Litigation Finance in South Carolina

South Carolina recognizes that banning litigation financing is not necessary to prevent frivolous litigation and abuse of process.  In 2000, the South Carolina Supreme Court abolished the doctrine of champerty and permitted third parties to invest in litigation.  The basis for this decision was its conclusion that modern tort law includes more than enough instruments for sanctioning parties who bring unfounded cases.

In Osprey, Inc. v. Cabana Ltd. P’shp., 340 S.C. 367, 382, 532 S.E.2d 269, 277 (2000), the court considered the legality of a contract under which the plaintiff funded litigation undertaken by the defendant.  The contract was a loan with a conditional repayment provision.  The defendant would receive $50,000 for its litigation.  If the defendant prevailed and obtained a recovery in excess of $150,000, it would repay $150,000.  If the defendant obtained less than $150,000, it would still have to repay $50,000.

The defendant did prevail, obtaining a settlement of $650,000.  But it refused to tell the plaintiff how much it had received or to repay according to the terms of the contract.  The plaintiff sued to enforce its contract for a portion of the litigation proceeds.  The trial court, dismissed the case on the pleadings, holding that the contract was void because it violated the doctrine of champerty.  On appeal, the intermediate appellate court held that South Carolina still recognized the doctrine of champerty, but it held that there was a factual question whether the contract was champertous.  The Supreme Court considered whether champerty was a part of South Carolina law, and, if so, the extent to which it still applied.

In a thorough discussion of the history of the doctrine of champerty, the Supreme Court noted that it was originally intended to prevent “officious intermeddling” and the “stirring up” of unmeritorious lawsuits.  But the court concluded that champerty was no longer needed to prevent such misconduct.  Its analysis explains why the most common argument against litigation finance simply carries no weight:

we abolish champerty as a defense. We are convinced that other well-developed principles of law can more effectively accomplish the goals of preventing speculation in groundless lawsuits and the filing of frivolous suits than dated notions of champerty.

For example, a lawyer is prohibited from prosecuting a frivolous lawsuit and may face various sanctions if he or she files frivolous pleadings. . . .  A litigant forced to endure a frivolous lawsuit has a statutory remedy in the South Carolina Frivolous Civil Proceedings Sanctions Act. . . .

Furthermore, the doctrines of unconscionability, duress, and good faith establish standards of fair dealing between opposing parties. . . .  In addition, the Legislature has defined barratry, i.e., the promotion or exciting of groundless judicial proceedings, as a misdemeanor offense.

The court also noted that litigation finance agreements were enforceable to the same extent as other contracts, as long as they were free from gross unfairness or overreaching by one of the contracting parties.

Topics:  litigation finance, legal reform, third-party funding, South Carolina, champerty

Works Cited: Osprey, Inc. v. Cabana Ltd. P’shp., 340 S.C. 367, 382, 532 S.E.2d 269 (2000)