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

Georgetown Journal of Legal Ethics, The, Summer 2004 by Hananel, Andrew, Staubitz, David

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