ILNews

Lawmaker targets burdensome pre-settlement funding by proposing cap on interest rates

Back to TopCommentsE-mailPrintBookmark and Share
Indiana Lawyer Focus

Funding companies woo plaintiffs in need with promises of quick cash for their pending settlements without oversight in Indiana. That soon could change.

“There’s really nothing guiding this practice at all at this point,” said Marty Wood, president of the Insurance Institute of Indiana, which is backing legislation sponsored by Rep. Matt Lehman, R-Berne, that would cap interest rates on lawsuit funding or pre-settlement advances. Wood and others said annual interest rates in the deals can exceed 100 percent, sometimes leaving plaintiffs out of their own judgments.

hammond-jeff-mug Hammond

The sales pitch is simple: Companies such as Oasis Legal Finance, Fairpay Solutions and a host of others front a portion of an anticipated settlement that a litigant repays only when the case settles. It can be an easy sell to struggling litigants with bills to pay, and even opponents of the practice recognize the companies’ function.

“There’s legitimacy to these,” Lehman said, but not without limits. “Some of these loans, at a minimum, are 60 to 70 percent interest. That’s not good public policy.”

Lehman’s House Bill 1205 would require a cap on interest rates, that the agreements be filed with the Department of Insurance, and that a plaintiff’s attorney sign off on the transaction.

“We regulate payday lenders, pawn shops,” Lehman said. “The public should never be put in a position where they have to borrow money at an extremely high interest rate.”

But the industry says the transactions aren’t loans at all, but rather an investment that carries a risk that the security may never materialize. If they were considered loans under the law, they would be subject to usury laws and much lower interest-rate caps under the Uniform Commercial Credit Code.

Industry representatives were among those who testified before a summer legislative study committee that returned no recommendation on pre-settlement funding. Kelly Gilroy of the American Legal Finance Association in New York presented model legislation that would include a five-day rescission period and require a plaintiff’s attorney to sign off on the transaction, which she said is a current practice for ALFA-affiliated financiers.

But the model legislation doesn’t include a cap on interest, and Gilroy said the agreements don’t include interest, but rather recurring fees.

“We’re completely OK with regulation, but it needs to be regulation that’s unique to the product because it’s a very unique product,” Gilroy said. People who receive funding repay nothing if they lose their case, and companies evaluating potential settlements are dealing with unknowns, she explained.

“The fees do reflect the risk, because the companies are taking a huge risk,” Gilroy said, noting that for borrowers, the money can be a lifesaver. “Consumers are never in a worse position, and they have to have a specific set of circumstances to even be considered” for pre-settlement funding. ALFA-aligned companies, according to Gilroy, typically front no more than 10 percent of an anticipated settlement amount.

“A lot of times these are people who’ve already used their credit cards, they’ve gone through their savings, and it’s like a lifeline for them,” Gilroy said.

This isn’t the first time lawmakers have tried to rein in the practice, but prior attempts have failed.

Sen. Brent Steele, R-Bedford, chairs the Senate Judiciary Committee and said lawmakers appear to have been torn in the past.

“I don’t like the whole idea of this, but these people are desperate,” Steele said referring to litigants. A ban of the practice would never pass, he said, and allowing it to continue is “the lesser of two evils, the way I see it.”

Indiana Department of Financial Institutions associate counsel Connie Gustafson said it is an open question how the transactions may be regulated. “We do see it as our job to look out for the public whenever there is any sort of product offered that relates to financial services,” she said.

Gustafson doubts the industry claims of extreme risk. “The reality is, they’re in the business of determining which cases are most likely to result in a settlement, and therefore whether the risk is as high as they say it is is somewhat questionable.”

Indiana University Maurer School of Law professor Sarah Jane Hughes said the transactions could be seen as akin to contingency fees, and various companies structure them differently. Some simply purchase the settlement while others extend a portion to be repaid when the case resolves.

But whether the advances are loans, investments or something else is likely to be decided by a court and by the way the Department of Finance and attorney general view them, she said.

For litigants, the business represents a form of gap funding and perhaps the only available credit, Hughes said. “One size does not fit everybody,” she said. Opting for pre-settlement funding is “a very personal decision and should be made after careful reflection.”

Cohen & Malad LLP associate Jeff Hammond represents medical malpractice and personal injury plaintiffs. “I generally caution clients against these loans and try to advise them as to what they are and let them know what can happen,” he said.

At the same time, some clients have immediate needs. “They’re not trying to buy a new truck. They’re trying to keep the heat on.”

Hammond said he’s never had a case where pre-settlement funding has impeded settlement. But, he said, “If there’s a way they can regulate this industry and put in some protections for vulnerable consumers, I don’t think that’s necessarily a bad thing.”

Greenwood attorney Patrick Olmstead serves as general counsel to several law firms and chairs the Indiana State Bar Association’s ethics hotline. “I hadn’t seen it a year or two ago,” he said of litigation funding. “Now I have some friends who are seeing it in probably a third of their cases.”

Funding companies rely on lawyers to advise them what a case might be worth when a client seeks an advance, Olmstead said. “Where it really hurts is on the backend because the victim gets some money up front, and at the end if you don’t get the settlement you want out of it, (the victim) may wind up with nothing else at the end of the case. It doesn’t incentivize the client to settle.”

Olmstead said some attorneys have cut their fees to make sure clients who’ve received funding up front will get something out of a settlement. He wouldn’t blame attorneys who raise their contingency fees for clients who use pre-settlement funding.

“I just really feel bad for the lawyers, because they get put in a trick box,” he said.

Indianapolis attorney Lance Wittry represented a couple in a medical malpractice negligence suit over their child’s stillbirth. The case didn’t get resolved until a favorable ruling in the Indiana Supreme Court eight years later prompted a settlement.

One of the parents had signed a pre-settlement funding agreement and received $50,000, Wittry said. He said the company four years later claims it is owed $1.3 million.

Wittry now is representing the parent in federal court in the Southern District of New York, where the company has sued, seeking to compel arbitration.

In response, Wittry claims the agreement was unconscionable, because, among other things, it contained a monthly interest rate of 4.99 percent. Wittry also says the company’s bid to enforce arbitration violated an agreement with former New York Attorney General Eliot Spitzer, in which a number of pre-settlement companies agreed to ax arbitration clauses from their deals.

Wittry dismisses the industry’s claim that it’s providing a needed lifeline to people who need cash fast.

“People always need money right now. We all need money right now,” he said. “They’re taking advantage of people.”•

ADVERTISEMENT

  • they website didnot post
    www.lawsuitloantruth.com
  • Lawsuit loans suck
    People should be able to enter into contracts but only if they are equally situated. I got a lot of my information from googling a lot and reading as much as possible. The industry should be regulated. Some of the interest rates are crazy high and they hide them and the fees. See The Truth about Lawsuit Loans

    Post a comment to this story

    COMMENTS POLICY
    We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
     
    You are legally responsible for what you post and your anonymity is not guaranteed.
     
    Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
     
    No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
     
    We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
     

    Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

    Sponsored by
    ADVERTISEMENT
    Subscribe to Indiana Lawyer
    1. Wishing Mary Willis only God's best, and superhuman strength, as she attempts to right a ship that too often strays far off course. May she never suffer this personal affect, as some do who attempt to change a broken system: https://www.youtube.com/watch?v=QojajMsd2nE

    2. Indiana's seatbelt law is not punishable as a crime. It is an infraction. Apparently some of our Circuit judges have deemed settled law inapplicable if it fails to fit their litmus test of political correctness. Extrapolating to redefine terms of behavior in a violation of immigration law to the entire body of criminal law leaves a smorgasbord of opportunity for judicial mischief.

    3. I wonder if $10 diversions for failure to wear seat belts are considered moral turpitude in federal immigration law like they are under Indiana law? Anyone know?

    4. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

    5. Justice has finally been served. So glad that Dr. Ley can finally sleep peacefully at night knowing the truth has finally come to the surface.

    ADVERTISEMENT