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.
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.”•