The U.S. Chamber of Commerce Institute for Legal Reform (ILR) is attempting to persuade those able to amend the Federal Rules of Civil Procedure to require that third-party funding of litigation be disclosed in federal suits. Champerty is an old English term used to describe third-party litigation funding beginning in medieval times. Burford Capital suggests well over 10% of attorneys have been involved with litigation financing. Although prevalent in countries including the U.K. & Australia, it is still relatively new in the U.S., commonly seen in personal injury actions.
An ILR white paper recommends the follows:
- Investors should be prohibited from assuming control of cases
- Prohibiting arrangements between lawyers and investors that exclude the party (client)
- Prohibiting law firms from owning litigation finance entities
- No financing be permitted in class action cases
- That funding of litigation be disclosed
Proponents of these funding activities say plaintiffs are often injured, out of work, and unable to cover their expenses. Cases may take several years with clients incurring credit card debt and potentially being forced into bankruptcy amid overwhelming medical bills. Legal financing is “nonrecourse” funding, meaning plaintiffs are not obligated to repay advances; financiers are paid exclusively from settlements or court awarded compensation.
Funding entities typically approach potential cases by evaluating the strength of the claim, likely amount of damages, and means (likelihood) for the defendant to pay a judgment. Some feel funding “levels” the playing field, providing otherwise unavailable resources for plaintiff’s to investigate matters, obtain critical evidence, or expert testimony. Opponents feel third-party investors hinder efforts to settle matters for reasonable amounts without risk or delay, leading to trials.
Consumer vs Commercial
The industry avoids classifying these financial advances as loans. Lending laws and regulations may prohibit these transactions in some locations and situations, thus they describe the acts as investments, funding or advances. Consumer financing tends to involve small amounts, likely evaluated on a case-by-case basis.
Funding on the market’s commercial side may involve “portfolios” of several active claims that a law firm is litigating. The American Bar Association explained that commercial advances can easily exceed $500,000. The American Legal Financing Association (ALFA), the market’s primary trade association seeks to promote the industry in a positive light among the general public, lawmakers, and media outlets, who often view it with scrutiny.
Insurance Company Stance
Matthew Probolus, a Portfolio Manager with Travelers Bond & Specialty Insurance, expressed concerns for possible abuse within legal financing. Many in his industry see the potential for cases of a frivolous nature, increased costs of litigating, and difficulty in reaching settlements. The majority of Probolus’ colleagues support mandatory funding disclosures.
Legislators recently in Maine, Nebraska, Ohio, and New York considered provisions regarding the litigation finance industry, mainly from a consumer protection standpoint. Texas, Florida, New Jersey are among states that now specifically allow contracts for litigation funding; meanwhile, Colorado, Pennsylvania, & Alabama are deemed restrictive. The Consumer Financial Protection Bureau often investigates and enforces litigation finance organizations.
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