Home Management Alternative Litigation Finance:
Good or Bad?
Alternative Litigation Finance: Good or Bad?
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Alternative Litigation Finance:
Good or Bad?

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Alternative Litigation Finance (ALF) or Litigation Funding seems to be receiving considerable attention lately. It refers to third party financing of litigation to support litigation activity. Simply stated, it is an advance against any future lawsuit settlement or award amount. Litigation financing companies offer litigants (generally plaintiffs) cash advances to cover pressing bills and living expenses, subject to a financing fee, in exchange for a slice of potential winnings. Litigation funding is available in most of the common law jurisdictions in the U.S.

The three types of alternative litigation finance currently common in the market are: consumer legal funding, commercial legal funding, and subprime lending to plaintiffs’ law firms that specialize in personal-injury claims. Consumer legal funding is generally non-recourse loans to personal injury plaintiffs, which is to be repaid, along with the financing fees, if the plaintiff recovers in the lawsuit. Commercial legal funding involves non-recourse loans to companies in return for a percentage of the ultimate recovery, if any, in a commercial lawsuit. Commercial loans involve large sums, while consumer loans are typically smaller amounts.

Why Litigation Financing?

All types of litigation, even pro se litigation, needs monetary funding. Victims of personal injury suits and lawsuit plaintiffs often run into financial difficulties while waiting for the legal process to take its course. At times, the defendants and insurance companies prolong the legal process, forcing low settlements on those who cannot afford to wait. This offer of a cash advance is a blessing in disguise for these individuals. They can use the money to manage their cash flow when paying the expenses and also to finance litigation. Although it sounds enticing and helps them manage short-term financial hurdles, it needs to be approached with caution. To make up for the fact that the litigation financing agreements are non-recourse, the financing companies charge unreasonable interest rates, usually on the basis of exaggerated risk projections.

The Legal Scenario

Despite big leaps in this industry’s growth, the alternative litigation finance industry still remains largely unregulated in many states. As far as traditional laws are concerned, the laws on champerty and usury are fast fading into insignificance. Although the consistent trend across the country is toward limiting and not expanding champerty’s reach[1], a recent survey shows that the majority of the states in the United States (including the District of Columbia) explicitly permit champerty, however with varying limitations.

As far as usury laws go, they are mostly state specific. Although discussions on alternate legal financing often refer to the funding provided as a loan, the funding companies believe they are making an investment or purchasing a share of a claim, rather than making a loan. The litigation financing agreements cannot be classified as true loans because the funding companies are not allowed to recover in cases of an insufficient settlement or unfavorable judgment. Various courts have also enforced the traditional view that alternate litigation funding advances are not subject to usury law because they are repayable contingently, and not absolutely. The alternative litigation financing companies have been able to avoid violations and active regulation under usury laws because of this non-recourse nature of litigation financing[2].

In the U.S., Maine[3], Nebraska[4], Ohio[5] and Oklahoma[6] are some states with statutes preventing predatory consumer litigation lending. These state statutes call for some form of consumer protection to regulate this type of consumer finance. They follow either the “Disclosure Only Model” or “Registration Model” to regulate alternate legal financing. Ohio uses the Disclosure Only Model, whereas the other three states have adopted the Registration Model. The Disclosure Only Model requires detailed disclosures of all important financial terms, including the amount advanced to the consumer, fees, imputed interest, the period from the date of advance during which the funder’s return increases, and the process followed in arriving at the total amount recoverable by the funder over that term. This helps the consumers from entering into transactions they do not fully understand. The Registration Model, on the other hand, includes consumer protection disclosures, as well as several restrictions on the activities of the funders. The restrictions imposed include prohibition of false advertising, prohibition from using the advanced funds to pay legal expenses, and others. The law specifies certain requirements for legal funding contracts that need to be followed. Regrettably, in reality, none of these measures seem to be followed strictly, and these regulations are not without loopholes. Still, it must be conceded that these statutes are definitely an improvement over the current unregulated landscape.

Conclusion

The market for alternative litigation finance involves a segment of society that is in dire need of this funding source, and suppliers who thrive on this form of financing. Because of this demand, alternative legal funding transactions will undoubtedly continue to evolve. This largely unregulated industry has its own potential benefits and problems. Over-regulation may cut off the access to financing now available, and lax regulations will pave the way for unjust enrichment. A medium approach needs to be taken, and regulations should aim at preserving the benefits of litigation financing, while protecting those who are desperately in need of it.


 

Sources Referred:

http://litigationfinancecontract.com/have-the-states-properly-addressed-the-evils-of-consumer-litigation-finance/

http://www.colorado.edu/law/sites/default/files/LitigationFinancing-2013.pdf

http://www.nolo.com/legal-encyclopedia/lawsuit-loans.html

[1] Del Webb Cmtys., Inc. v. Partington, 652 F.3d 1145, 1154 (9th Cir. Nev. 2011)

[2] Fausone v. U.S. Claims, Inc., 915 So. 2d 626, 630 (Fla. Dist. Ct. App. 2d Dist. Sept. 14, 2005); Anglo-Dutch Petroleum Int’l, Inc. v. Haskell, 193 S.W.3d 87, 96-97 (Tex. App. Houston 1st Dist. 2006)

[3] 9-A M.R.S. §§ 12-101 -107

[4] R.R.S. Neb. §§ 25-3303 -3309

[5] ORC Ann. §§ 1349.25 -1349.25

[6] 14A Okl. St. § 3

 

About the Author

This article was provided by LegalEase Solutions.  LegalEase is a specialized legal research and writing company serving attorneys, law firms and legal departments across the US and beyond since 2004. For more information, please feel free to contact us at 1(877) 712-8003 or email us.

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Priyanka Menon
Priyanka Menon

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