• Barratry And Champerty Bar Contingent Fee For Collecting Tenant Overcharges
  • June 19, 2003 | Author: Harris Ominsky
  • Law Firm: Blank Rome LLP - Philadelphia Office
  • Since law school, you may have forgotten the exact meaning of "barratry" and "champerty." If so, a recent case will refresh your memory. The issue arose in the case of Accrued Financial Services, Inc. v. Prime Retail, Inc., et al., No. 00-1971, CA-99-2573-JFM, CA-00-2474-JFM (4th Cir. July 29, 2002), which invalidated tenant audit contracts between tenants and their consultant to help the tenants collect overcharges made under leases.

    Control Over Litigation

    The two-judge majority of the court invalidated the audit contracts because they had authorized the auditor to retain 40% or 50% of any discrepancy discovered and collected, and because the auditor had taken an assignment of all legal claims that the tenant had against the landlords and had taken "control over any litigation that might ensue."

    The auditor contends that it had performed audits and discovered that the landlords had overbilled the tenants over a period of time for what would likely result in an aggregate of "millions of dollars." In addition, it contended that these overcharges could not be explained as mere errors or even aggressive billing practices. The errors were systematic and pervasive. As a result, the auditor persuaded additional tenants to enter into similar contractual arrangements and thereby launched a larger attack against the landlord than it originally contemplated.

    Rather than negotiate with the plaintiff, the landlord filed an action seeking a declaratory judgment that the plaintiff lacked standing to assert the claims and also moved to dismiss them because the assignments were champertous and void as a matter of public policy under Maryland law. The assignments provided that California law should govern, but the opinion states that it will have that choice only to the extent that the chosen law does not violate a fundamental public policy of the forum state, which is Maryland.

    The court supported the landlord's defense because the auditor's interest in the litigation was "solely to collect fees that its audits and their litigation would generate." The provisions of the agreement that disturbed the court were the contingent fee percentage and the requirement that if the tenant should want to withdraw, the auditor could proceed without the tenant. Also, that if the tenant refused to cooperate, it would still be obligated to pay the fee that would otherwise have been earned if litigation had been successful.

    In light of this type of a contract, the court held: "Because we see these broad assignments as nothing more than arrangements through which to intermeddle and stir up litigation for the purpose of making a profit, we conclude that they violate Maryland's strong public policy against stirring up litigation and are therefore void and unenforceable in Maryland."

    Common Law

    The court tracked the history of barratry, maintenance and champerty by explaining that at first the courts recognized these concepts that were part of the early common law. Over time, the early definitions proved too broad and interfered with emerging commercial conditions, the recognition of assignments in general, and the rise of attorney representation under contingent fee contracts. But despite the narrowing of definitions, Maryland continues to reserve a policy against some of the originally prohibited conduct. In fact, the court cited the Maryland criminal statute which outlaws barratry as follows: "Without an existing relationship or interest in an issue[,] a person may not, for personal gain, solicit another person to sue or to retain a lawyer to represent the other person in a lawsuit."

    The court concluded that the applicable contracts were violations of the law and public policy because the tenants' rights were assigned not in exchange for an existing value, but for future fees to be determined by decisions and value judgments controlled by the consultant, who had no interest in the underlying claims. "As such, AFS was given the power to mine lawsuits, promote them, and profit off of them without regard to the interests and desires of the injured party."

    The court rejected AFS's position that the real purpose of the contract was to provide consulting services within its expertise. In response, the court stated that it did not intend by this decision to undermine or devalue the claims that AFS had discovered and that the tenants may have. Rather, the decision stated that if those claims are viable, AFS can continue that business without the objectionable assignments, and there should be no barrier for the tenants to prosecute claims with the assistance of AFS.

    Dissent

    Judge Michael wrote a 12-page dissent that took the position that the California-law provision in the contract should have been applied and that these types of assignments are legal in California, and should not be against Maryland public policy. He pointed out that for Maryland to reject another state's law, Maryland must have a "strong" public policy against enforcing that state's law. He raised the question about how there could be a strong Maryland public policy when barratry and champerty are rules that are "tending to become obsolete." He pointed out that Maryland has not used these common law doctrines to invalidate any contract in the last 100 years.

    He stated:

    Accordingly, no strong public policy against the California law allowing the assignments in this case can be gleaned from whatever, if anything, might remain of the common law doctrine of maintenance, champerty and barratry in Maryland. He disagreed with the majority interpretation that what AFS did violated the criminal code section quoted earlier because AFS was not pushing or soliciting litigation here. Its first and most important task under the agreements and assignments was to conduct audits, audits that the tenants had the right to pursue under their leases. Litigation was only available as a last resort and AFS had to pursue litigation in only less than 10% of the cases it handled.

    The dissent pointed out that even 150 years ago the law of champerty did not outlaw every effort by a person to encourage or assist another in pursuing litigation. That concept was recognized by a Chief Baron of the Court of Exchequer who said in an 1843 case, "If a man were to seek a poor person in the street oppressive and abused, and without the means of obtaining redress, and furnished him with money and employed an attorney to obtain redress for his wrongs, it would require a very strong argument to convince me that that man could be said to be stirring up litigation and strife." In addition, Judge Michael pointed out that today, "For example, contingent fees are legal . . . lawyers are allowed to advertise . . . choses-in-action may be assigned . . . and class actions are permitted . . . ." To the extent that the common law is still viable, it would be aimed only at the stirring up of a certain kind of litigation, specifically, litigation that is groundless, vexatious or multitudinous. In this case, AFS was making a serious claim, based on a partial audit, that the landlord overcharged its tenants by aggressive billing or fraud in amounts that could total millions of dollars. He further stated, "The majority's decision thus hurts the tenants, not just AFS. The decision benefits the mall owners and managers, who could be getting away with the overcharging and fraud."

    Contingent Fees

    It is not clear where the Pennsylvania courts would stand if the same case were brought before them, but it is clear that even in Maryland and states that still have laws barring barratry and champerty, contingent fee arrangements are not in themselves improper. The issues that seem to lead to the majority's decision in Accrued Financial Services, Inc. were the complete assignment of the tenants' rights and the strong language in those assignments which required the tenants to give up control over their cases. Also, while this does not appear to be stated as a reason for the decision, the court may have been bothered by the fact that after discovering the discrepancies for one tenant, AFS then solicited and signed up an additional 16 tenants to enter into similar contingent fee arrangements.

    While barratry and champerty may still be alive in certain states, a reading of the Fourth Circuit decision leads to the conclusion that contingent fee arrangements that don't overreach should be enforceable even in those states.