Litigation Finance – 60 Minutes Piece Reaction
A recent 60 Minutes “news” show did a piece on litigation funding entitled, “Litigation Funding”. In this post, we will go into the details of the piece, how it was presented, and give our own account of the lawsuit funding business.
Litigation Funding Need
Lawsuit funding is the advancing of money to litigants (mostly plaintiffs) in anticipation of a successful recovery. These are specialty finance transactions where a ‘lawsuit lender’ advances money, plaintiff pledges a portion of the recovery, and the advance is repaid with that recovery.
Lawsuit funding occurs informally in some jurisdictions where attorneys are allowed to advance their clients money prior to settlement. Clients may be strapped for cash and their counsel, knowing the likely success of a particular case, “lends” their financial support. When the case is resolved, the money is reimbursed and everyone is happy. It is important to note that charging of interest for this transaction is prohibited in most, if not all circumstances.
To be clear, most states have ethical rules that prohibits attorneys from advancing money to clients. This rule exists to prevent aggressive attorneys from indirectly paying for clients by providing financial assistance.
Clients still need money, and the lawsuit funding business fills this need.
The 60 Minutes Story
The story begins with a little bit about the business and then sets the table with this:
Litigation funding can help in cases where otherwise the little guy who’s suing would just get crushed or lowballed by defendants with deep pockets. Problem is – this market is exploding with nearly no rules or oversight.By Lesley Stahl
December 18, 2022 / 7:36 PM / CBS News
Based upon that statement, it became immediately clear the purpose of the story was to make a case for regulation.
60 Minutes does a good job at appearing impartial because they begin with a success story involving Craig Underwood, a pepper farmer in Ventura County, California. Underwood used to sell exclusively to a Sriracha pepper sauce manufacturer which abruptly ended their business relationship. He filed a lawsuit to protect his rights under their contractual agreement.
While the case progressed, Underwood was facing the loss of his farm. “With nowhere else to turn”, the story goes, he contacted Burford Capital, a litigation finance company. Burford supported the farmer and advanced $4 million to him while he waited for the legal process to conclude.
Ultimately, Underwood paid $8 million back to Burford. When Leslie Stahl asked whether he thought paying 100% on his money was predatory lending, he did not take the bait. Instead, he responded:
Some people might think that. I didn’t feel that way. ‘Cause they stepped in and helped us out when we couldn’t have gotten money from anybody else. They basically rescued us.
The Underwood example is exact reason for litigation finance. A struggling individual or entity secures a lifeline that would otherwise be unavailable. The money saved his family business.
Near the end of the segment, 60 minutes, perhaps looking for some tension for the story, suggests litigation investors are in a position to force plaintiffs to settle their case. When asked specifically about this, Burford Capital president, Christopher Bogart denied they exert any pressure on their clients to handle their cases in any particular way.
In response, Maya Steinitz, a law professor at the University of Iowa, suggests it is simply human nature to pressure clients and attorneys into making legal decisions. Of course, there already ARE ethics rules in place making sure attorneys solely abide by the wishes of their clients. It is unclear how more rules (regulation) would negate human nature.
Second Story Finishes the Argument
The second story is an example of lawsuit funding gone wrong. It was also the basis of a lawsuit filed against RD Legal Funding, a lawsuit funding business which was advancing pre-settlement cash to 9/11 first responder victims. Former New York police officer Donald Sefcik received funds from RD Legal and wound up paying back 150% on the advance.
Sefcik says the contract was confusing and he was taken advantage of. Maybe he was. Not knowing the exact contract language, we cannot speak to this point but NY Attorney General’s “best practices” recommendations require disclosure of the actual payoff amounts and how they are calculated. These best practices suggestions are meant to be guidance for lawsuit funding companies. Sefcik was a New Yorker. It is likely the contract had these disclosures.
Finally and not surprisingly, Maya Steinitz then gives her opinion the industry should be regulated. She doesn’t explain why but she doesn’t really need to. An expert thinks the business should be regulated – cut to commercial.
Creating a Problem Where None Really Exists
Using the Sefcik case as an example, 60 minutes tries to frame the situation as a problem. The Sefcik example is not an accurate depiction of the lawsuit funding business because it is not a typical candidate for lawsuit funding. Instead, the vast majority of plaintiff funding involves personal injury insurance claims that have not yet been paid. Injured litigants, sometimes unable to work due to their condition, need an influx of cash to pay expenses, medical treatment or any other need.
9/11 compensation cases were less risky as an investment because they were backed by the US Treasury. That’s probably accurate. It is also accurate that these types of cases represent a tiny fraction of the plaintiff funding market. Most cases require the managing of additional risk. This might include one or more of the following:
- the potential for misinformation
- unforeseen liability issues
- previously undisclosed prior medical conditions
- bankruptcy issues
- tax lien encumbrances
- insurance coverage issues
- and more. . .
Pointing to the exception (that the claim is backed by the Federal Government) rather than the norm (suing private parties and their insurers) creates the appearance of a problem where none actually exists. The free exchange of individuals (market) sets the pricing. Below, we look a little deeper into regulation and lawsuit loan cost.
Regulation and Non-Essential Services (Lawsuit Funding)
Regulating certain activities protects the public at an acceptable cost. For example, requiring a license to drive a car provides safety on the roads by testing both a driver’s ability and knowledge. The protection is measurable and the cost (training and maintenance) is minimal.
When regulating businesses (as opposed to people), the needs of the public are also served. Consider regulating electricity production by a power company. The service provides a general public need because everyone uses electricity.
For an electric company, maximizing profits might mean holding customers (public) hostage by threatening a service interruption. This would be unacceptable. Thus, government regulates the industry by mandating specific rules for pricing, safety, etc. In return, the utility is allowed a monopoly for the production of electricity in a certain area. The public is protected from price gouging and the utility protected from competition. Both parties win in this scenario.
Again, the reason for regulation is to prevent the power company from having too much power over the public. Pricing is an important issue because parties have no other option for the product or service. The public has an interest in making sure the pricing does not get out of hand. Allowing one entity have this much power is ripe for abuse and against the public good. This makes sense. But it is only this clear when dealing with ESSENTIAL services.
Non-Essential Services (Lawsuit Loans)
For non-essential services, analyzing the need for regulation becomes more difficult.
Lawsuit loans may seem essential for litigants in financial trouble, but they can hardly be characterized as “essential”. Critics thus need another reason for regulation. That reason is usually framed in “fairness”.
Regulation because something is “unfair” gets a little tricky. Who gets to determine what is fair? Do we listen to who is in the best position to decide or do we listen to anyone who cares to comment? Let us analyze the pricing (fairness) issue in this regard.
Lawsuit Loan Pricing Argument and Effect on the Legal System
The 60 minutes story suggests lawsuit loan terms can be oppressive. However, as mentioned above, there should be a compelling reason to protect individuals entering into lawsuit loan transactions. Ideally, the reason should show the product or service is a necessity and the cost to consumers would be unfair without the regulation.
Lawsuit Funding – a Necessity?
Litigation finance is specialty finance. The industry serves litigants and only those who need immediate financial support. Plaintiffs are not forced to enter into these transactions. Unlike electric power, plaintiffs can simply pass on the opportunity. All other sources of capital are still available to plaintiffs. These might include:
- home equity loans
- personal loans from friends and family
- bank loans
- credit card cash advances, etc.
Although many plaintiffs enter into a lawsuit loan agreement only after examining other options, critics cannot accurately state lawsuit funding clients have no choice. Clients could sell almost ANY of their possessions for cash. A portion of future lawsuit proceeds is just one such possession.
In other words, lawsuit funding companies do NOT hold a monopoly on purchasing assets. People buy and sell all types of assets every day. Litigation finance companies simply specialize in the purchase of a special type of asset.
Assuming there is a need for regulation, the argument in favor of regulation still should make sense. This news story compares relative cost by mentioning car loans. But comparing lawsuit funding to car loans is misleading since the two products are completely different. The story even concedes this. They make the comparison anyway but wind up missing the point entirely.
The point is: there is a legitimate need in the marketplace and that need is being filled by willing participants. Logically, the discussion should end there. Pricing is set by the market as competition determines what funders are willing to accept as payment for their services. In fact, the cost of lawsuit funding has actually decreased over the years as market participants attempt to secure more clients. This was left out of the story.
Litigation Finance Regulation
Like it or not, it seems that regulation is on its way. Complying with regulations can be a costly affair for businesses. This additional cost must be passed along to the consumer. Below, we examine the issue of regulation in its proper context.
Current Lawsuit Funding Market
Lawsuit funding, if not prohibited by state law, is largely unregulated. But some states do regulate the practice. In the unregulated markets, participants (plaintiffs and lawsuit “lenders”) negotiate their own terms. Remember, lawsuit funding contracts are not loans. They are non-recourse transactions structured as asset purchase agreements, giving the purchaser a partial interest in the future proceeds of the lawsuit or claim.
Although pricing can vary, competition has drastically reduced pricing from almost 100% per year to under 36% in the last several years. Because the market is unregulated, the funders are able to fund riskier cases such as medical malpractice and large mass tort claims. They can change the pricing to reflect the additional risk.
Regulating Price and Fees
Most settlement funding regulation efforts recommend setting limits upon what a lawsuit funding company can charge its clients. Certain states cap the “rate” at 36% per year for plaintiff funding. Most existing regulation limits the amount of processing fees that can be charged at closing.
At first blush, the pricing seems fair. After all, this is the current competitive price level anyway. By comparison, credit cards charge a similar rate for introductory offers. And by limiting lawsuit funding contract amounts, there should be plenty of settlement money left for the plaintiff after everyone is paid/repaid. Everyone is happy.
Not Everyone Wins
Price caps will likely help existing lawsuit funding operations who already have access to cheaper pools of money. Companies with higher cost of capital would not be able to secure a large enough return to stay in the business. This limits competition. Ultimately, only a few larger players would remain. Those that remain will have the luxury of funding only the best cases.
The losers are mostly likely the ones regulation is trying to protect. They are the plaintiffs whose cases do not fit into the funding models of the remaining companies. This means many plaintiffs, who nonetheless face severe injuries and are unable to earn a living, will be shut out of the relief they desperately need.
Most lawsuit funding investments that are lost are total losses. If companies cannot charge enough to overcome these losses, they will simply decline the investment opportunity. Lawsuit funding for products’ liability, medical and legal malpractice cases will lessen since they are more risky by nature. In the unregulated marketplace, investors fund these cases and adjust the pricing to offset the risk.
What to Take from the Story
There’s an old saying: “Whatever message you receive, someone paid for you to hear it.” When a mainstream news program pushes for regulation, you can be sure there are forces behind the scenes promoting it.
Unfortunately, the solution offered will result in more harm than good as free market participants (customers) benefit from flexibility an unregulated marketplace provides. The ability to craft lawsuit funding deals in creative ways allows both plaintiffs and funders the ability to serve their own needs. Hampering creativity with regulation prohibits otherwise willing participants from solutions which would otherwise be available.
And that’s the real problem, settlement funding regulation actually hurts many of the people (consumers) it tries to protect. Inflexible pricing shuts out many litigants who need cash now but whose cases do not fit into a predetermined box. Unfortunately, the consumer always gets the raw end of the deal.
Thank you for your interest in lawsuit funding.