Litigation Finance in Michigan

Michigan is one of the relatively few states that have directly addressed the question whether litigation finance agreements are enforceable, as well as the question whether they are subject to usury laws.  Michigan courts have expressed rejected the doctrine of champerty, thus permitting outsiders to provide financial support to litigants.  In addition, in Michigan, courts have held that litigation finance agreements are not regulated by usury law, as long as there is some risk at the time of the agreement that the funder will not be repaid.

Michigan does not recognize the common-law doctrine of champerty as a defense to the enforcement of a contract. In Smith v. Childs, 497 N.W.2d 538, 540 (Mich. Ct. App. 1993), the plaintiff sued multiple defendants and reached a settlement agreement with one of them, under which the settling defendant guaranteed the plaintiff a minimum recovery of $20,000.  If the other defendants prevailed, the settling defendant would pay the plaintiff that amount.  If the plaintiff prevailed and received less than $20,000 from the other defendants, the settling defendant would make up the difference.  And if the plaintiff obtained more than $20,000, the settling defendant would pay nothing.  Another defendant contended that this agreement was invalid as against the doctrine of champerty, but “[t]his argument fails because the defense of champerty does not exist in Michigan except as specified by statute with regard to attorneys.”

In Lawsuit Financial, L.L.C. v. Curry, 261 Mich. App. 579, 588; 683 N.W.2d 233, 239-40 (2004), the Michigan Court of Appeals voided a litigation financing agreement where the defendant in the underlying case had admitted to full liability to the extent of $27 million in damages.  Because the plaintiff was practically guaranteed a tremendous recovery, the court found that the litigation financing constituted a usurious loan.

We believe that the transactions at issue here were loans because at the time the advances were made, plaintiff had an absolute right to repayment. In support of its argument that plaintiff did not have an absolute right to repayment, plaintiff directs us to language in the agreements that states that repayment is contingent on defendant Curry’s recovery. Despite that language in the agreements, we conclude that the right to repayment was absolute because the parties entered into those agreements long after the defendants in the underlying personal injury suit admitted liability and after the jury returned a verdict of $ 27 million in damages.
Id. at 588.

In a subsequent case in federal district court, a litigation finance agreement was held to be outside the scope of Michigan’s usury laws because, at the time of contracting, the claimant was not assured of a recovery and, therefore, its obligation to repay was truly contingent.  MoneyForLawsuits V LP v. Rowe, No. 10-cv-11537, 2012 U.S. Dist. LEXIS 43633 (E.D. Mich. Mar. 29, 2012).

 Topics:  litigation finance, legal reform, third-party funding, Michigan, usury, non-recourse financing

 Works Cited: Lawsuit Financial, L.L.C. v. Curry, 261 Mich. App. 579; 683 N.W.2d 233 (2004)