Reference no: EM13784152

MEMORANDUM

From: Baumfield & Baumfield LLP

To: ABC Insurance Company (ABC)

Subject:

As an associate of Baumfield and Baumfield, I hereby provide this memorandum in response to Richard and Victoria Baumfield's concern whether ABC Insurance Company may bring or fund (litigation funding) claims in Michigan as per Michigan law.

Lehman v Detroit, G.H & M.R. Co. et al. (No. 170) (Mich. 1914), the supreme court states that at common law, champerty is a bargain with a plaintiff or defendant to divide the land or other thing sued for between them if they prevail at law; the champertor agreeing to carry on the suit at his own expense. In common law, see, Smith v Childs, 497 N.W.2d 538 (Mich.App. 1993) it was found that the defense of champerty does not exist in Michigan except as specified by statute with regard to attorneys seen in theM.C.L.A 600.919(1). Therefore the rule of champtery would not apply if ABC bought out the policyholders to bring about litigation. In say that, if ABC decided to proceed with litigation they may have an action of an abuse of process bought against them. InPeisner v. Detroit Free press, 242 N.W.2d 775 (Mich.App 1976) the court held that there are two essential elements of common-law claims of abuse of process, they are an ulterior purpose, and an act which is improper in the regular conduct of prosecution of a case. ABC's ulterior purpose is ensure that they are not charged that special fund. In this situation it is debatable whether the conduct of purchasing the policyholders claims to litigate, is an act which is improper in the regular conduct of the prosectution of a case.

Where as maintence is defined in Fetters v. Wittmer Oil & Gas Properties, 242 N.W. 258 (Mich. 1932) as the offense of intermeddling where there is no agreement to share the proceeds. ABC funding of the policy holder litigation would require a contract and will have to be very careful with how it is worded as to not share in the proceeds but only to fund them. In Lawsuit Financial, L.L.C v. Curry, 683 N.W.2d 233 (Mich. Ct. App 2004), the court found that if the money is a loan then there is an absolute obligation to repay per the contract terms, it also found that champerty does not apply to financing cases. The court of appeal found that the contract terms needed to be set before the commencement of the litigation for it to be considered a loan and the policyholders will only be liable to repay the amount loaned. Usury laws apply to litigation funding. ABC whether they are funding them policyholders or loaning them the money. If the loan exceeds 7%, it would be in violation of Michigan Laws and would be cosindered void.

ABC can fund the policyholders litigation, there will need to be a clear and concise contract signed by both parties for the loan.

You are an associate at the law firm of Baumfield & Baumfield LLP, a New York law firm.

The Issue - Background Facts

One of the firm's clients, ABC Insurance Company (ABC), is upset that a competitor, Synergy Insurance Company (Synergy), was recently allowed to complete a corporate transaction that has had the effect of capping the liability that Synergy will have with regard to asbestos claims payable under insurance policies that it issued to various manufacturing companies in the 1950s through 1980s. They did this by moving all of the relevant insurance companies into a newly created subsidiary company, Brandenberg Insurance Company (Brandenberg), without getting the policyholders' approval for the change in insurer, and then "de-merging" Brandenberg from Synergy so that Brandenberg no longer has any corporate connection to Synergy. Brandenberg was given only a limited pool of $250 million in funds to pay the claims, based on actuarial projections of the value of future claims. Within a year of the de-merger, new projections revealed that claims would total at least $400 million, not $250 million. Since then, the projections of total claims likely to be payable on the policies keep going up. (Asbestos claims keep growing even though companies no longer use asbestos, as more and more former employees present with asbestos-related illnesses, such as mesothelioma.) Synergy asserts that it has no further obligation toward the policyholders whose policies were transferred to Brandenberg, even though Brandenberg will not have enough money to pay all of the claims.

ABC's Connection to the Above

ABC is concerned because when Brandenberg's funds run out, as they inevitably will, based on the trends described above, state insurance law in each of the 50 states where Synergy wrote its insurance policies requires that the shortfall due to Synergy's former customers must be paid from a special state emergency fund. The funds are financed by levies imposed on each insurance company operating in that state. So all of the other insurance companies in each state will be charged a special levy by the fund to cover the cost of paying for Synergy's policyholders' claims! ABC thinks it is unfair that Synergy was able to do a deal that effectively transferred its liability to its policyholders to ABC.

ABC initially challenged the corporate transaction to the state regulators in Pennsylvania, where Synergy Insurance is based. It even litigated the matter up to the Pennsylvania Supreme Court, and lost. So ABC has realized that the only way for the transaction to be overturned is for affected Synergy policyholders to sue Synergy, for example via a class action. ABC believes the policyholders would have a good claim for breach of contract since Synergy transferred liability to a third party, Brandenberg, without securing the policyholders' consent. ABC believes that Synergy should have asked each affected policyholder to grant a novation of the contract before that person's contract could be transferred to Brandenberg. ABC's goal is to find affected policyholders and then either convince them to sell their claims to ABC so that it can sue Synergy, or, alternatively, offer to pay to fund their lawsuits against Synergy.

The Legal Issue

Traditionally, pursuing another party's claims, and perhaps paying another party's legal fees, were forbidden under legal rules prohibiting champerty and maintenance unless the person pursuing the claim or paying the fee had some interest in the outcome of the lawsuit. The idea was that a person should not be able to cause mischief by encouraging lawsuits where that person had nothing at stake.

Baumfield & Baumfield's partners, Richard and Victoria Baumfield, are concerned that if ABC acts on its idea of inciting the litigation described above, either by buying and then litigating the claims itself or paying for policyholders' to bring their own claims, it may be prosecuted for breaching these rules. Accordingly, they would like to prepare a 50-state survey of the law in this area so that they can determine in which states, if any, ABC may bring or fund these claims. Therefore, they are asking their associates to each research the law ofone state (a different state for each associate) to help them in this project.

Your assignment

The specific legal question that you will be researching is as follows:

Do the ancient legal doctrines of champerty and maintenance still apply in Michigan? If so, what are the rules? Will ABC be able to bring a policyholder's claim itself or fund a policyholder lawsuit in your state?

You will be expected to consult U.S. legal resources on websites such as Westlaw International to come up with your answer. Do not forget to KeyCite (on Westlaw) your cases to make sure that the cases you are citing are still good law. KeyCite will also help you find the most recent cases on point. You may wish to consult legal encyclopedias such as the Am Jur (American Jurisprudence) or CJS (Corpus Juris Secondum) to get you started. We believe that in some states, these rules are now contained in statutes. In that case, you may be able to find the statutes by linking through from the relevant cases. Remember that if there is an applicable statute, you should check the relevant case authority interpreting the statute to see how the statute is currently being interpreted and applied by the courts.

As noted, each associate will be researching one state. Students who attend the Thursday, Week 4 seminar may pick a state in class. Other students may e-mail Tory and Richard. With the state they wish to research Once a student has selected a state, that state will no longer be available.