Pamela Maslowski was injured in a car accident and retained the law firm of Schwebel Goetz & Sieben to commence a personal-injury action on her behalf. Two years later, Maslowski entered into a litigation-funding agreement with Prospect Funding Partners. Under the terms of the agreement, Maslowski sold to Prospect an interest in her personal-injury action for $6,000. In the event Maslowski recovers damages, Prospect is entitled to receive $6,000, a $1,425 processing fee, and 60% annual interest based on a set schedule, for a total “repurchase” amount not to exceed $25,245. After settling her personal injury action, Maslowski brought this action in Minnesota seeking a declaration that the agreement is invalid because it is champertous and unconscionable. Prospect, at the same time, filed a breach of contract case against Maslowski in New York. Both the Minnesota court and the New York court rejected application of the New York forum-selection clause, and the New York lawsuit was dismissed. In Minnesota, the trial court refused to apply the New York choice-of-law provision in the litigation-funding agreement, concluding that it was drafted to evade Minnesota law, and determined that the entire agreement was void and unenforceable. The Court of Appeal affirmed.
“Minnesota law prohibits champerty and maintenance for public policy reasons. These prohibitions are designed to prevent officious intermeddlers from stirring up strife and contention by vexatious or speculative litigation which would disturb the peace of society, lead to corrupt practices, and pervert the remedial process of the law.”
In this particular case, Prospect was not a party to Maslowski’s personal-injury action. “The agreement speculates on Maslowski’s potential recovery by effectively selling $6,000 to her in exchange for her payment of a $1,425 administrative fee and a 60% annual interest rate on the ‘repurchase’ of the $6,000, with Maslowski owing nothing if she does not recover in the underlying action. And the agreement requires Maslowski to relinquish control over certain aspects of her action, such as requiring Prospect to be notified if she retains a different attorney and requiring her attorney to sign an ‘Acknowledgement’ and ‘Letter of Direction’ as to how Prospect should be paid. The key circumstances of this case – a contingent recovery, exorbitant interest rate, and a contrived interest in the underlying litigation – are the same as those Minnesota’s appellate courts have deemed to violate the law against champerty and maintenance.”
Maslowski v. Prospect Funding Partners, No.18-1906, 2019 WL 3000747 (Minn. App. Sept. 25, 2019).