- As litigation funding becomes more prevalent, the courts must determine how a variety of laws govern litigation funding arrangements.
- The US Third Circuit Court of Appeals recently advised attorneys and funders when a litigation finance loan could constitute a “debt” under the Fair Debt Collection Practices Act (FDCPA).
- The opinion is that while a client’s obligations may constitute a debt under the FDCPA, an attorney’s obligations cannot.
As litigation funding becomes more prevalent, the courts must determine how a variety of laws govern litigation funding arrangements. So far, the courts have mainly focused on two issues: 1) whether or when communications with the funder can be protected by attorney or labor product privilege, and 2) whether the agreement is enforceable in the face of possible legal or common law defenses such as championship, maintenance, barratry and usury. The US Third Circuit Court of Appeals recently advised attorneys and funders when a litigation loan could constitute a “debt” under the Fair Debt Collection Practices Act (FDCPA), 15 USC Section 1692. ff.
Practitioners following developments in litigation funding case law are likely to recognize the Boling name. As of 2014, cases have been initiated in the western district of Kentucky (Boling’s home district) and New Jersey (the forum and statute set out in the Litigation Funding Agreement) regarding the enforceability of Christopher Boling’s litigation funding agreement. . After years of litigation, the Sixth Court ruled in 2019 that the District Court had not disregarded the Forum’s provisions on the selection and selection of laws in the litigation funding agreement entered into by Boling.1 The application of Kentucky law ultimately made the agreement unenforceable, which would not have been the result had the notion of choice of law been applied in New Jersey.
It seems like a final decision that the agreement is unenforceable should the end of the story be, but it wasn’t. After the Western District of Kentucky determined that Boling’s litigation funding agreement was unenforceable and the appeal was pending, the funder’s attorneys (Callagy Law) filed an infringement suit against Boling’s attorney, Michael Breen, pending execution of a confirmation of the Litigation was based on funding agreement. In response, Breen filed a lawsuit in New Jersey District alleging Callagy Law violated the FDCPA. The District of New Jersey dismissed Breen’s claim because its litigation funding agreement obligations did not constitute a “debt” as defined by the FDCPA, and Breen appealed.
The opinion of the third circle
On April 5, 2021, the third district issued its decision in Breen v. Callagy Law PC20-1445, —- Fed. App’x —- (3d Cir. April 5, 2021). The opinion analyzes what litigation funding obligations may constitute a “debt” under the FDCPA and determines that while a client’s obligations may constitute a debt under the FDCPA, an attorney’s obligations cannot.
The Third Circuit argued that the FDCPA definition of “debt” is controlling. The FDCPA defines debt as an actual or alleged obligation to pay money to a creditor when the obligation results from a transaction that is primarily for personal, family, or household purposes. Breen argued that Christopher Boling and his wife Holly entered into the litigation funding agreement to pay for living and medical expenses while Christopher Boling’s assault lawsuit was pending. The court agreed, without making a decision, that “the commitments of the Bolings can be a ‘debt’ under the FDCPA. “
However, the court ruled that Bolings attorney’s obligations did not constitute fault under the FDCPA. Breen’s obligations under the Agreement (if any) did not arise for his own personal, family, or household purposes. Rather, his obligations arose in connection with his professional representation with the Bolings, and “it is common knowledge that debts incurred for commercial, business or professional purposes are not FDCPA debts.” (Changes and quotations omitted).
There are two main types of litigation funding arrangements: 1) client-facing, where the funder enters into an agreement with the client (as in the Boling case), and 2) solicitor, where the funder enters into an agreement with the attorney or law firm. Within the first category of customer-facing litigation financing arrangements, a distinction can be made between financing arrangements that are effectively consumer credit and financing arrangements that are used exclusively or primarily to finance litigation. Just as the risks and considerations of the parties differ between these types of agreements, so do the tradeoffs Breen Case.
For parties to customer-oriented financing agreements, the Breen case offers two points to consider depending on the purpose of customer-oriented financing. First, when funding is for living or medical expenses, funders and the lawyers they represent need to think about the FDCPA. Although the Sixth Circuit did not believe that customer facing finance used for food and medical purposes was a “debt” under the FDCPA, the court has advised lawyers and litigation that the fund’s customer beneficiary may have an FDCPA – Has a claim if the funder’s collection procedures otherwise violate the FDCPA.
Second, if the customer-facing funding is only intended to pay the client recipient’s legal fees and other legal costs, the funding is likely not a “debt” under the FDCPA. However, funders who enter into such agreements and the lawyers who represent them should consider whether it would be beneficial to explicitly state in their agreements that the funds will only be used to pay the costs of the litigation and thus all arguments of the client Eliminate -receiver ultimately uses the funds for personal reasons.
For parties to lawyer-controlled financing agreements, the Breen Case probably won’t change anything. Law firms as corporations and / or corporations are not “consumers” under the FDCPA, and even with individual lawyers like Breen, attorney-led funding is provided for commercial and professional costs associated with running a law firm while engaged in (generally long and complex) litigation on behalf of clients with contingent fees or clients who are unable or unwilling to pay the full costs of the litigation while the claim is pending. So it is not an FDCPA “guilt”.