We used to author occasional “There’ll Always Be Posner” posts, highlighting the latest ruminations of that lively, capacious intellect. But it is doubtful whether we will ever have occasion to pen another such post, since Judge Posner stepped down from the Seventh Circuit. But Judge Danny Boggs still sits on the Sixth Circuit, and he still seems to have his fastball. We’ve mentioned a couple of times our admiration for Judge Boggs — he of the notorious clerk trivia quiz, spotty performance as a lifeline on Who Wants to be a Millionaire, host of Kentucky Derby parties, and dazzling mastery of prose and law. Last week he wrote a rather long opinion in Boling v. Prospect Funding Holdings, LLC, 2019 WL 1858506 (6th Cir. April 25, 2019), a case about whether certain litigation funding contracts were enforceable. We will, in turn, write a rather short summary. It will lack the Judge’s splendid phrase-turning, but it will give a sense of the main issues and rulings. Our summary might even inspire you to go the original opinion, especially if you have a case involving litigation funding. Call today’s effort a Boggs-post.
The plaintiff in Boling claimed injuries when a gas can ignited. He and his wife sued the manufacturer of the gas can. Over the course of the litigation, the plaintiff entered into four litigation funding agreements. The funding was in the form of loans (more on that later), but the plaintiff was not required to repay the loans unless he recovered money from the personal injury lawsuit. But if he did need to repay the loans, he would repay big-time. The interest rate was 4.99 % per month, which works out to an annual interest rate of approximately 79%. The plaintiff borrowed a total of $30,000, not including fees. After the case settled, the lender presented a bill for over $340,000. No wonder the plaintiff wanted to find a way out.
The plaintiff filed an action in the Western District of Kentucky seeking a declaratory judgment that the litigation funding contracts were unenforceable under Kentucky statutes prohibiting champerty and usury. He won. The funder appealed to the Sixth Circuit. The issues centered around where the case should have been litigated, what law applied, and whether the contracts ran afoul of champerty and usury laws.
The conundrum is that the four litigation funding contracts had inconsistent provisions regarding forum selection and choice of law. One of the four permitted the plaintiff to choose the forum. The others did not. The district court went with the plaintiff-can-choose provision, and reasoned the judicial economy would be served by dealing with all four contracts in the same place. On appeal, the funder argued that the court should have split the claims and permitted different fora for different contracts. But the funder had not argued that position below. The Sixth Circuit held that the funder had forfeited that argument and that the plaintiff’s choice of forum prevailed. That part was relatively easy.
Choice of law was not so easy. None of the four contracts selected Kentucky law to govern. But no matter what the contract said, the Kentucky federal court had to apply Kentucky choice of law based on the most-substantial-relationship test. Even so, wouldn’t the contracts’ choices of law be dispositive? The answer, somewhat surprising to our eyes, is: Nope. Kentucky’s most-substantial-relationship test trumps even an otherwise valid choice of law clause when the dispute is centered in Kentucky. The underlying lawsuit was filed in Kentucky and the plaintiff in that case was a Kentucky resident. When he executed the litigation funding contracts, he was in Kentucky. In short, the litigation funding dispute was over the proceeds of a Kentucky lawsuit and would determine how much a Kentucky resident could keep. So grab hold of glass of Buffalo Trace, find a Stephen Foster playlist on your iPod, place a bet on the ponies, put on your blue basketball jersey, and start delving into Kentucky law, because that is what is going to decide the champerty and usury issues.
It turns out that how to apply Kentucky law was a good deal simpler than whether to apply it. Kentucky’s champerty statute voids any contract where a non-party renders services in aid of a lawsuit and thereby acquires an interest in “the thing sued for or in controversy thereof.” The funder argued that it had merely acquired a contingent interest in the potential proceeds of the claim, and that should pass muster under Kentucky law. The plaintiff pointed out that Kentucky forbids assignment of claims in personal injury suits, plus the litigation funding contracts gave the funder “substantial control over the litigation” (e.g., forcing the plaintiff to execute documents or pay filing fees to protect the funder’s interest, limiting the right to change attorneys, etc.) The district court worried that the litigation funding contracts might have the effect of discouraging a reasonable settlement if the plaintiff feared all of the proceeds would go to the funder. The Sixth Circuit painstaking analyzed Kentucky precedents, and concluded that the district court correctly predicted that the Kentucky Supreme Court would deem the litigation funding contract champertous and in violation of Kentucky’s public policy.
Kentucky’s defined legal rate of interest is 8% per year, so the whopping 79% in the litigation funding contracts certainly smells usurious. The funder argued that the funding agreements were not really loans. The problem for the funder is that the Kentucky statute does not limit its scope to loans. Thus, whether the funder wants to call the arrangement a “non-recourse investment” rather than a loan, the usury restriction still applies. Moreover, the funding agreements clearly speak in terms of interest rates, not profits. Therefore, the Sixth Circuit held in Boling that the district court had not erred when it granted summary judgment to the plaintiff on the basis of the usury statute. (We should point out, just in case you wondered, that the district court granted summary judgment in favor of the funder on unjust enrichment and promissory estoppel, and awarded the funder $30,000 for the principal plus $4625 in fees. Rough justice?)
This is not the first time a court has voided a litigation funding agreement. We wrote about a Pennsylvania court holding such an agreement champertous here.