Oregon Litigation Finance Journal

Does State Law Prevent Lawsuit Financing?

A state’s interpretation of doctrines of champerty and doctrines of maintenance are often used as arguments to invalidate funding contracts between funding providers and claimants.  In both Minnesota and Ohio, financing agreements have been voided by the Supreme Courts in each state. As an example, in Johnson v. Wright, the Minnesota Court of Appeals rescinded a funding agreement.  

The current trend for lawsuit funding especially with respect to tort financing is to allow legal funding so long as the funding agreements do not offend judicial sensibilities.  The previous prohibitions against high rate lending has been relaxed in Ohio, Nebraska, and Maine.  Each state has passed legislation allowing third party funding and a framework for the business.  

28 out of 51 jurisdictions allow some form of maintenance for legal funding.  These states include: Arizona, California, Colorado, Connecticut, Florida, Hawaii, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Washington, and West Virginia.  

New York has taken a nuanced view of champerty and maintenance.  New York is an important state for legal funding because many legal finance companies are located there and many of the best pre settlement loan companies use New York Law as a basis for evaluating loans on lawsuits.  

Usury is a Contract Defense that can Invalidate a Funding Agreement

The majority of the time, usury as a defense is relevant only with regard to tort legal advances because commercial investments are exempt to to their size and more plaintiffs are businesses.  The most common type of tort advance are car accident loans for plaintiffs who are having a difficult time making ends meet and returning to work from an injury.