Litigation funding may soon be addressed by the New York legislature


Hardly a week goes by without receiving an email or other solicitation from a third-party litigation finance company indicating if my clients would be interested in making a deal. I suspect that I am not alone and that many other attorneys are receiving the same type of targeted email marketing from litigation finance companies.

If you are not familiar with Litigation financing and why it is praised by some and criticized by others, in layman’s terms the practice can be described as a contract to obtain financial assistance from a third party in exchange for an interest in potential recovery in an ongoing lawsuit . In other words: Money now for your ongoing lawsuit, in return for a repayment – but you only have to pay the loan back if you win your case!

This industry has grown in leaps and bounds in the United States over the past 10 to 15 years, although litigation funding has been around much longer than that. Litigation finance firms are backed behind the scenes by deep-pocketed venture capitalists and types of private equity who know a lucrative opportunity when they see one. They have ties to various groups of lawyers and bar associations, and they regularly advertise widely. They are often founded, or directed, by litigators.

The industry even has its own business lobby, called the American Legal Finance Association (ALFA), to defend its interests and protect its interests before legislatures and regulators. They work with teams of insurance experts and lawyers who analyze incoming claims and select those that are most likely to have a favorable outcome. Their numbers have grown, with dozens of litigation finance companies now operating in the United States. New entities are constantly entering the market. About $ 2.5 billion was invested by litigation finance companies in 2020 alone despite the impact of the pandemic.

Litigation financing is a diversified practice. It can finance a single business or an entire business portfolio. It can fund personal injury cases, property damage cases, intellectual property cases – almost all types of cases, even class actions, from both plaintiffs and defendants. No guarantee is given to the funder and, because there is no guarantee of repayment to the litigation finance company – indeed, there is only payment if a “favorable outcome” is obtained, however defined – litigation funders are able to circumvent states’ usury laws.

Litigation financing agreements are often made between the litigant and the litigation finance company without the knowledge of the litigant’s lawyer. When this happens, the sacrosanct lawyer / client relationship is affected, enough that the American Bar Association not long ago published a list of best practices regarding the practice. Questions regarding the discoverability of litigation funding agreements now regularly receive the attention of our courts and newly enacted federal and state rules of procedure. (For example, some places now require disclosure during litigation of any litigation finance agreement.) Other issues arise when plaintiffs or their attorneys are asked to provide information or documents to the litigation finance company regarding liability and damages in the underlying claim. Attempts to access these communications are not necessarily protected by solicitor-client privilege and / or work product doctrine.

In summary, Litigation Funding has grown into a large industry that has become part of the American legal system. With this evolution come all kinds of relationships and dynamics that did not exist before, and the many challenges they pose to our litigation system.

Otherwise, why should we be concerned as litigants and insurers on the defense side of the legal system? Because we are discovering that litigation funding often drives the litigation process behind the scenes. If you are not aware of a litigation financing agreement operating in the background of the case you are defending, you will not know how it can impact your case. You may not realize, for example, that this could make the resolution of your case much more difficult to achieve, and often much more expensive, because the complainant has entered into an agreement with the litigation finance company, which charges very high interest rates and expects a high return on investment.

There are reported cases where litigants have attempted to rescind the litigation funding agreement, claiming they had no idea what they had signed. Just a few months ago, for example, the New York Post published an editorial that included a story of a litigation finance company that allegedly demanded more than $ 2 million to pay off a $ 21,000 loan in dispute. With this kind of financial obligation on the plaintiff, is it any wonder that the settlement can be so much more costly for the defendant? The New York Post the editorial went on to call for industry regulation and legislative oversight.

What could this oversight look like? Currently, only a few states have passed legislation regulating the practice, but a bill tabled in the New York state legislature earlier this year contains some interesting provisions. If passed, it will be called the New York Consumer Litigation Funding Act.

Here are some of its provisions:

  • Finance companies must be registered with the state and post a bond

  • Disputes Financing contracts should be written in plain language and should disclose in exact terms the maximum amount the consumer will pay

  • A maximum annual interest rate of 36% applies

  • Prepayment of the advance is possible without penalty

  • No referral fees can be paid to the plaintiff’s lawyer

  • The litigation finance company will have no control or influence over the litigation.

  • All communications remain protected by attorney-client and work product doctrines.

The last time I saw it, the bill remains in legislative committee. In the past, there have been attempts in New York to go through similar disputes, so there is no guarantee that this time the law will actually be enacted.

Proponents of litigation financing say the practice opens up the world of civil litigation to people who otherwise could not afford to assert their rights and provides them with the funds necessary to survive the years leading up to the closing of the case. Opponents of this practice cite predatory lending practices, rates similar to usury, an increase in litigation encumbering our courts and distortions of the lawyer / client relationship, including conflicts of interest between litigants and their own. lawyers.

Obviously, the need for reasonable regulation probably exists. Maybe the New York legislature is about to get there.


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