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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. I grew up on a farm and live in the county and it's interesting that the big industrial farmers like Jeff Shoaf don't live next to their industrial operations...

    2. So that none are misinformed by my posting wihtout a non de plume here, please allow me to state that I am NOT an Indiana licensed attorney, although I am an Indiana resident approved to practice law and represent clients in Indiana's fed court of Nth Dist and before the 7th circuit. I remain licensed in KS, since 1996, no discipline. This must be clarified since the IN court records will reveal that I did sit for and pass the Indiana bar last February. Yet be not confused by the fact that I was so allowed to be tested .... I am not, to be clear in the service of my duty to be absolutely candid about this, I AM NOT a member of the Indiana bar, and might never be so licensed given my unrepented from errors of thought documented in this opinion, at fn2, which likely supports Mr Smith's initial post in this thread: http://caselaw.findlaw.com/us-7th-circuit/1592921.html

    3. When I served the State of Kansas as Deputy AG over Consumer Protection & Antitrust for four years, supervising 20 special agents and assistant attorneys general (back before the IBLE denied me the right to practice law in Indiana for not having the right stuff and pretty much crushed my legal career) we had a saying around the office: Resist the lure of the ring!!! It was a take off on Tolkiem, the idea that absolute power (I signed investigative subpoenas as a judge would in many other contexts, no need to show probable cause)could corrupt absolutely. We feared that we would overreach constitutional limits if not reminded, over and over, to be mindful to not do so. Our approach in so challenging one another was Madisonian, as the following quotes from the Father of our Constitution reveal: The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse. We are right to take alarm at the first experiment upon our liberties. I believe there are more instances of the abridgement of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations. Liberty may be endangered by the abuse of liberty, but also by the abuse of power. All men having power ought to be mistrusted. -- James Madison, Federalist Papers and other sources: http://www.constitution.org/jm/jm_quotes.htm RESIST THE LURE OF THE RING ALL YE WITH POLITICAL OR JUDICIAL POWER!

    4. My dear Mr Smith, I respect your opinions and much enjoy your posts here. We do differ on our view of the benefits and viability of the American Experiment in Ordered Liberty. While I do agree that it could be better, and that your points in criticism are well taken, Utopia does indeed mean nowhere. I think Madison, Jefferson, Adams and company got it about as good as it gets in a fallen post-Enlightenment social order. That said, a constitution only protects the citizens if it is followed. We currently have a bevy of public officials and judicial agents who believe that their subjectivism, their personal ideology, their elitist fears and concerns and cause celebs trump the constitutions of our forefathers. This is most troubling. More to follow in the next post on that subject.

    5. Yep I am not Bryan Brown. Bryan you appear to be a bigger believer in the Constitution than I am. Were I still a big believer then I might be using my real name like you. Personally, I am no longer a fan of secularism. I favor the confessional state. In religious mattes, it seems to me that social diversity is chaos and conflict, while uniformity is order and peace.... secularism has been imposed by America on other nations now by force and that has not exactly worked out very well.... I think the American historical experiment with disestablishmentarianism is withering on the vine before our eyes..... Since I do not know if that is OK for an officially licensed lawyer to say, I keep the nom de plume.

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