Litigation Finance in Washington

Washington is another state with an appropriately progressive attitude towards litigation financing.  Although Washington courts have not ruled on the question of litigation financing in recent years, a decision from the 1970s demonstrates that the economic dynamics of contemporary litigation financing are consistent with Washington law.  This decision demonstrates that an economically rational investment in litigation is lawful.

The case arose from a unique kind of transaction that was briefly common in the 1970s.  At that time, there were strictly limits on the interest rates that banks could pay on certificates of deposit.  But a loophole permitted the banks to pay a “bonus” to a “money broker” who would place a deposit with the bank on behalf of a depositor.   In these transactions, the “money broker” would pay a portion of the bonus to the depositor, thus effectively giving the depositor interest above the maximum allowable rate.  Splitting the bonus was of doubtful legality, however.  Thus, some brokers worked through their own intermediaries to mask the ultimate disposition of the money in the transaction.

One of these transactions went wrong because of wrongdoing by a broker’s intermediary, and the depositor sent out funds but never received a certificate of deposit from the bank.  The broker reached an agreement with the depositors, promising to pay the depositor’s legal fees if the depositor first tried to obtain recovery from the bank instead of from the broker.  In the legal action by the depositor against the bank, the bank argued that the depositor’s claims should be dismissed because the broker’s agreement with the depositor was champertous.

In Giambattista v. Nat’l Bank of Commerce of Seattle, 586 P.2d 1180 (Wash. Ct. App. 1978), the Washington Court of Appeals rejected this argument.  It noted that, in modern law, the doctrine of champerty is only applied to prevent “officious intermeddling” in disputes between other parties. In the court’s view, the broker’s agreement to pay the depositor’s expenses was not “officious intermeddling” because the broker had a legitimate interest in the outcome of the depositor’s suit against the bank.

 Although the agreement between the broker and depositor had some significant differences from current litigation financing agreements, the Giambattista decision established that it is not unlawful for one party to provide financial support for another party’s litigation, as long as the funding party is not instigating the case and has its own independent interest in providing the funding.  This principle would certainly apply to the kinds of litigation finance agreements that are prevalent today.

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

 Works Cited: Giambattista v. Nat’l Bank of Commerce of Seattle, 586 P.2d 1180 (Wash. Ct. App. 1978)