A champertous agreement is a deal in which an outsider who has no prior connection to a lawsuit pays the costs of pursuing it in exchange for a share of whatever the case recovers. Courts treat these arrangements as an abuse of the legal system in the states that still recognize the doctrine, and where the doctrine applies, the agreement is unenforceable and can carry fines or criminal penalties. The rule traces back to the old common law doctrine of champerty, and while many states have abandoned it, enough still enforce it that the label continues to matter for anyone thinking about funding, buying, or assigning a legal claim.
The Three Elements That Make an Agreement Champertous
Courts look for three things lining up before calling an arrangement champertous.1Legal Information Institute. Champerty
The first is a stranger. The person putting up the money has to be someone with no legal right, obligation, or pre-existing interest in the dispute. A party to the case, a creditor with a stake in the outcome, or a lienholder trying to protect an investment is not a stranger, and the analysis stops there.
The second is a share of the proceeds. The funder pays for the litigation in exchange for a cut of whatever the case produces. This is what separates champerty from generosity. A relative who lends money to hire a lawyer and expects nothing back is just helping. The same relative demanding thirty percent of the settlement, with no other connection to the dispute, is doing something the doctrine was built to catch.
The third is motive. Judges ask whether the funder’s real purpose is profit from the outcome rather than any genuine interest in resolving the underlying dispute, and whether the arrangement stirred up a lawsuit that would not otherwise have happened. Evidence that the funder sought out the case and pushed it forward to generate a return weighs heavily toward a champertous finding.
Arrangements That Look Similar but Are Not Champertous
Several common funding structures share features with champerty and still remain lawful, even in states that enforce the doctrine.
Contingency Fees
The standard contingency fee agreement between a lawyer and client technically involves sharing in the proceeds of litigation, and courts universally treat it as legitimate. The attorney-client relationship is regulated, the lawyer owes duties to the client and the court, and contingency fees give people access to representation they could not otherwise afford. Without this exception, the entire contingency system would collapse.
Pre-Existing Interest in the Dispute
A funder who already has a stake in the subject matter is not a stranger, and that changes everything. If you hold a junior lending position on a property and pay to litigate a dispute that protects that investment, courts recognize your interest as legitimate rather than speculative. The test is whether the funding relationship grew out of a real commercial or property interest that existed before the lawsuit, or whether the funder went shopping for a case.
Assignments Where Litigation Is Incidental
Buying a legal claim is not automatically champertous. The dividing line is purpose. If you acquire a claim primarily to enforce a right you care about, and litigation happens to be necessary, most courts uphold the assignment. If your only purpose in buying the claim is to sue on it and profit, with no other business reason, that is the textbook champertous assignment.2New York State Senate. New York Code JUD 489 – Purchase of Claims by Corporations or Collection Agencies
Commercial Litigation Finance
The commercial litigation finance industry now runs into the billions of dollars, and on paper its deals look champertous: outside capital provided in exchange for a return tied to case outcome. In practice, most jurisdictions permit it, and the industry has structured itself around two distinctions.
Control is the first. Legitimate funding leaves all decision-making with the client and their attorney. The funder is a passive investor with no say in settlement, strategy, or whether to accept an offer, and the funding contract usually spells this out. A champertous arrangement, by contrast, often has the funder directing how the case proceeds.
Non-recourse structure is the second. Most litigation funding is written so the funder gets paid only if the case succeeds. If the plaintiff loses, the funder loses the investment. Courts in jurisdictions that permit this business tend to view that risk-sharing as different from the exploitative deals champerty law was built to stop.
Where Champerty Still Applies
The doctrine varies sharply by state. Most states either never adopted it or have abandoned it, and the trend over the last two decades has moved decisively toward abolition. Massachusetts eliminated the common law doctrine in 1997. South Carolina followed in 2000. Ohio abrogated the prohibition by statute in 2008. Minnesota’s Supreme Court struck it down in 2020, holding that champertous contracts no longer violate public policy. The reasoning across these decisions has been consistent: professional ethics rules and civil procedure safeguards do a better job policing litigation abuse than a medieval doctrine.
New York, Delaware, and Florida continue to enforce champerty restrictions. New York codifies the rule in Judiciary Law Section 489, which bars collection agencies, corporations, and associations from buying claims with the intent and purpose of bringing a lawsuit. A corporation that violates the statute can be fined up to $5,000, and individuals who participate face misdemeanor charges.2New York State Senate. New York Code JUD 489 – Purchase of Claims by Corporations or Collection Agencies
Even New York has adapted the rule for modern commerce. The statute includes a safe harbor exempting any assignment, purchase, or transfer of claims with an aggregate purchase price of at least $500,000. In effect, the champerty prohibition applies to smaller claims while sophisticated commercial parties can buy and sell litigation rights freely in high-value disputes.2New York State Senate. New York Code JUD 489 – Purchase of Claims by Corporations or Collection Agencies
What Happens If a Court Voids the Agreement
When a court finds an agreement champertous, the contract is voided as against public policy. The funder loses any contractual right to a share of the proceeds, and the arrangement is treated as if it never existed. That usually means the funder walks away with nothing and no legal path to recover the investment.
The effect on the underlying lawsuit depends on the jurisdiction and the circumstances. Sometimes the case can continue without the tainted funding, especially if the plaintiff has other resources or can find legitimate financing. In other cases the loss of funding effectively ends the lawsuit. Statutory regimes can add more. Under New York’s Section 489, penalties go beyond voiding the contract and include fines against the corporation and misdemeanor liability for the individuals involved.2New York State Senate. New York Code JUD 489 – Purchase of Claims by Corporations or Collection Agencies
The defendant in the underlying case can raise champerty as a defense, arguing that the plaintiff’s claim is tainted by the illegal arrangement. Where the defense succeeds, it can lead to dismissal of the action or force the plaintiff to proceed without the funding that made the lawsuit possible. That is where most champertous arrangements come apart: the funder believed it had made an investment, and a single ruling leaves it with no return and the plaintiff scrambling to continue.