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B&L Makes New PA Law in Litigation Funding Arrangements

Lizzy McLellan, The Legal Intelligencer

In a first-impression issue, the Pennsylvania Superior Court has affirmed the dismissal of a lawyer’s unjust enrichment claim against litigation funders, ruling that the fee agreement between them and the plaintiff could not be enforced.

A three-judge panel of the court ruled that a 2008 contingent fee agreement between attorney Bruce McKissock and client Polymer Dynamics was not valid, because it provided for unrelated parties with no legitimate interest in the litigation to benefit from the outcome. The amended fee agreement, which they entered while appealing a $12.5 million verdict in pursuit of a larger award, had said McKissock would receive a one-third legal fee, from which he would pay the unrelated parties who were funding the litigation.

“The requisite elements of champerty have all clearly been met in the present case,” Judge John T. Bender wrote in a Sept. 13 published opinion. “Accordingly, we are constrained to conclude that the 2008 fee agreement is invalid and, therefore, [McKissock] is not entitled to any fees under said agreement.”

Polymer Dynamics filed a lawsuit against Bayer Corp. in 1999, alleging that a malfunction in Bayer’s machinery caused Polymer to become insolvent. Polymer expected an award of at least $100 million, Bender’s opinion said, but the 2005 verdict was only $12.5 million. Both parties appealed—Polymer seeking a larger award, and Bayer arguing the $12.5 million verdict was excessive—but Polymer required money from investors to continue in the litigation.

The investors included a number of individuals, referred to in Bender’s opinion as the litigation fund investors, and Pafco Investment. After the U.S. Court of Appeals for the Third Circuit affirmed the verdict, Polymer gave the balance of the recovery amount, after taxes and fees, to Pafco, which then paid the individual investors. By that time, McKissock had withdrawn his representation of Polymer due to a conflict. So Polymer had paid legal fees to its new firm, Gross McGinley, and to Bochetto & Lentz, which represents Pafco.

In 2011, one of the creditors, through the entity WFIC, filed a complaint over the distribution of the litigation proceeds. McKissock filed an answer and new matter asserting his cross-claims, including the unjust enrichment claim against the investors.

With regard to WFIC’s claims, the trial court ruled that WFIC did not have a priority over other creditors. Several of McKissock’s claims were resolved at summary judgment in the investors’ favor, and some were dismissed as moot. McKissock’s unjust enrichment cross-claim was dismissed entirely at the trial court level, leading to his Superior Court appeal.

The WFIC claims and McKissock’s cross-claims were not the only litigation to arise out of the Polymer v. Bayer lawsuit. In addition to those, Polymer filed a legal malpractice suit against McKissock, in which summary judgment was granted in McKissock’s favor.

McKissock also filed a claim against Polymer for his fee. According to a 2011 opinion in that case, McKissock & Hoffman v. Polymer Dynamics, the only compensation McKissock’s firm received for its work on the Bayer lawsuit was a $25,000 payment, which was substantially less than the amount due pursuant to the fee agreement. But the trial court and Superior Court denied McKissock’s motion to compel arbitration in the fee dispute, and McKissock took no further action, according to court documents.

George Bochetto of Bochetto & Lentz, who represented Pafco, said he was “delighted” with the Superior Court’s most recent decision on the 2008 fee agreement.

“We maintained from the very beginning that it was an unenforceable contract,” Bochetto said.

Arthur W. Lefco of Marshall Dennehey Warner Coleman & Goggin represented McKissock, who is now senior counsel at Marshall Dennehey.

“We were disappointed, but the court has spoken,” Lefco said. He said he will have to confer with McKissock over whether to seek an appeal at the Supreme Court level.

View story on The Legal Intelligencer.

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