Litigation funding contract held invalid by Pennsylvania court

By Kerry Goff | Nov 17, 2016

HARRISBURG – In WFIC LLC v Labarre, a three-judge Superior Court panel in September ruled that a complex funding contract was invalid because it met the definition of champerty, which means to invest in litigation with the promise of future proceeds.

The basics of the case involve Polymer Dynamics Inc. (PDI), which sued Bayer for fraud and theft of trade secrets. PDI believed its case was worth more than $100 million, but a jury awarded $12.5 million. The company sought investors to fund its appeal and anticipated retrial.

Bruce McKissock, the lawyer hired to handle the case, was due to be paid 7.5 percent of PDI’s award, with payment to the investors to come out of his share. After the appeal failed, he wound up with nothing. 

McKissock, whom PDI blamed for the disappointing outcome of the case, ended up suing the investors to recover the fees he believed he was owed. He argued that his fee should have been considered a lien against PDI’s recovery, so he should have been paid before investors.

In an opinion written by Judge John Bender, he agreed with the lower court that McKissock did not have a valid lien under the revised fee agreement, which it deemed invalid.

Pennsylvania champerty has three elements, the court said: The outside funder must have no legitimate interest in the underlying suit; it must expend its own money on the litigation; and it must be entitled to share in the proceeds of the suit.

The court argued that PDI’s plan to pay investors out of McKissock’s contingency fee met all of those criteria.

“The litigation fund investors are completely unrelated parties who had no legitimate interest in the Bayer litigation,” the court opinion said.

“The litigation fund investors loaned their own money simply to aid in the cost of the litigation, and in return, were promised to be paid ‘principal, interest, and incentive’ out of the proceeds of the litigation.”

Therefore, the court held, the fee agreement is champertous and McKissock was entitled to receive nothing.

George Bochetto of Bochetto & Lentz, who represented the investor in PDI’s case, said that it remains to be seen how this will affect future litigation since there is not much precedent in Pennsylvania on champerty or litigation funding.

The arrangement between PDI, McKissock and the investors in this case was much more complicated than ordinary litigation funding agreements, Bochetto said, and the court was concerned about whether the lawyer had a controlling say in the resolution of the litigation.

The three-judge panel unanimously declared the litigation funding agreement itself “champertous,” and therefore void and unenforceable by anyone.  

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