saw greater coalescence around precedents favorable to funders – and even a few cracks in the opposition. If 2017 was the year that litigation funding established itself as a de facto fixture in the legal landscape, 2018 was the year that many courts began to move on from debating the validity of funding agreements to considering more technical questions concerning the operation of funding arrangements.
Drawing on the growing body of precedent upholding litigation funding arrangements, courts continue to reject attempts by funded parties to invalidate funding agreements:
- In Fast Trak Investment Co, LLC v. Sax, No. 4:17-cv-00257, 2018 WL 2183237 (N.D. Cal. May 11, 2018), the court, applying New York law, granted a litigation funder summary judgment based on the defendant lawyer’s failure to pay the funder its contractual return, rejecting defendant’s arguments that the agreement was champertous and usurious. The decision tracks numerous decisions before it finding that usury laws do not apply to contingent, non-recourse funding arrangements because such arrangements are not loans. Likewise, the court followed clear precedent in holding that champerty did not apply because the funder neither caused the litigation to be undertaken nor controlled it once started. 2018 WL 2183237, at *6. The decision also suggests that courts are gaining confidence in funders’ ability to defer to claimants on litigation strategy and settlement decisions: the court outright rejected defendant’s argument that a complaint the funder made about the lawyer’s withdrawal from a funded case established control, as “the very act of complaining indicates a lack of control over the underlying litigation.”Id.
- The Third Circuit similarly upheld a litigation funding agreement under New York law on the same reasoning that usury laws did not apply because a contingent, non-recourse funding is not a loan.
- The New York Supreme Court refused to apply New York’s champerty statute to a third-party—funded litigation seeking to recover Nazi-looted artwork, echoing prior cases holding that the statute is to be applied narrowly and “does not apply when the purpose of an assignment is the collection of a legitimate claim.”
- The Ninth Circuit upheld a contract between Chapter 11 debtors and a litigation funder over the debtors’ objections that the terms of the contract were usurious and unfair. Prior to filing for Chapter 11, the debtors had settled the funder’s claim for a return out of a successful litigation by executing a promissory note entitling the funder to over $50 million, with interest of up to 35%.In finding the note enforceable, the court noted that both parties were sophisticated, and the 35% rate reflected the funder’s considerable risk of nonpayment – factors that appear in virtually every commercial funding.
Courts also largely continued to protect communications with funders and funding agreements from discovery. For example, the Western District of Pennsylvania found that work product protection applied to the plaintiff’s communications with litigation funders and to the agreement itself, even if the relationship at issue was “commercial,” because the funders were “Plaintiff’s agents” and the communications were made in anticipation of litigation. In addition, the Northern District of California rejected a defendant’s request for discovery into the plaintiff’s mere consideration of litigation funding as irrelevant, noting that even the relevance of an executed funding arrangement is “contestable,” and that “potential litigation funding is a side issue at best.”
With respect to disclosure of third-party funding in litigation, 2018 also saw a more practical approach applied in the class action context. Judge Polster in the Northern District of Ohio, responsible for managing the multidistrict opiate litigation, ordered all counsel to submit a description of any third-party funding for in camera review, as well as affirmations from both counsel and funders that the financing does not: (i) create any conflict for counsel or affect counsel’s independent judgment, (ii) give the funder any control over strategy or settlement decisions, or (iii) affect party control of settlement. Having established this procedure, the Court noted that it would not permit any discovery into third-party funding “[a]bsent extraordinary circumstances.” While even such in camera review of third-party funding may not be necessary outside of the class action context, Judge Polster’s rational approach to disclosure serves as a much-needed lesson for advocates of mandatory initial disclosure of third-party funding to defendants like that proposed in the Litigation Funding Transparency Act of 2018.
Finally, in at least one jurisdiction generally considered unfriendly to litigation funding, there was a hint of open-mindedness toward funding. In a long-standing battle over a funding arrangement found unenforceable under Kentucky law (despite the parties’ choice of New York law in the agreement), the District Court for the Western District of Kentucky permitted the funder to seek restitution of its principal and fees. The court found that equitable relief remained available to the funder because “the illegality of litigation funding agreements was not a foregone conclusion at the time the parties entered into the loan agreements; in fact, it is still somewhat of an open question under Kentucky law.” While the court ultimately predicted that the Kentucky Supreme Court would come down against litigation funding agreements on the basis of champerty, it made clear that it considered there to be some room for the Kentucky Supreme Court to rule in favor of permitting funders to operate in the state.
As these cases demonstrate, 2018 continued the general trend toward courts’ acceptance and enforcement of litigation funding agreements. To the extent that decisions unfavorable to funding are still being reached, it may well be a case of bad facts making bad law: many of the decisions arise out of arrangements viewed by the court with some skepticism. For example, in Colorado, which previously ruled that litigation funding agreements are “loans” subject to its commercial code and usury laws, the federal district court granted discovery into a questionable litigation funding arrangement in a suit brought under the ADA. The court broke with the growing consensus that funding agreements are protected work product, at least in part because it found a “substantial need” for the agreement to be produced to determine if the plaintiff and funder were perpetrating a fraud on the court. The fact that the agreement explicitly limited the plaintiff’s ability to discontinue or settle the suit without the funder’s consent – and even required her to settle it “if so directed by” the funder – could not have helped things.
Notwithstanding decisions like these, we predict that in 2019 we will see continued momentum in the courts toward acceptance and enforcement of litigation funding agreements. Disputes will begin to focus less on the permissibility of funding, and more on the mechanics of their operation. Indeed, we’ve already begun to see this trend as courts grapple with whether and to what extent a funder may sue a lawyer to enforce an irrevocable instruction from the client regarding the disbursement of litigation funds to the funder.
We also predict that defendants’ growing use of champerty arguments to attack third-party funders will leak into other areas. For example, champerty arguments were raised last year against a Chapter 7 trustee who sought to sell litigation claims to the debtor’s controlling shareholder (who was also a co-plaintiff in the underlying litigation) where the estate lacked the resources to continue the suit. The court questioned whether champerty even applies “to a trustee’s sale of an asset in a liquidating case such as this,” given the trustee’s statutory duties and thus the lurking preemption issues. Should creative defendants continue to seek to apply champerty more broadly, it may only highlight how difficult it is to draw principled distinctions between litigation funding arrangements and the many other complex relationships that are found between claimants and third parties.
 Obermayer v. Fast Trak Investment Co., LLC, No. 16-1376, 725 Fed. Appx. 153 (3d Cir. 2018).
 Gowen v. Helly Nahmad Gallery, Inc., 77 N.Y.S.3d 605 (N.Y. Sup. N.Y. Cty. 2018).
 In re: Epicenter Partners, LLC v. CPF Vaseo Assoc’n, LCC, No. 2:16-bk-05493, 2018 WL 1354330 (9th Cir. March 15, 2018).
 Lambeth Magnetic Structures, LLC v. Seagate Tech., No. 2:16-cv-00538, 2018 WL 466045, at *5 (W.D. Penn. Jan. 18, 2018).
 Space Data Corp. v. Google LLC, No. 16-cv-02360, 2018 WL 3054797 (N.D. Cal. June 11, 2018).
 In re National Prescription Opiate Litig., No. 1:17-MD-2804, 2018 WL 2127807 (N.D. Oh. May 7, 2018).
 Boling v. Prospect Funding Holdings, LLC, No. 1:14-cv-00081, 2018 WL 2422753 (W.D. Ken. May 25, 2018) (emphasis in original).
 Id. at *4.
 Oasis Legal Fin. Grp., LLC v. Coffman, 2015 CO 63, ¶ 4, 361 P.3d 400, 401 (2015).
 Mize v. Kai, Inc., No. 17-cv-00915, 2018 WL 1035084 (D. Col. Feb. 23, 2018).
 See, e.g., Prospect Funding Holdings, LLC v. Breen, No. 2:17-cv-3328, 2018 WL 734665 (D. N.J. Feb. 5, 2018) (dismissing suit brought against attorney third party to funding agreement on the basis of Kentucky federal court’s determination that funding agreement was unenforceable); Prospect Funding Holdings , LLC v. Saulter, No. 1-17-1277, 102 N.E.3d 741 (Ill. App. 2018) (because purchase agreement unenforceable under Minnesota law, letter of direction re: client funds was also not enforceable against lawyer).
 In re Quivus Sys., LLC, No. 17-00119, 2017 WL 5198117 (D.D.C. Nov. 9, 2017).
 Ultimately, the court found champerty did not apply because the controlling shareholder could not be an officious intermeddler given its co-plaintiff status and its financial interest in the debtor’s claims proceeding.