Maslowski v. Prospect Funding Partners LLC
| Decision Date | 27 June 2022 |
| Docket Number | A21-1338 |
| Parties | Pamela Maslowski, Respondent, v. Prospect Funding Partners LLC, et al., Appellants, v. James Schwebel, Esq., et al., Respondents. |
| Court | Minnesota Court of Appeals |
Hennepin County District Court File No. 27-CV-15-15143
James R. Schwebel, James S. Ballentine, Matthew J. Barber, Schwebel Goetz &Sieben, P.A., Minneapolis, Minnesota (for respondent Maslowski)
Daniel A. Beckman, Erickson, Bell, Beckman &Quinn, P.A. Roseville, Minnesota (for appellants)
Kay Nord Hunt, Michelle K. Kuhl, Barry A. O'Neil, Lommen Abdo, P.A., Minneapolis, Minnesota (for respondents Schwebel et al.)
Considered and decided by Connolly, Presiding Judge; Larkin, Judge; and Smith, Tracy M., Judge.
litigant if that agreement contains obligations that seek to control the litigant's ability to select counsel or to settle the underlying legal claim.
Appellants Prospect Fundings Partners LLC, Prospect Funding Holdings LLC, and Prospect Funding Holdings (NY) LLC (collectively, Prospect) appeal the district court's grant of summary judgment declaring its litigation-financing contract with respondent Pamela Maslowski to be enforceable in part and unconscionable in part and dismissing Prospect's claims against respondents James Schwebel, Esq. and Schwebel, Goetz & Sieben P.A. (collectively, Schwebel). Prospect also appeals from the district court's denial of its motion for attorney fees and costs under the contract. Because the district court did not err in (1) determining that the penalty clauses and the interest rate in the contract were unconscionable, (2) determining that neither party prevailed in the litigation, or (3) concluding that no contract existed between Prospect and Schwebel, we affirm.
The underlying dispute between the parties has been the subject of several previous appeals. See generally Maslowski v. Prospect Funding Partners LLC, 944 N.W.2d 235 (Minn. 2020). We therefore restate only the facts most pertinent to the present appeal.
Maslowski was injured in an automobile accident in 2012 and retained Schwebel shortly thereafter to pursue a lawsuit against the other driver (the Personal-Injury Lawsuit). Two years later, Maslowski entered into a litigation-financing agreement with Prospect to secure funds for her living expenses. Prospect is a litigation-financing company that purchases "a financial stake in the outcome of" a legal proceeding "in exchange for money paid to a party." Maslowski, 944 N.W.2d at 236 n.1 (quotation omitted).
The litigation-financing agreement purported to purchase a maximum $25,245 interest in any proceeds recovered from the Personal-Injury Lawsuit in exchange for a net purchase price of $6,000.[1] Maslowski is characterized as the "Seller" and Prospect as the "Purchaser." The litigation-financing agreement also included a "Repurchase Rate" of "30% every 6 months (60% annually)" that drove the "Repurchase Schedule" up to the maximum $25,245 after 42 months. The agreement stated that if Maslowski "RECOVERS NOTHING FROM THE LEGAL CLAIM," then Prospect "SHALL RECEIVE NOTHING." But Maslowski was "NOT ENTITLED TO RECEIVE ANY PROCEEDS" from the Personal-Injury Lawsuit "UNTIL PURCHASER HAS RECEIVED" payment. Maslowski signed the agreement on May 20, 2014.
Schwebel signed the "CERTIFICATION OF SELLER'S ATTORNEY" included in the litigation-financing agreement on the same day. This "CERTIFICATION" indicated Schwebel reviewed the terms of the agreement with Maslowski and that any proceeds of the Personal-Injury Lawsuit would be distributed from "the attorney's trust account" in accordance with the agreement. The agreement was also accompanied by an "IRREVOCABLE LETTER OF DIRECTION" from Maslowski instructing Schwebel as to the disbursement of funds. Schwebel executed the "ATTORNEY ACKNOWLEDGEMENT" on this letter that same day.
Maslowski settled the Personal-Injury Lawsuit in July 2015 for $70,000. Several years of litigation ensued, in which Maslowski sought to void the litigation-financing agreement and Prospect sought to enforce the repayment terms against both Maslowski and Schwebel. This litigation led to our decision declaring the agreement to be void under the common law prohibition against champerty.[2] Maslowski v. Prospect Funding Partners LLC, No. 18-1906, 2019 WL 3000747, at *5 (Minn.App. July 8, 2019). The Minnesota Supreme Court reversed our decision. See Maslowski, 944 N.W.2d at 238.
Although the supreme court determined that "[t]he lower courts . . . did not err in determining that, under our prior decisions, the contract was unenforceable," it declined "to hold that the contract between Maslowski and Prospect is void as against public policy as we understand it today." Maslowski, 944 N.W.2d at 238. The supreme court abolished the common-law prohibition against champerty and remanded, noting that "district courts may still scrutinize litigation-financing agreements to determine whether equity allows their enforcement." Id. at 241. The supreme court specifically instructed that "[c]ourts and attorneys should . . . be careful to ensure that litigation financiers do not attempt to control the course of the underlying litigation." Id.
On remand, the parties each filed dispositive motions. Prospect filed a motion for summary judgment against Maslowski and Schwebel. Schwebel moved for judgment on the pleadings on the basis that it was not a party to the litigation-financing agreement and therefore not bound by its terms. Maslowski also moved for judgment on the pleadings, contending that the agreement's penalty clauses[3] are unenforceable and that its interest rate and interference with the attorney-client relationship[4] render it unconscionable. The district court issued a combined order on these and other motions in April 2021. It granted in part and denied in part both Maslowski's and Prospect's motions, finding the agreement is "enforceable in part, but not in whole," and ordered Maslowski to pay Prospect $6,000, plus fees in the amount of $1,425, and interest at 8% accrued from June 3, 2020. The district court also granted Schwebel's motion in its entirety and dismissed Schwebel from the lawsuit.
Prospect filed a motion seeking over $290,000 in attorney fees and costs in May 2021, claiming authority under the agreement to collect such costs as the prevailing party.[5]The district court denied this motion in August, because, when "[t]aking into consideration the entirety of this litigation, . . . neither Maslowski nor [Prospect] fully prevailed." The district court also rejected Prospect's argument that it is entitled to recover the claimed fees as the costs of collection[6] pursuant to the agreement.
Prospect appeals the district court's determination that some provisions of the agreement are unenforceable, its decision to award interest only from June 3, 2020, its dismissal of Schwebel from the lawsuit, and its determination that Prospect was not the prevailing party and therefore not entitled to attorney fees.
I. Did the district court err by determining that certain provisions of the litigation financing agreement were unenforceable?
II. Did the district court err by awarding interest only from June 3, 2020?
III. Did the district court err by determining that Schwebel was not a party to a contract with Prospect and dismissing Schwebel from the lawsuit?
IV. Did the district court abuse its discretion by declining to award attorney fees and costs to Prospect?
I. The district court did not err when it determined that certain provisions of the agreement were unenforceable.
In a detailed and well-reasoned opinion, the district court determined that two main provisions of the litigation-financing agreement were unenforceable. First, it determined that the purported liquidated-damages provisions were unenforceable penalties and an unconscionable intrusion into the attorney-client relationship. Second, the district court determined that the "repurchase rate" was both subject to and unconscionable under the usury statute. We apply de novo review to both determinations. See SCI Minn. Funeral Servs., Inc. v. Washburn-McReavy Funeral Corp., 795 N.W.2d 855, 861 (Minn. 2011) (); St. Jude Med., Inc. v. Medtronic, Inc., 536 N.W.2d 24, 27 (Minn.App. 1995) (), rev. denied (Minn. Oct. 27 1995); Glarner v. Time Ins. Co., 465 N.W.2d 591, 595 (Minn.App. 1991) (), rev. denied (Minn. Apr. 18, 1991).
Liquidated damages are “fixed sums payable to a party when actual damages are difficult to ascertain or prove.” In re Qwest's Wholesale Serv. Quality Standards, 702 N.W.2d 246, 262 (Minn. 2005). But liquidated damages cannot be mere penalties. Id.
Courts therefore "scrutinize a particular provision to ascertain if it is one for a penalty or one for damages." Gorco Constr. Co. v. Stein, 99 N.W.2d 69, 74 (Minn. 1959).
A penalty is designed "to secure performance" and is unenforceable, while liquidated damages are designed "to fix the amount to be paid in lieu of performance." Frank v. Jansen, 226 N.W.2d 739, 743 (Minn. 1975); see also Gorco, 99 N.W.2d at 74 (...
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