Image courtesy of ColoradoFamilyCenter.com
Have you heard about the latest hot investment? No, it’s not plastics, young graduate. Lawsuits. Yes, lawsuits. But I’m not talking about prosecuting (or persecuting) litigation. I’m talking about investing in other people’s suits.
Actually, it turns out there is nothing new about this practice, but like wide ties (or is it narrow ties this year?) some things do eventually come back in style. What we are seeing is the resurgence of a very old feudal practice banned by British Common Law (upon which our legal system is based). Let’s take a look.
Jeffrey Segal, M.D., J.D, founder of Medical Justice, delivers the disturbing message.
At one time, before many of us were born, plaintiffs had to bankroll their own lawsuits. There, they would pay the attorney for his time and counsel. The plaintiff bore the entire risk for the outcome. But, if he won, he kept the entire pile of money, minus his expenses paid to the attorney.
The next – and dominant – paradigm: contingency fees. There, the risk is transferred to the attorney. In exchange for accepting that risk, the attorney keeps a healthy portion of any settlement / judgment after expenses. That amount is generally 33 to 40%. Naturally, the plaintiff’s attorney must diligently assess the risk / benefit for each opportunity. If the attorney loses, the plaintiff does not go bankrupt.
Enter the modern age.
Third party financing of lawsuits, as reported in the NY Times on November 15th:
Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings…
Ardec Funding, a New York lender backed by a hedge fund, lent $45,000 in June to a Manhattan lawyer hired by the parents of a baby brain-damaged at birth. The lawyer hired two doctors, a physical therapist and an economist to testify at a July trial. The jury ordered the delivering doctor and hospital to pay the baby $510,000. Ardec is collecting interest at an annual rate of 24 percent, or $900 a month, until the award is paid.
For decades, state laws prevented people from “betting” on other person’s lawsuits (scrabble word: “champerty”). The rationale: such interventions would stir up vexatious litigation. Recent changes in some state laws are propping open the floodgates.
The New York Times article fleshes out the practice a bit more, revealing some of the good and bad aspects:
Lawsuit lending is a child of the subprime revolution, the mainstream embrace of high-risk lending at high interest rates that began in the early 1990s.
(T)he founder of the LawFinance Group, practiced law for more than two decades before moving into finance in California in 1992. A lawyer friend called to ask if he would lend to a client who had won a sexual harassment lawsuit. The woman’s former employer had appealed, and she needed money for living expenses or she would be forced to take a smaller settlement. Mr. Zimmerman invested $30,000 in the case; the former employer almost immediately dropped the appeal and paid out the verdict. Mr. Zimmerman made $20,000. “I said: ‘That’s an interesting way to make money. Is there a way to turn that into a business?’ ” he recalled. The company he created has since invested more than $350 million in litigation.
. . . A review by The New York Times and the Center for Public Integrity shows that the inflow of money is giving more people a day in court and arming them with well-paid experts and elaborate evidence. It is helping to ensure that cases are decided by merit rather than resources, echoing and expanding a shift a century ago when lawyers started fronting money for clients’ lawsuits.
But the review shows that borrowed money also is fueling abuses, including cases initiated and controlled by investors. A Florida judge in December ordered an investment banker who orchestrated a shareholder lawsuit against Fresh Del Monte Produce to repay the company’s legal expenses, ruling that the case should not have reached trial.
Back in the good old days, when feudal lords ran the show in England, and life-expectancy was 35 for those few children who survived into adulthood, it was not uncommon for the nobility to dabble in such things. From the Wiki:
The restrictions arose to combat abuses in medieval England. Unscrupulous nobles and royal officials would lend their names to bolster the credibility of doubtful and fraudulent claims in return for a share of the property recovered. Gradually, judicial independence was established and by the early 19th century Jeremy Bentham wrote:
A mischief, in those times it seems but too common, though a mischief not to be cured by such laws, was, that a man would buy a weak claim, in hopes that power might convert it into a strong one, and that the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a hundred barons? Neither fearing nor hoping, hating nor loving, the judge of our days is ready with equal phlegm to administer, upon all occasions, that system, whatever it be, of justice or injustice, which the law has put into his hands.
Brings to mind the image of Denny Crane sauntering into the courtroom with an AK-47:
Well, you get the idea.
The concepts of champerty and maintenance followed. From AMLaw.com:
“Maintenance” is assistance to a litigant in pursuing or defending a lawsuit provided by someone who does not have a bona fide interest in the case. “Champerty” is a form of maintenance in which a nonparty undertakes to further another’s interest in a suit in exchange for a part of the litigated matter if a favorable result ensues. 14 Ohio Jurisprudence 3d (1995), Champerty and Maintenance, Section 1. “The doctrines of champerty and maintenance were developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law.” 14 Corpus Juris Secondum (1991), Champerty and Maintenance, Section 3.
Stated a different way,
“Champerty was a ‘means by which powerful men aggrandized their estates and the background was unquestionably that of private war.'” Id. at 375 (quoting Max Radin, Maintenance by Champerty, 24 Cal.L.Rev. 48, 58-64 (1935)). In response to rampant champerty and maintenance in feudal society, the law came to sternly prohibit these practices….
Some US states still have laws prohibiting champerty and maintenance, but many do not. My own beloved state of South Carolina is one of the latter, based on a decision in the case of Osprey, Inc. v. Cabana Ltd. Partnership:
The South Carolina Supreme Court held that champerty-an agreement to finance a party’s litigation in return for a portion of the matter involved in the lawsuit in the event of a successful outcome–can no longer be used as a defense to void financing agreements between parties to a lawsuit and outside financiers…
An appellate court agreed with the trial court that South Carolina recognizes the doctrine of champerty. However, the court limited the doctrine based on the reasoning that times have changed since the medieval era when champerty was strongly disfavored…
Affirming, the state high court modified the appellate court’s ruling and completely abolished champerty as a defense. Other well-developed principles of law can more effectively accomplish the goals of preventing financing of groundless lawsuits and the filing of frivolous suits than the outdated notion of champerty, the court noted. The court observed that lawyers are prohibited from prosecuting frivolous lawsuits and may face various sanctions for doing so. Also, the doctrines of unconscionability, duress, and good faith establish standards of fair dealing between opposing parties. In addition, the court continued, the legislature has made barratry-the promotion of groundless judicial proceedings-a misdemeanor.
The court cautioned that its abolishment of champerty as a defense does not mean that all such financing agreements are enforceable. When an agreement is challenged, a court must consider whether the fees charged by the financier are excessive or whether any recovery is vitiated because of impermissible overreaching by the financier, the court explained. To determine what is fair and reasonable, a court may examine, among other things, whether the bargaining positions of the parties were equal and whether the financier engaged in officious intermeddling. After analyzing these factors and any others that may be relevant, a court may enforce, modify, or set aside an agreement, the court concluded.
I guess “excessive fees” are in the eyes of the beholder. I think 24 percent interest per year is a little high, personally.
The courts today have decided for the most part that champerty is OK due to the far more transparent nature of our legal system when compared to that of feudal times. Oh well. I guess I’ll have to defer to the judges, mostly former lawyers, who are the only ones in position to decide how current lawyers practice. In some ways, champerty is a rather paradoxical thing. Trial lawyers, mostly on the Left for some reason, love the chance to have someone invest in their cases, allowing more grandiose “evidence” and “experts” to be brought to bear, all for the benefit of their client. Of course, this feeds the horrendous Capitalist greed of the investors at 24% interest. So everybody wins. Except for the concept of justice.
The whole point of the ban on champerty was to prevent undue influence on any particular case, the thwarting of justice in the name of profit or other motive beyond the scope of the situation itself. In the old days, the mere presence of the feudal lord and a few of his cronies sitting in the back sharpening their lances was enough to sway the court. Thus, a little investment of time and money went a long way. Today, of course, the investors are paying surrogates to accomplish the intimidation, providing the finest “expert testimony” money can buy (literally) in exchance for their 24% interest. This isn’t justice, and it isn’t fair or even particularly nice. In addition, the plaintiff becomes beholden to the investor, and could be forced into a trial that isn’t even necessary, in order to pad a judgement that never should have been made in the first place. Yup, justice is served, alright. On a silver platter with ketchup.
The argument about tort reform always provided by the Left in general, as well as trial lawyers in particular, is that damage caps would unfairly limit “justice” in the form of compensation, and might not allow full recovery of damages. While that might be true in a few cases, it is probably more reasonable to assume that the problem lies more with the amount of compensation the attorney will receive. Human nature, folks. Gotta love it. Champerty, too, is touted as path to justice for those who otherwise couldn’t afford it. Balderdash. In my book, this is simply a way to add a layer of profit to an already rigged system. And yes, I do mean rigged. As I have bemoaned before, our tort system is totally out of whack, and clearly encourages abuses such as champerty, since the folks with the most cash backing them up can buy the best testimony. Remember, if testimony can be paid for, then it can be bought. Human nature strikes again.
Now don’t get me wrong, I like profit. But only when achieved on a level playing field. I despise those who made money offering bogus investments like the derivatives based on bad loans. (By the way, many thanks to Barney Frank for bringing down the US economy with his rabid insistance on the offering of loans to his constituents who couldn’t possibly pay them back, leading the banks to try to dispose of the loss in this manner.) Similarly, champerty is profitable because it is profitable to game the legal system, and thus deserves nothing but scorn. No one will convince me otherwise.
Since the courts and legislatures are filled with lawyers, champerty is likely with us to stay. The solution, however, is simple, and provides an end-around run to bollux the lawyer’s plans. Sadly, it involves sacrifice on the part of physicians, and most will never go along. Still, my logic is sound, and I think you’ll agree I have a point.
To repeat what I noted above, if testimony can be paid for, then it can be bought. The incentive to please those paying the exhorbitant bill leads one to testify to whatever it is that side wants to hear. Testimony from an “expert witness” can run as high as $10,000-$20,000 per case. This is ridiculous. What I have proposed in the past is a simple decoupling of testimony from payment. Witnesses must be subpoenaed, and brought to the court to TELL THE TRUTH, with no bias, and no incentive to say one thing or another. They must not be beholden to either side, but rather be truly impartial experts. The truth can only be set free if no one can buy it.
Clearly this will never happen unless legislated into law, and the chance of that is about as likely as my getting an invitation to Osama Bin Laden’s grandson’s Bar Mitzvah. I know several litigators, and when I tell them of my idea, they laugh. It seems that the first question any doctor asks when approached for testimony and case review is “HOW MUCH???” Gimme, gimme, gimme. We are no better than the lawyers in that regard, are we? It’s OK to take money for testimony, but it sure isn’t any fun when you yourself get sued based on the evidence of some hired gun. As usual, we are our own worst enemies.
Champerty and maintenance. Just when you thought it was safe to talk to lawyers again.
Oh, I almost forgot. Happy Thanksgiving, everyone! (Even lawyers…)