Ethics of Law Loans in the Post-Rancman Era, The

Ethics of Law Loans in the Post-Rancman Era, The

Hananel, Andrew

INTRODUCTION

Until recently, the doctrines of maintenance and champerty were believed to be all but dead.1 Maintenance is defined as the giving of assistance to a litigant by someone who does not have a bona fide interest in the case.2 Champerty, a subset of maintenance, is defined as undertaking to further another’s interest in a suit in exchange for a part of the litigated matter if a favorable result ensues.3 While almost all states have kept champerty and maintenance prohibitions on their books, few states have made explicit reference to the doctrines in recent years.4 This is not to say that incidents of actions that could be said to be prohibited by these doctrines have declined. If anything, the opposite is true. The internet has provided fertile ground for companies who offer non-recourse loans that need not be repaid should the lendee prove unsuccessful in their case.5 The controversial part of these transactions lies in the fact that, should the litigant win or reach a favorable settlement, the lending company claims the right to a very substantial chunk of that verdict or award.6 Some states have chosen to deal with challenges to the validity of these types of transactions through contract law doctrines such as duress or unconscionability.7 Others have chosen to legalize the practice to some extent.8 And then there is Ohio.

In Rancman v. Interim Settlement Funding Corporation,9 the Ohio Supreme Court resurrected the doctrines of champerty and maintenance in order to rule a “law loan” contract invalid. Part I of this Note will analyze the Ohio Supreme Court’s reasoning in coming to its decision in Rancman, as well as a historical overview of champerty and maintenance and the state of the law generally in regards to transactions that may constitute champerty or maintenance. Part II of this Note will consider the ethical implications of the “law loan” and identify the major policy issues driving the debate over the ethics of law loans.

I. RANCMAN AND THE STATE OF THE LAW

The fact that the Ohio Supreme Court chose to refer to the doctrines of champerty and maintenance must have come as a surprise to both parties in Rancman. After all, neither party raised the issue at trial or at the Court of Appeals for Summit County.10 In Rancman, the plaintiff was seriously injured in a car crash and filed suit against her insurance company, claiming benefits under a policy in the name of her estranged husband.11 The plaintiff, Roberta Rancman, did not want to wait until a judgment was reached in her case and accordingly contacted Interim Settlement Funding Corporation (“Interim”), the defendant, in order to obtain an advance of funds secured by her pending claim.12 After looking into Rancman’s case, Interim agreed to forward $6,000 to Rancman in return for the first $16,800 she recovered if the case was resolved in 12 months, for the first $22,200 if resolved in 18 months, or for the first $27,600 if resolved within 24 months.13 If Rancman did not resolve the suit in her favor, the parties agreed that no repayment would be required.14

Within the first 12 months of the suit, Rancman and her insurance company settled for $100,000.15 However, instead of fulfilling her agreement with Interim, Rancman refused to pay the amount owed on the contract and instead tried to repay the amount of money loaned plus eight percent interest per annum.16 When Interim refused to accept such payment, Rancman filed suit against Interim seeking recission of the contract and a declaratory judgment that the practices of Interim were “unfair, deceptive, and unconscionable sales practices.”17 At trial, the magistrate ruled in Rancman’s favor based on a finding that the transactions between Rancman and Interim were loans that violated the portion of Ohio’s usury laws that establish limitations on legally permissible interest rates for small loans.18 The Court of Appeals agreed that the transactions were loans and that the loans were void because Interim did not have the requisite licenses to undertake such loans.19 In arguing before the Ohio Supreme Court, Rancman argued that the advances were loans because Interim had incurred no risk in the transaction.20 Interim argued that the advances were investments and that Ohio places no limits on the permissible returns on investments.21 The court affirmed for Rancman based on the seldom used doctrines of champerty and maintenance.22

The Ohio Supreme Court found the transaction between Rancman and Interim to be champertous because Interim sought to profit from Rancman’s case.23 In addition, the court found that the transaction constituted maintenance because Interim agreed to purchase a share of a suit in which they did not have an independent interest.24 The court worried that such an arrangement provided Rancman with a disincentive to settle her suit.25 The court pointed out that, assuming Rancman’s attorney charged a 30% contingency fee, Rancman would have a disincentive to settle for less than $24,000 in the first 12 months of the suit because such a settlement would result in her receiving nothing.26 For these reasons the court invalidated the contract between Rancman and Interim under the champerty and maintenance laws of Ohio.27

A. HISTORICAL OVERVIEW-CHAMPERTY, MAINTENANCE, AND CONTINGENCY FEES

The common law maintenance doctrine developed in feudal England in response to the practice of feudal lords of maintaining all of their retainers’ lawsuits in order to enlarge their estates.28 Christianity invoked an influential attitude that litigation in itself was to be discouraged even if a claim was well founded.29 A more paternalistic justification held that the wealthy should be prohibited from acquiring property by convincing plaintiffs to part with their claims for much less than their actual value.30

Champerty and maintenance were originally used most frequently to bar lawyers from seeking contingency fees.31 This use stemmed from the Roman and English laws prohibiting advocates from accepting compensation for their services.32 Furthermore, collection of any fees at all by attorneys was frowned upon by Christianity, which tended to view litigation as morally suspect.33 It wasn’t until 1908 that the American Bar Association (“ABA”) finally granted approval of collection of contingency fees by attorneys in the US.34 In part, this was a reflection of the view in the United States that litigation is a form of political or even commercial speech that was worthy of being encouraged.35 Also, with an increasing number of industrial accidents involving working class plaintiffs with few resources, concerns for fairness dictated that contingent fees should be allowed in certain situations.36 Finally, young lawyers who were seeking to establish themselves found that taking cases on a contingency basis provided them with more clients, since more clients could afford to hire them.37

In the end, it was the notion of risk that enabled contingency fees to become ethically acceptable.38 In other words, the fact that the attorney is not assured of the outcome of the case should, in theory, serve to minimize any conflict of interest or legitimacy problems which would naturally crop up.39 Contingency fees must be reasonable in light of the risk, cost and effort needed to bring the case to conclusion.40 Of course, many of these factors are often not met. One concern has been that in many contingency situations the risk is low, and the amount charged is out of proportion to the amount of time needed for the case.41 The use of contingency fees also creates a system of unapproved cross subsidies in which attorneys take on low risk cases which require little effort and still charge high contingency fees in order to make up for much riskier or more time consuming cases.42

B. INDUSTRY OVERVIEW

1. LAW LOAN BUSINESS

There are many different ways in which law loan companies conduct their businesses. Some companies pool claims that they have acquired and sell shares of these funds to raise money.43 Similar to mutual funds, this is a way for investors to diversify the risk of investing in the claims. Other companies buy claims with borrowed money and do not attempt to find independent investors.44 There are also circumstances where law loan companies have people invest directly in individual claims rather than a portfolio of claims.45 These direct investments carry a little more risk but have a greater upside. No matter what the form of funding, the general corporate model is similar. Most of the companies have different divisions focusing on locating claims that can be acquired, on due diligence (determining which claims make good investments and under what terms), and on litigating claims that have been acquired.

2. CLAIM ACQUISITION

This is the most important function of any law loan company because it is how a portfolio is constructed. The lender must first identify claims that can be bought.46 The best way to do this is to have lawyers bring clients who need loans to the lender. Sometimes, lenders provide these lawyers with fees for making such references.47 Also, many companies have web sites that advertise their services.48 It is not unusual to find advertisements in legal professional journals.49 Thus, there are many ways for lawyers to learn about these companies and the services they provide. Particularly where referral fees are involved, it is likely that lawyers will interact with the same law loan company on a regular basis and build a relationship whereby he will bring clients to only that company.50

3. DUE DILIGENCE

Once a claim is identified, the company must evaluate it and decide how to structure the transaction. There are a couple of options that are available in this regard. The company can have the plaintiff assign his interest in the claim to it.51 The company might choose this route if it feels that there is an excellent chance of winning the suit and thus that there is great upside.32 Under this arrangement, the claim would essentially be owned by the law loan company and the plaintiff would be merely a figurehead.53 However, the company would not want to drop the plaintiff from the case for fear of raising standing issues. If a court were to recognize that an independent third party was now controlling the litigation, it might dismiss the claim.54

It is important to decide whether the original lawyer will continue to litigate the case and whether there is any reason to insist that the original plaintiff keeps some interest in the litigation.55 If the company is satisfied with the job that the lawyer is doing, it could choose to have him continue to litigate the case. However, if it seems that the company’s litigation department might be more successful, part of the assignment could involve buying the lawyer out so that the litigation can be handled internally.56 If the plaintiff is an integral part of the litigation (e.g., his testimony is necessary or for some other trial related reason), the company is likely to give the plaintiff an incentive by insisting that he maintain some ownership in the claim.57

When the plaintiff keeps some ownership of the case, a secondary option exists that is somewhat different than straight assignment-partial sale.58 A partial sale involves the plaintiff selling shares in the litigation to the law loan company.59 The plaintiff can be compensated with cash or legal services.60 In this way, the plaintiff is able to maintain an interest in the suit while at the same time hedging the risk that he will not recover any money.61 From the perspective of a law loan company, this option is less of an investment and therefore, less risky than a straight assignment. This is a better option for the company if a claim is a little riskier.

Finally, there is the law loan. Companies that extend loans do so with the lawsuit as collateral. They evaluate the merits of the lawsuit and determine what rate of return they will need to earn in order to justify taking the risk of loaning the plaintiff money.62 Control over the suit is a question that is also determined in negotiations and the varying degrees of control can factor into the interest rate the loan carries.63 From the perspective of the plaintiff, the loan is fully nonrecourse in that if the lawsuit does not generate a settlement or award, the loan is forgiven and there is no further liability. This is the hardest option for the law loan company to evaluate and thus, is offered to low-risk claims.64

4. LITIGATION

Once a claim is acquired, there is a varying degree of involvement on the part of the law loan company. As discussed above, part of the transaction is determining who will control the litigation of the claim. Many plaintiffs’ attorneys operate small law offices with few resources. They rely on contingency fees and often take loans themselves to finance their business. The law loan company’s litigation department offers a crutch that can be very valuable to such an independent lawyer.65 Thus, in all transactions, the company will offer whatever support is needed.

C. STATE OF THE LAW BEFORE RANCMAN

Outside of Ohio, the approaches taken by states regarding whether law loans constitute champerty and maintenance fall into roughly four categories: statutes, common law, public policy, and legal champerty.66 New York is a good example of a state that has placed a prohibition against champerty in its statutes. section 489 of the Judiciary Law states a general prohibition against the practice and makes violation a misdemeanor.67 The language of the provision indicates that the New York State Legislature intended to put an end to investment in litigation.68 The courts of Pennsylvania69 and Oklahoma,70 as well as other states, recognize the common law rule against champerty and maintenance. States such as Connecticut71 and California72 have chosen to pursue a public policy based approach to champerty and maintenance. California has never actually adopted the common law doctrine of champerty; state courts there have declared champertous agreements to be void as a matter of public policy.73 Although such cases are a rarity, this approach is demonstrated in such precedents as Killian v. Millard14 where, despite a holding that the defendant lacked standing to challenge the validity of contracts between the plaintiff and its investors, the California Court of Appeal declined to overturn the lower court’s ruling that a lawsuit-syndication scheme violates California public policy against discouragement of settlements, fomenting litigation, and interference with the orderly process of the courts and litigation.75 Finally, there are states, such as New Jersey76 and Massachusetts, which have explicitly stated that champerty and maintenance are no longer part of the law.77 The Massachusetts courts reached this result in 1997 in Saladini v. Righellis.78

The facts of Saladini are, in substance, only slightly different from the facts of Rancman. In Saladini, the defendant sought to pursue a legal claim arising out of a property interest.79 The plaintiff agreed to loan the defendant the money needed to continue the suit on the condition that defendant would repay the loan and that plaintiff would be entitled to fifty percent of any net recovery remaining after payment of attorney’s fees.80 The Massachusetts Supreme Court took the opportunity not to affirm the place of champerty and maintenance within the law of the state but to declare that those doctrines would no longer be used.81 The court expressed its belief that champerty and maintenance were outdated doctrines born of distrust of litigation and the abuses of the feudal system, and that the concerns that the doctrines were originally designed to deal with were better controlled under a different rubric.82 Specifically, the court stated that in the future it would apply a reasonableness inquiry and would examine the circumstances surrounding each agreement to make sure that the deal was fair.83 The court listed factors that would be considered in such an inquiry including: the respective bargaining positions of the parties when the deal was made, whether both parties were aware of the terms and consequences of the deal, whether the lendee would have been able to pursue the suit without the loan from the lendor, and whether the amount that the lendee would receive out of any settlement or judgment, after paying off the lendor and attorney’s fees, would be reasonable under the circumstances.84 Through the use of these factors, the court believed that it would be able to make sure that the ethical and public policy concerns underlying the doctrines of champerty and maintenance would live on without having to adhere to formalistic and outdated rules.

Although it is true that most states have in the past exercised some form of control over champertous agreements, it is also true today that very few states strictly enforce those statutory, common law, or public policy based controls. Without going as far as the Massachusetts courts did in Saladini, other states have expressed varying degrees of willingness to enforce these controls.85 New York, for instance, has chosen to construe Judiciary Law section 489 very narrowly.86 The last time the New York Court of Appeals ruled on this provision, the court stated that “in order to fall within the statutory prohibition, the assignment of a legal claim must be made for the very purpose of bringing a suit and this implies an exclusion of any other purpose.”87 In addition, recent lower court rulings have held that the prohibitions of Judiciary Law section 489 do not apply unless mischief or strife was caused, especially where there is a legitimate business purpose for the assignment of a claim.88 In other words, the courts have strictly applied the statute only where the claimant could prove some sort of undesirable behavior.89 Merely buying an interest in the litigation of another has not been enough to trigger sanctions under the statute if the behavior seems benign.90

States such as Alabama have chosen to construe champerty much more broadly based upon a public policy against gambling and speculating in litigation.91 Alabama courts have found champerty even in cases where, as admitted by the court, the facts of the case did not fit the requirements for champerty but were “closely akin to champerty,” and the underlying public policy goals were implicated.92 Other states, including Alaska, Colorado, Nevada, Kentucky, Georgia, Maryland, Oklahoma, and Montana, prohibit champerty to some extent but have chosen not to invalidate an agreement on that basis for many years.93 The reasons for this lack of enforcement range from concern about overuse of the power of the courts to declare a contract void for reasons of public policy,94 to an acknowledgement that the reasons for a public policy against champerty have disappeared.9S Nevada has declared that as long as an investor in a suit has some interest or reasonably believes that they have some interest in that litigation, the agreement to finance the suit will not be voided as champerty.96 Finally, there are states such as Florida and South Carolina which have construed champerty according to a “modern view” which states that “officious intermeddling,” or “stirring up strife and continuing litigation,” are necessary elements of champerty.97

II. ETHICAL AND POLICY CONSIDERATIONS

All attorneys should be cognizant of the ethical guidelines dictated by the bar associations to which they belong. The Model Rules of Professional Conduct (“Model Rules”) (or some derivation thereof) have been adopted by a majority of the bar associations within the United States98 and serve as an ethical guide to practicing lawyers across the country.99 These rules can be violated in situations where a lawyer’s conduct would otherwise be legal-even if law loans are legal, it might be illegal for lawyers to involve themselves with such loans. Many of the ethical considerations that arise in the law loan context relate to the way the companies that furnish the loans conduct their business. In an attempt to gain access to prospective borrowers, the companies rely on those borrowers’ lawyers and thus, the state codes of professional ethics are implicated. Referral fees that companies pay to lawyers who bring them cases can also create ethical problems. Model Rules 1.5, 1.6, 1.8, 2.1, and 2.3 all seem to be implicated in some fashion in the law loan context and lawyers who bring their clients to law loan sources must evaluate the risk of being charged with professional misconduct.

A. RULE 1.5: FEES100

Under Model Rule 1.5, lawyers are prohibited from collecting “unreasonable fees.”101 This rule could be implicated if the referral fee paid to a lawyer by a law loan company is interpreted as having been paid by the client. This determination could be made even though said fees are actually paid by the law loan company because the client does compensate the law loan company for its services and the lawyer’s fee comes out ofthat compensation. If the rule is applicable, the fee that the referring lawyer earns would be considered unreasonable unless it were exceedingly small.

Rule 1.5 outlines a list of factors that should be applied to determine if a fee is reasonable.102 In evaluating the reasonableness of a fee, one must make an “informed application of the factors enumerated in Rule 1.5(a) to the circumstances of each case.”103 The first factor, relating to the time, novelty, and difficulty of the service for which the fee is paid, is applicable in the law loan context. The lawyer is paid the referral fee for bringing the client to the law loan company, a service that does not take much time or energy. The loan company’s brokerage network likely contacted the lawyer and made sure the loan was secured. The minimal effort on the part of the referring lawyer would probably not justify a fee. Under Rule 1.5(a), the fee can be justified if the service rendered precludes the lawyer from taking on other business.104 Any fee derived from a referral is unlikely to satisfy this standard because making a referral is not a substantial legal service requiring effort on the part of the lawyer. Moreover, one must consider whether the fee is customary for the service that is provided.105 This factor may cut in the direction of reasonableness if it is found that most lawyers who bring clients to law loan companies receive a similar fee. The money at issue and the results obtained in the litigation are also useful indicators in evaluating a fee.106 Once the trial is completed, the outcome could retroactively justify the referral fee and thus, the fee could be deemed reasonable (particularly if the law loan was integral in making it so). Each case should be evaluated separately but it is important to keep in mind that the courts have ruled that “a lawyer who drafts a fee agreement stands in a fiduciary relationship to the client and has the burden of showing the agreement is fair, reasonable, and fully understood by the client . . . any ambiguity in a written fee agreement will be resolved against the lawyer.”107

The ABA has promoted a transparent procedure and has tried to spur communications about fees between the lawyer and his client.108 In this respect, no matter the outcome in the reasonableness determination, Rule 1.5 dictates other requirements that are not likely met in the law loan context. “When developments occur during the representation that render an earlier estimate substantially inaccurate, a revised estimate should be provided to the client.”109 The referral fee might alter the original fee estimate so that it must be disclosed to the client. Moreover, Rule 1.5(b) creates an explicit duty on the part of a lawyer to disclose the fee that is charged to his client.110 Such a duty is heightened in the law loan context because a lawyer’s receipt of referral compensation would likely be considered a modification of his original agreement with the client (unless the loan is made before such an agreement is in place). When a modification is beneficial to the lawyer, there is a presumption of impropriety which must be overcome by complete disclosure.111 This requirement could be problematic because a client might become suspicious if he learns that his lawyer is profiting from the law loan. Furthermore, if the fee is considered a “shared fee” between the law loan company and the lawyer, Rule 1.5 dictates that the client must agree to the arrangement in writing.112 The client can object to the sharing agreement in the same manner as any fee charged by his lawyer.113 There is also some precedent which suggests that the two parties that share the fee can be liable as joint venturers should a problem arise.114 These issues could impact the effectiveness of the use of referrals by law loan companies.

B. RULE 1.6-CONFIDENTIALITY OF INFORMATION115 AND RULE 2.3-EVALUATION FOR USE BY THIRD PARTY116

Rules 1.6 and 2.3 are both implicated in the evaluation process that law loan companies conduct before making a loan to an individual. These companies need to use privileged information about a lawsuit in order to decide whether they can make a loan to a particular plaintiff. Under the confidentiality standards of Rule 1.6, a lawyer must have the informed consent of the client to release any information about a case.117 Similarly, under Rule 2.3, a lawyer must get consent from his client to release information (in the form of evaluations) about the litigation to a third party if it will materially impact the client’s interests.118 Thus, any evaluation based on information that the lawyer will provide must be consented to by the client. This does not pose much of a problem because the typical plaintiff who is attracted to law loan companies needs the money and services they provide. If the plaintiff desires the money, she will consent to have her information released-otherwise, the money will not be available. Nevertheless, a lawyer must be cognizant of this fact and be careful to make sure that he receives adequate consent before sending any information.

One issue that is not directly apparent from the text of the rule is that the duty imposed by Rule 1.6 survives the termination of representation and may extend to prospective clients.119 If the law loan company purchases the entire claim and the lawyer is excused, that lawyer still must comply with Rule 1.6’s requirement of confidentiality. Moreover, it seems that even if the client has yet to sign a formal retention contract, the lawyer must respect his confidentiality and cannot release any information to the law loan company without his consent. This restrains the potential for speculation in the law loan market.

C. RULE 1.8-CONFLICT OF INTEREST120

Rule 1.8 clearly applies to law loan referrals because there are conflicts inherent in the relationship between a referring lawyer and the law loan company.121 First, the rule prevents lawyers from entering into business transactions with their clients unless certain requirements are met.122 This provision might be relevant in law loans because a lawyer who refers a client to a law loan company may be considered to have conducted a business transaction with the client. The loan itself is certainly a business transaction, and the lawyer’s role in its origination may be considered part of the transaction. If this is so, based on the rule, in order to ethically refer a client to a law loan company, a lawyer must believe that the loan is fair and reasonable to the client, must disclose the referral fee, must give the client a chance to seek the advice of other counsel regarding the loan, and must receive informed consent in writing from the client that includes all of the essential terms of the loan.123 If all of these requirements were met, a lawyer will probably not be considered to have violated this section of Rule 1.8.

Rule 1.8 also limits the financial assistance that a lawyer can provide his client.124 A lawyer may pay court costs but is not allowed to provide any other financing.125 This limitation is intended in part to codify the champerty doctrine and is one of the reasons that lawyers must rely on law loan companies.126 Without this section of Rule 1.8, a lawyer could be free to provide liquidity to his clients in return for an interest in the litigation (although this might not be advisable economically as it would be very capital intensive). One issue that can arise under this section is what level of lawyer involvement in securing a law loan will be considered “financial assistance.” This would probably not be an issue if the client approaches the law loan company without the aid of the lawyer, but could be a problem if the lawyer refers the client to a specific company. Moreover, under a different section of the rule, a lawyer cannot acquire a proprietary interest in a lawsuit,127 which is exactly what a law loan company looks to acquire. Thus, if the lawyer is too involved in securing the loan, he could be considered to have acquired a proprietary interest in the suit through the law loan company.

As with other rules discussed above, this rule probably requires informed consent of the client in order for the lawyer to ethically take a referral fee from the law loan company. A lawyer may not be compensated for representing a client by anyone other than that client.128 If the referral fee is interpreted as compensation the lawyer receives for representing the client, this section could present a real issue. If this is the case, the lawyer will have to receive consent from the client after consultation, maintain complete control of the decision-making (which may be difficult if the law loan company purchases the claim outright), and abide by confidentiality requirements.129 Moreover, this requirement likely dictates the manner in which the law loan funds can be distributed-if the law loan company distributes the funds directly to the lawyer (to be applied against his fee), Rule 1.8 is probably violated, but if the funds are given to the client and the client pays the lawyer, a violation may be avoided.

D. RULE 2.1-ADVISOR130

Lawyers who involve their clients with law loan companies might find a safe harbor in this provision of the Model Rules. “A lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social, and political factors that may be relevant to the client’s situation.”131 A lawyer referring a client to a law loan company would likely argue that he is carrying out his responsibility as advisor to his client by securing necessary financing.132 On the other hand, opponents could argue that it is impossible for a lawyer who is paid a referral fee to give truly candid advice, as the rule requires. It seems that the rule is intended to grant additional power to a lawyer in circumstances such as this-where a lawyer can render advice that is integral to a client’s economic livelihood. The inclusion of economic considerations as a factor that can be used in determining what advice is candid supports this reading of the rule. It is likely that lawyers who refer clients to law loan companies will find justification for their actions in this rule.

E. ETHICAL CONSIDERATIONS IN ACTION

The question of whether it is ethical for a lawyer to assist a client by referring that client to a “law loan” company is still an open one. However, several states have issued ethics opinions that seem to suggest that there is nothing inherently unethical about such a recommendation. Arizona Ethics Opinion 91-22 dealt with this very question. The opinion states that referring a client to a law loan company does not in itself violate Model Rule 1.8(e) any more than assisting a client to obtain any other sort of loan so long as certain other rules, such as Model Rule 1.7 on conflict of interest, are followed.133 The opinion further states that such a referral would be unethical if the attorney has a personal interest in the loan service that would affect his independent judgment on behalf of the client or might lead to a conflict of interest.134 Also, assistance of the attorney should be fairly limited.135 The attorney should not reveal any information about a client unless the client has consented after a consultation.136 Finally, the attorney cannot ethically co-sign or guarantee a loan to a client provided by a third party.137

South Carolina Ethics Opinion 84-04 reaches similar conclusions.138 However, this opinion goes further towards allowing law loans by stating that an attorney can ethically counsel a client on the availability of such loans when the client asks for such information or when the attorney concludes in his professional judgment that the client’s legal and economic position warrants advice about such opportunities.139 The opinion provides that the attorney should inform both the lender and the opposing side that the client intends to maintain full control over the suit.140 Additionally, the attorney has a duty to fully advise the client about the advantages and disadvantages of such an option.141 The trend of states moving away from barring behavior by attorneys that could be characterized as champerty or maintenance based on a rethinking of ethical considerations is not new to the area. A key example of this is the movement from restriction of contingency fee arrangements for ethical reasons to the modern state of the law which allows contingency fees.142

F. POLICY DEBATE

In addition to the historical and ethical debate being waged, there are strong policy arguments to be made on both sides of this issue. The strongest argument for allowing law loans is that to not allow such transactions would effectively bar plaintiffs with few resources from receiving justice.143 Many plaintiffs simply do not have the resources to wage the war of attrition that characterizes so many suits against deep pocket defendants.144 While a plaintiff may be able to hire an attorney on a contingency basis, that plaintiff may not be able to cover his costs of living and medical expenses due to the injury he has suffered. Model Rule 1.8(e) bars attorneys from making loans to clients for personal expenses.145 No bank will engage in the risky investment in litigation.146 Therefore, even plaintiffs with a contingency fee arrangement will have a strong incentive to settle early and for a low amount. Law loans allow such plaintiffs to pursue their suit without having to choose between underselling their claim and bankruptcy.147

In addition, law loans cure some of the major strategic bargaining problems of the settlement system: “threat credibility” and bilateral monopoly.148 “Threat credibility” refers to the fact that, without the possibility of a law loan, a wealthy defendant can treat a potential plaintiff’s threat to litigate as negligible, since a great deal of the plaintiff’s resources would have to be spent to do so.149 A defendant will often not engage in settlement negotiations until a plaintiff has actually expended a great deal of his or her resources.150 Bilateral monopoly refers to the fact that, without the allowance of law loans, the defendant is the only party willing to “buy” the claim of the defendant. Therefore, the defendant can walk away from the table without fear that someone else will buy the claim.151 Once “law loans” are introduced, a plaintiff will be able to engage in the sale of the claim to other bidders, and litigate if the defendant is unwilling to bargain. This will cause deep pocket defendants to engage in settlement talks as if the parties had equal bargaining power.152

In modern times, the justifications for retaining the bans on champerty and maintenance seem to center on preventing the stirring up of baseless litigation.153 Other justifications include encouragement of settlement, prevention of unauthorized practice of law by corporations, prevention of strife, discord and harassment, and prevention of speculation in litigation.154

Many critics of champerty and maintenance point out that the doctrines seem to have been retained largely for historical reasons.155 Most of the modern justifications listed above are much more easily dealt with under various other legal mechanisms, whether they are contract law provisions such as duress and unconscionability, or provisions designed to deter frivolous or harassing litigation, such as the crime of malicious prosecution and Rule 11 of the Federal Rules of Civil Procedure.156 Also, lawyers who accept contingency fees are, in fact, champertors. An attorney accepting a contingency fee is really buying a share of a law suit and paying with legal services instead of cash.157 If ethical problems such as conflict of interest can be evaded, without resort to a general ban on the use of contingency fees it is hard to see why ethics or public policy require the type of blanket ban represented by modern champerty and maintenance laws. With a law loan, the party buying a share of the suit is far more disconnected from the intimate details and workings of the suit itself. In addition, champerty and maintenance seem to work a great inequity in that where an agreement is found to be champertous, the litigant will experience a windfall-the client will be allowed to keep the judgment, which would not have been the case were it not for the money lent.158

CONCLUSION

With the Rancman decision, the Ohio Supreme Court has reopened the debate over the ethics of law loans. The questions raised by this opinion will surely cause states with a two sided policy towards such loans to rethink their position as attorneys, clients, and law loan companies seek guidance on how such transactions will be treated. Rancman is likely to make it much more difficult for states to ban champerty and maintenance in theory but not in practice. Will states follow the Rancman decision with its concern for officious intermeddling and profiteering from lawsuits? Or, will states follow Saladini and subsume the doctrines of champerty and maintenance into contract doctrines such as duress and unconsionability? What is clear is that the industry will continue to evolve to meet the new obstacles presented by the changing legal climate.

ANDREW HANANEL* & DAVID STAUBITZ**

* J.D., Georgetown University Law Center (expected May 2005).

* J.D., Georgetown University Law Center (expected May 2005).

Copyright Georgetown University Law Center Summer 2004

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