Maslowski v. Prospect Funding Partners LLC

994 N.W.2d 293

Pamela MASLOWSKI, Respondent, v. PROSPECT FUNDING PARTNERS LLC, et al., Appellants, v. James Schwebel, Esq., et al., Respondents.

A21-1338

Supreme Court of Minnesota.

Filed: August 23, 2023

James R. Schwebel, James S. Ballentine, Matthew J. Barber, Schwebel, Goetz & Sieben, Minneapolis, Minnesota, for respondent Pamela Maslowski.

Daniel A. Beckman, Erickson, Bell, Beckman & Quinn, P.A., Roseville, Minnesota, for appellants.

Chad J. Hammerlind, Pillsbury Winthrop Shaw Pittman LLP, Austin, Texas, for amicus curiae American Legal Finance Association.

Jennifer E. Olson, TSR Injury Law, Bloomington, Minnesota, and Stephen M. Warner, Jeffrey M. Markowitz, Harrison E. Berg, Arthur, Chapman, Kettering, Smetak & Pikala, P.A., Minneapolis, Minnesota, for amici curiae Minnesota Association for Justice and Minnesota Defense Lawyers Association.

OPINION

McKEIG, Justice.

This case involves the enforceability of a litigation financing agreement. Appellants Prospect Funding Partners LLC, et al., seek enforcement of a litigation financing agreement they entered into with respondent Pamela Maslowski. The agreement was originally deemed unenforceable by the district court and court of appeals due to the common-law prohibition on champerty. We abolished the prohibition on champerty in a prior appeal. Maslowski v. Prospect Funding Partners LLC (Maslowski I) , 944 N.W.2d 235, 241 (Minn. 2020). Following our reversal and remand to the district court, Maslowski continued to challenge the enforceability of the agreement on several different grounds, including the agreement's 60 percent repurchase rate. The courts below found that the repurchase rate violated Minnesota's usury statute, Minn. Stat. § 334.01 (2022), and concluded that the rate, reduced to 8 percent under the usury statute, began to accrue only after the date of our 2020 decision in Maslowski I . We reverse and remand.

FACTS

Respondent Pamela Maslowski was injured in an automobile accident in 2012. She hired Schwebel, Goetz & Sieben, P.A., to represent her in a personal injury lawsuit against the other driver. Maslowski subsequently faced economic hardship and entered into a "Sale and Repurchase Agreement" with appellants Prospect Funding Partners LLC, et al. ("Prospect") to cover her living expenses while she continued to pursue her personal injury lawsuit. Maslowski's attorney reviewed the contract with her and signed the last page of the Agreement, certifying that he had reviewed the terms with her and acknowledged the payment directions in the event of a settlement.

Pursuant to the Agreement, Prospect paid Maslowski $6,000 for the right to receive a portion of the proceeds from any recovery in the personal injury lawsuit. In return, Maslowski agreed that if she was successful in her personal injury suit, she would repay Prospect the $6,000 along with a processing fee of $1,425. Under the repayment schedule, a 30 percent repurchase rate would accrue on the total ($7,425) she owed every 6 months, for a total annual rate of 60 percent. But if Maslowski was not successful in her suit, she would owe Prospect nothing.

Following the settlement of the underlying personal injury case, Maslowski refused to pay according to the terms of her Agreement with Prospect. In response, Prospect filed suit in New York against Maslowski, her attorney, and her attorney's law firm for breach of contract, among other claims. This lawsuit began a multi-year litigation process, which included a battle over a choice-of-law clause in the contract that declared that New York law would govern. After the dispute was moved to Minnesota and Minnesota law was applied to the contract, the district court found the Agreement unenforceable because it violated Minnesota's common-law prohibition against champerty. ¹ The court of appeals affirmed. Maslowski v. Prospect Funding Partners LLC , No. A18-1906, 2019 WL 3000747, at *1 (Minn. App. July 8, 2019).

We reversed. We agreed that "[t]he lower courts ... did not err in determining that, under our prior decisions, the contract was unenforceable." Maslowski I , 944 N.W.2d at 238. We explained, however, that while the agreement was plainly champertous, it was not "void as against public policy as we understand it today." Id. Explaining that the common law reflects the needs of the community it governs and therefore develops alongside it, we eliminated the common-law prohibition against champerty. Id. at 238–41. We specifically stated that litigation financing agreements "allow plaintiffs who would otherwise be priced out of the justice system to assert their rights." Id. at 241. But we also acknowledged that courts "may still scrutinize litigation financing agreements to determine whether equity allows their enforcement," pointing to the common-law defense of unconscionability in particular. Id. We then remanded the case back to district court.

On remand, the parties continued to dispute the enforceability of the Agreement. Prospect filed a motion for summary judgment. As part of the motion for summary judgment, Prospect included an affidavit from A. Mark Berlin, a manager of Prospect, who explained that the terms of the company's purchase agreements vary depending on the underwriting process. Maslowski filed a cross-motion for judgment on the pleadings, in which she continued to challenge the enforceability of the Agreement. In particular, Maslowski challenged the 60 percent repurchase rate set by the Agreement. She claimed that Prospect's repurchase rate was unconscionable, or, alternatively, that it fell under Minnesota's usury statute, Minn. Stat. § 334.01, and that the repurchase rate should therefore be reduced to 8 percent in conformity with the statute.

The district court denied in part and granted in part both Prospect's motion for summary judgment and Maslowski's motion for judgment on the pleadings. The court found that "the contract ... is not unconscionable as a whole, but it is unconscionable as to its penalty clauses, interest rate, and restrictions on the relationship between Maslowski and her counsel." As relevant here, the district court concluded that, despite the Agreement not appearing as "a classic loan," the 60 percent annual repurchase rate in the Agreement is unconscionable on the sole basis that it violates Minnesota's usury statute, Minn. Stat. § 334.01. ² Addressing Prospect's claim that the Agreement did not fall under the usury law because Maslowski's repayment obligation was not absolute, the district court pointed out that the underwriting process provided assurance that Prospect would receive payment despite its purported contingency. The district court ordered Maslowski to pay Prospect the amount advanced, $6,000; the processing fee of $1,425; and simple interest on the amount advanced at an annual rate of 8 percent. The district court further found that the interest only began to accrue following our abolition of the prohibition on champerty, because the Agreement was not legally enforceable until that date.

The court of appeals affirmed. Maslowski v. Prospect Funding Partners LLC , 978 N.W.2d 447 (Minn. App. 2022). The court of appeals agreed with the district court that, despite being labeled as a sale of an interest, the Agreement was actually subject to the usury statute. Id. at 457–58. The court of appeals wrote that, because Prospect would not fund frivolous suits, "[t]he obligation to repay is therefore absolute unless Maslowski chooses to forego pursuing a recovery in the underlying legal claim." Id. at 458. But the Agreement also required Maslowski to use her "best efforts to prosecute the Legal Claim." Id.

The court of appeals also affirmed the district court's decision to begin the accumulation of interest following our decision abolishing the prohibition on champerty. Id. at 459–60. The court suggested that parties "who have entered into agreements are entitled to their rights under those agreements even if the law under which they were made is later changed." Id. at 460. Furthermore, the court concluded that our decision abolishing the prohibition on champerty did not apply retroactively because the earlier decisions declaring the contract champertous and therefore void were not "erroneous." Id.

Prospect appealed, and we granted review.

ANALYSIS

This case is before us on a partial grant of Prospect's summary judgment motion and a partial grant of Maslowski's motion for judgment on the pleadings. The parties do not appear to disagree on any of the facts considered by the district court, meaning that we review both determinations de novo. ³ See SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp. , 795 N.W.2d 855, 861 (Minn. 2011) (reviewing cross-motions for summary judgment de novo when the motions were based on undisputed facts).

Prospect raises two issues: (1) whether the Agreement is subject to Minnesota's usury statute, and (2) whether the repurchase rate only began to accrue after we abolished the common-law prohibition on champerty. We, in turn, address Minnesota's usury statute, the broader unconscionability argument against the repurchase rate that was never addressed by either of the courts, and when the repurchase rate began to accrue.

I.

The district court's decision that the repurchase rate charged by Prospect was unconscionable rests on a determination that the Agreement falls under the usury restrictions set by Minnesota law. Questions involving usury are typically factual because they involve scrutinizing a transaction to determine whether it fits within the class of transactions subject to usury restrictions. Midland Loan Fin. Co. v. Lorentz , 209 Minn. 278, 296 N.W. 911, 914 (1941). But the question of whether usury applies in this case is based on the prior courts’ determination that a litigation financing agreement subject to a contingency of recovering in the underlying lawsuit can constitute an "absolute obligation of repayment." The...