MINNEAPOLIS (Legal Newsline) - Companies that front lump sum payments to plaintiffs in exchange for a percentage of what is recovered in their lawsuits can continue to charge whatever interest rate they want, the Minnesota Supreme Court says.
The 60% repurchase rate charged by Prospect Funding Partners to Pamela Maslowski does not violate the state's usury laws, the court ruled in a 4-3 vote Aug. 23, because Maslowski would not have had to make those payments if she lost her lawsuit.
The ruling is the latest to decide whether the deals struck by litigation financers are traditional loans subject to state limits on interest rates. The industry says they are not, given the risks of recovering nothing from the plaintiff.
Maslowski and Prospect's previous trip to the Supreme Court resulted in it striking a prohibition on the practice, called champerty. This time, the Supreme Court overturned lower rulings that the agreement violated usury laws.
The agreement came as Maslowski pursued an automobile accident lawsuit. She was given $6,000 by Prospect for living expenses and agreed to repay that amount, $1,425 for a processing fee and a 30% repurchase rate every six months.
Her lawsuit eventually settled, leading to a long court fight over repayment to Prospect.
"(S)ome states have explicitly changed their laws (on litigation financing)," the opinion says.
"The Legislature would be best poised to decide what an acceptable interest rate may be - possibly higher than the limit on conventional loans due to the uncertainty of recovery, but low enough to prevent vulnerable individuals from falling prey to predator lenders.
"The question before us, though, is a narrow one - does the litigation financing agreement between Prospect and Maslowski fall under Minnesota's usury law? And under the law as it currently stands, it does not."
The majority found fault with lower courts finding the rate was usurious under Minnesota law even though Maslowski's original claim was only that it was "unconscionable."
"Because the district court resolved the unconscionability argument regarding the repurchase rate on the usury statute without considering Maslowski's primary argument claiming the 'repurchase rate' was 'unconscionable on its face,' we remand that issue for the district court's determination," the majority opinion says.