LAW LOANS A MODERN TWIST TO AN OLD
CONCEPT
"Ohio Court Says Advances to Litigants Are Void as Champerty"
BY DAVID L. HUDSON JR.
So-called law-loan companies have
been on the rise since the mid-1990s. But the Ohio Supreme Court dealt
them a dramatic blow last week. The court ruled that these companies may
not advance funds to litigants in exchange for a return of the proceeds of
the case at a high interest rate. Specifically, the state high court ruled
that an agreement between a litigant and two funding groups was void under
state law as champerty and maintenance, ancient practices long outlawed in
Ohio, according to the court. Rancman v. Interim Settlement Funding Corp.,
99 Ohio St.3d 121, 2003-Ohio-2721 (June 11). Black's Law Dictionary
defines maintenance as "maintaining, supporting, or promoting the
litigation of another." Champerty is a type of maintenance in which a
nonparty furthers another's litigation interests in exchange for a part of
the proceeds if the suit ends favorably. Roberta Rancman sued her
insurance company for uninsured motorist benefits in March 1999 for
injuries suffered in a one-vehicle collision. But she was unable or
unwilling to wait for the insurance proceeds. Against the advice of her
attorney, Rancman contracted with Interim Settlement Funding Corp. for an
advance of funds. Interim and another company, Future Settlement
Funding Corp., agreed to forward Rancman $6,000 in exchange for the first
$16,800 she would recover if the case was resolved within 12 months,
$22,200 if resolved within 18 months, or $27,600 if resolved within 24
months. Rancman settled the case against the insurance company for
$100,000 within 12 months of filing suit and then refused to pay the
companies the contracted amount. Instead, she returned the money with 8
percent interest. Then, in December 1999, she sued the companies, asking a
judge to rescind the contracts and declare them void as unconscionable. A
magistrate judge concluded the loans were usurious under Ohio law, and a
trial judge adopted that finding. The Ohio Court of Appeals affirmed the
lower court ruling. On appeal, the Ohio Supreme Court also ruled for the
plaintiff-but on dramatically different grounds. "The advances here are
void as champerty and maintenance regardless of whether they are loans or
investments," the court wrote. "The ancient practices of champerty and
maintenance have been vilified in Ohio since the early years of our
statehood. The advances sub judice constitute champerty because FSF and
Interim sought to profit from Rancman's case. They also constitute
maintenance because FSF and Interim each purchased a share of a suit to
which they did not have an independent interest; and because the
agreements provided Rancman with a disincentive to settle her case."
"Equally troubling is a champertor's earning a handsome profit by
speculating in a lawsuit and by potentially manipulating a party to the
suit," the court wrote. "Speculating in lawsuits is prohibited by Ohio
law.
An intermeddler is not permitted
to gorge upon the fruits of litigation." "We are pleased that we have been
able to eliminate a business practice in the state of Ohio which preyed on
unfortunate and desperate personal injury victims," say Jim Slater and
Walter Kaufmann, Rancman's lawyers, in a statement. "We are looking
forward to sharing our research and information with counsel who wish to
take on this challenge in other states." The decision is "curious," says
legal ethics expert Peter Joy, a law professor at Washington University in
St. Louis. "The court decided that the contract was void as champerty and
maintenance but never really discussed the underlying basic issue of
usury," though it noted that the interest rate was at least 180 percent.
"Even though the court cites a case from 1996, the terms champerty and
maintenance are legal terms that were typically used in the 1800s and up
through the early 1960s," Joy says. "Champerty and maintenance for the
first part of the 20th century were concepts used to make contingency fee
agreements illegal." Joy explained that most states since then have
followed the ABA's compromise position of permitting contingency fee
agreements but prohibiting lawyers from making loans to clients. Loaning
money to clients has been determined to give lawyers too much of an
interest in a case and perhaps an advantage over lawyers who do not make
loans. "It would be better if Ohio and other states were to set a fixed
cap on what lenders could charge in interest," Joy says. "The case is
significant because these law-loan companies have been on the rise since
the mid-1990s." Robert Stefancin, an Akron attorney who represented
Interim Settlement Funding Corp. and Future Settlement Funding Corp., did
not return calls by press time.
