## Facts

- A litigation-funding company advanced money to a personal-injury plaintiff in exchange for a right to receive a specified sum from any settlement or judgment proceeds.
- The funder notified the plaintiff’s law firm that it claimed an interest in the client’s future litigation proceeds and demanded payment from any recovery handled by the firm.
- The underlying personal-injury matter later produced settlement proceeds that the law firm disbursed to or for the benefit of the client without remitting the amount claimed by the funder.
- The funder sued the law firm and associated lawyers, asserting contract, assignment/UCC Article 9, and equitable theories to enforce its claimed right to the proceeds.
- The parties filed cross-motions for summary judgment in federal district court.

## Issues

1. Whether the funding agreement created a valid, enforceable assignment and/or security interest in the client’s right to receive settlement proceeds.
2. Whether the client’s right to settlement proceeds is collateral governed by U.C.C. Article 9, and, if so, how it should be classified (including whether it is a “payment intangible”).
3. Whether a law firm with notice of an assignee’s or secured party’s interest can be liable for distributing settlement funds to the client in disregard of that interest.
4. Whether the non-recourse structure and public-policy defenses (including champerty/maintenance) rendered the agreement unenforceable.

## Decision

- The court largely ruled for the funder on the central legal questions at the summary-judgment stage.
- It held the funding agreement created an enforceable property interest in the client’s settlement proceeds, properly treated as an Article 9 assignment/security interest.
- It characterized the right to payment from the settlement as a “payment intangible” (a type of general intangible), bringing the transaction within Article 9 rules governing attachment and perfection.
- It concluded that, after receiving notice of the funder’s interest, the law firm could not treat payment to the client as necessarily discharging obligations as against the assignee/secured party; the firm faced potential liability for disbursing funds inconsistent with the funder’s rights.
- It rejected defendants’ champerty/maintenance arguments because the funder obtained only an economic interest in proceeds and did not obtain litigation control.
- It left remaining factual and remedial questions (including amounts and any remaining elements of liability) for further proceedings.

## Legal Principles

- An agreement transferring an interest in the proceeds of a personal-injury claim can be enforceable when it transfers only a right to payment from recovery, not the underlying tort cause of action.
- U.C.C. Article 9 applies to sales/assignments of “payment intangibles”; a settlement-derived right to payment may qualify as a payment intangible subject to Article 9.
- After an obligor or payor with control of funds receives notification of an assignment or security interest directing payment to the assignee/secured party, payment to the original claimant may not discharge the obligation as against the assignee/secured party.
- Public-policy defenses based on champerty/maintenance do not void a litigation-funding transaction that does not authorize the funder to direct or interfere with the litigation and instead conveys only a contingent economic interest in proceeds.

## Conclusion

The court treated the litigation-funding arrangement as an Article 9 transaction involving a payment intangible, recognized the funder’s enforceable interest in settlement proceeds, and held that a law firm with notice of that interest may be liable for distributing funds to the client contrary to the assignee/secured party’s rights, while rejecting champerty-based invalidity arguments.


U.S. Claims, Inc. v. Flomenhaft & Cannata, LLC, 519 F. Supp. 2d 532 (E.D. Pa. 2007)