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

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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.”•

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  • 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

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    1. Too many attorneys take their position as a license to intimidate and threaten non attorneys in person and by mail. Did find it ironic that a reader moved to comment twice on this article could not complete a paragraph without resorting to insulting name calling (rethuglican) as a substitute for reasoned discussion. Some people will never get the point this action should have made.

    2. People have heard of Magna Carta, and not the Provisions of Oxford & Westminster. Not that anybody really cares. Today, it might be considered ethnic or racial bias to talk about the "Anglo Saxon common law." I don't even see the word English in the blurb above. Anyhow speaking of Edward I-- he was famously intolerant of diversity himself viz the Edict of Expulsion 1290. So all he did too like making parliament a permanent institution-- that all must be discredited. 100 years from now such commemorations will be in the dustbin of history.

    3. Oops, I meant discipline, not disciple. Interesting that those words share such a close relationship. We attorneys are to be disciples of the law, being disciplined to serve the law and its source, the constitutions. Do that, and the goals of Magna Carta are advanced. Do that not and Magna Carta is usurped. Do that not and you should be disciplined. Do that and you should be counted a good disciple. My experiences, once again, do not reveal a process that is adhering to the due process ideals of Magna Carta. Just the opposite, in fact. Braveheart's dying rebel (for a great cause) yell comes to mind.

    4. It is not a sign of the times that many Ind licensed attorneys (I am not) would fear writing what I wrote below, even if they had experiences to back it up. Let's take a minute to thank God for the brave Baron's who risked death by torture to tell the government that it was in the wrong. Today is a career ruination that whistleblowers risk. That is often brought on by denial of licenses or disciple for those who dare speak truth to power. Magna Carta says truth rules power, power too often claims that truth matters not, only Power. Fight such power for the good of our constitutional republics. If we lose them we have only bureaucratic tyranny to pass onto our children. Government attorneys, of all lawyers, should best realize this and work to see our patrimony preserved. I am now a government attorney (once again) in Kansas, and respecting the rule of law is my passion, first and foremost.

    5. I have dealt with more than a few I-465 moat-protected government attorneys and even judges who just cannot seem to wrap their heads around the core of this 800 year old document. I guess monarchial privileges and powers corrupt still ..... from an academic website on this fantastic "treaty" between the King and the people ... "Enduring Principles of Liberty Magna Carta was written by a group of 13th-century barons to protect their rights and property against a tyrannical king. There are two principles expressed in Magna Carta that resonate to this day: "No freeman shall be taken, imprisoned, disseised, outlawed, banished, or in any way destroyed, nor will We proceed against or prosecute him, except by the lawful judgment of his peers or by the law of the land." "To no one will We sell, to no one will We deny or delay, right or justice." Inspiration for Americans During the American Revolution, Magna Carta served to inspire and justify action in liberty’s defense. The colonists believed they were entitled to the same rights as Englishmen, rights guaranteed in Magna Carta. They embedded those rights into the laws of their states and later into the Constitution and Bill of Rights. The Fifth Amendment to the Constitution ("no person shall . . . be deprived of life, liberty, or property, without due process of law.") is a direct descendent of Magna Carta's guarantee of proceedings according to the "law of the land." http://www.archives.gov/exhibits/featured_documents/magna_carta/

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