Focus on the Law: Lawsuit Funding

By Sharon Frankenberg,
Attorney at Law

It is a sad fact that some lawsuits take many months and even years before they are settled or proceed to trial.  Fortunately, people who are seriously injured can usually find an attorney to pursue a lawsuit against the responsible party without paying the attorney any money up front.   However, these same plaintiffs are often unable to work and earn money to pay their living expenses while their lawsuits are pending.  Sometimes this lack of income leaves them facing foreclosures and repossessions.  In 1997 an industry developed to help fund living expenses for people like these who were plaintiffs in lawsuits.

Plaintiffs can contact a litigation funding company and that company determines the likelihood of the lawsuit’s success and the projected amount of recovery.   Only the most promising cases will be considered by the funding companies.  If the client decides to take the loan, the terms of the amount and length of the loan as well as fees and expenses will be worked out in the form of a contract.  If the client later wins his or her lawsuit, the company gets paid from the lawsuit proceeds, plus hefty fees.  If the client recovers less than expected, the client’s attorney may try to negotiated lower fees from the company.  If the client loses, he or she is not required to repay.

Companies that specialize in pre-settlement loans or other types of litigation funding point out that they can be a lifeline for injured plaintiffs who have immediate household needs such as paying the mortgage, rent, car payments and putting food on the table.  The financial pressures of a serious accident can encourage plaintiffs to settle quickly for perhaps much less than would otherwise be entitled to receive if they had the luxury of time.

Buying time from the litigation funding companies, though, comes at a steep price.  Unlike typical loans, litigation funding is often done on a contingent basis where the plaintiff is only required to repay the money if his or her lawsuit is successful.  This is known as “non-recourse” funding.  No interest is charged but the companies charge application fees, administration fees and funding fees.  These fees usually range from 2% to 4%, compounded monthly.  Compared to the interest rate costs on a typical consumer loan, this would be well over what most states consider usurious.  That is why many of these companies are very careful not to refer to the funding transaction as a loan.  Because the financing is non-recourse, they avoid banking rules, regulations and lending laws.  It is less a loan and more of a gamble.  After all, if the plaintiff does not win, the litigation funding company receives nothing.  A bank would never take such a chance and the exorbitant cost of this type of funding reflects the extremely high risk of loss.

Due to concerns over abuses in the industry, 14 states have proposed legislation to regulate lawsuit financing transactions.  Tennessee has now passed the Tennessee Litigation Financing Consumer Protection Act.  It covers non-recourse transactions in which financing is provided to a consumer in return for a consumer assigning to the litigation financier a contingent right to receive an amount of the potential proceeds of the consumer’s judgment, award, settlement or verdict.  The new law requires registration in the state as a litigation financier; regulates charges and fees; requires a surety bond; and provides for a right of rescission.  As a telling result of the passage of this new law, Oasis Legal Finance, one of the country’s largest consumer legal funding services, has announced that it is leaving the Tennessee market.  You should always contact an attorney for legal advice concerning your specific situation.

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