he biggest weapon that opponents of plaintiff financing, often incorrectly called a “lawsuit loan”, have in their arsenal is the vague resemblance between plaintiff financing and loans. They use this weapon to push legislation that increasingly regulates financing that has the capacity to empower plaintiffs. The half-dozen states that regulate plaintiff financing under the name of protecting plaintiffs have failed to realize that they are ironically hurting plaintiffs by reducing the resources they have to maximize their settlement offers. Most states have recognized that the process of financing plaintiffs’ lawsuits is an investment, not a loan; usury caps, or regulation of interest rates, do not apply to investments, and thus, should not apply to plaintiff financing. If it did, the industry would not exist.
For the powerful lobbies behind loan-centric regulation, that’s their goal: to eliminate the system and capacity of lawsuits and plaintiffs to be financed.
Such lobbies were behind Arizona’s SB1403 bill, which passed its initial hearing on February 9, 2015 and classified plaintiff financing as a loan and limited its capacity to help plaintiffs in dragged out/stalled lawsuits. As a contrast to Arizona’s bill, Indiana’s SB373 bill classifies plaintiff financing as a non-loan transaction, which would benefit the industry and consumers alike by providing more resources to plaintiffs.
But there’s a more insidious bent to the language of loans: it frames the conversation. When we discuss the process of financing plaintiffs as an investment, we’re talking about an opportunity for plaintiffs. When we discuss plaintiff financing as a loan, we’re talking about something predatory that consumers need to be protected from. A little word goes a long way in shifting the tone.
This dichotomy was evident in Monday’s hearings. In Indiana, Senators on the Civil Law committee quickly understood, to quote chairman Joe Zakas, that plaintiff financing is “fundamentally different than a loan.” When representatives from the Chamber of Commerce and Indiana Manufacturer’s Association insisted that rate caps will benefit the free market, Senators Zakas and Greg Taylor rightfully pushed back. “We do have caps,”Taylor emphasized, “but those are usury caps”:
And those are typically [for] when it comes to paying penalties on defaulted loans… But when you initially go get a loan, you let the market… dictate where you are. And I would think the chamber, out of all the public interest groups here, would be supportive of that.
The Arizona hearing took a radically different tenor. Senator Kimberly Yee and her colleagues on the Commerce and Workforce Development Committee were already settled on the loan question – unsurprising, given that SB1403 has “lawsuit lending” in the title. They pushed back not against representatives from the Chamber of Commerce but those from ALFA. They went along with the fiction that plaintiff financing is associated with clogged courts and frivolous lawsuits, instead of the logical truth that rate caps will stifle the free market.
Here’s the crazy thing, though. The people in the loan camp make their case on unfounded and tautological evidence. Ed Roberts of the Indiana Manufacturer’s Association testified, “It looks like a loan to me, [so] I’m gonna call it a loan.” Almost that exact language was repeated by Representative Matt Lehman in his committee hearing two weeks ago. And the same line of reasoning came up in Arizona: because it resembles a loan, it’s a loan; because the rates are sometimes high, it’s predatory.
A question for the men and women who write our laws: a peach looks like an apple. Is it an apple?
One can point out that financing plaintiffs is not as simple as differentiating between a peach and an apple. However, few financial products are. But our response to a difficult thing should be to understand it, not to reduce it. Yes, this is a nuanced issue; most important things are. But once we grasp why plaintiff financing is not a loan, we might grasp why restrictive regulation is such a danger to consumers.
Victoria Shannon devotes several pages to this very issue in her article in the latest Cardozo Law Review. Shannon is an Assistant Professor of Law at Washington and Lee University; she is also one of the foremost scholars on plaintiff financing. She provides five straightforward reasons why the loan argument is fraught with inconsistences:
Unlike loan borrowers, plaintiffs who take plaintiff financing have no absolute obligation to repay. If their cases loses, they keep the money. This is because technically the transaction is structured as a purchase of an asset, the asset being a stake in the plaintiff’s claim.
“If the client loses the case,” Shannon writes, “the funder cannot pursue the client’s other assets.” This distinction is particularly important in the context of payday loans, to which plaintiff financing is often erroneously compared. If you fail to repay a payday loan, the lender will withdraw money directly from your bank account. Lawsuit funders have no such power. Even if you win, their return comes entirely out of your settlement.
Lawsuit funders take on every case knowing they might get paid back in six months, in ten years, or never. The risk is greater than in a traditional loan, and the rates are accordingly higher. “This is not a unique concept,” writes Shannon:
For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed even on subprime mortgages, which are backed by collateral.
This risk is so great, Shannon observes, partly because plaintiff financing is not a bilateral transaction. In the credit card example,
The credit card issuer and the debtor are making an agreement based on a promise by the debtor that he or she will repay the credit card charges at regular intervals. There is no third-party involved, and whether the debtor pays or not is based entirely upon the debtor’s own choices. By contrast, the funder and the client are making an agreement based on what a judge or arbitrator will do at some future unknown date or on whether the client and the other side will settle at some future unknown date.
A financing agreement relies on more parties than a traditional loan: not only on the judge but on the defendant, on the jury. This multiplicity of parties brings us to Shannon’s fifth reason:
In plaintiff financing, the riskiest investments are typically in cases that have just commenced. These are also often the most important investments for plaintiffs, when they’re in the greatest need. At this early stage, there is what Shannon describes as anasymmetry of information: “the client and funder do not yet have access to documents or evidence from the other side, so they cannot be completely sure the likelihood of winning on the merits or settling the case.”
In blunter terms, this means that what looks like a slam-dunk case today might get totally upended in six months. Or two years. Or ten.
Litigation is long and unpredictable; litigation funders take on substantial risk so plaintiffs can get by in the meantime. The returns from successful cases pay largely for the time and manpower invested in unsuccessful ones.
Well, there are three important conclusions we can draw from Shannon’s framework:
Debt just isn’t possible with plaintiff financing. Even plaintiffs who win will never owe more than the recovery. The debt spirals associated with payday loans? They simply aren’t in the cards for plaintiff financing consumers. In fact:
Remember that many, if not most plaintiffs who take financing are unable to work after an accident or injury. Funding is most commonly used to pay bills – mortgage, tuition, gas, electric – that otherwise would not get paid. Except, perhaps, with payday loans…
Suppose you have a case worth $50,000, but you’re not going to see that money for a year. Suppose you have medical bills in excess of $5,000 due last week. Suppose you’re being offered a settlement of $10,000 – cash that could be in your pocket tomorrow.
You could take the settlement, sure. You could also take $5,000 in plaintiff financing, pay the bills, and receive the full $50,000 that your case is worth later.
The real agenda
The conversation around bills like Arizona’s SB1403 is flawed. Lawmakers are working from the wrong premise: they’re right to want to combat predatory lending, but plaintiff financing is neither predatory nor lending. Before we try to protect consumers from a product, we should always aim to understand what the product is first. But by framing the conversation around loans, lobbyists negatively skew lawmakers’ perception of plaintiff financing, without allowing them to understand what the process of financing plaintiffs actually entails.
A law that classifies plaintiff financing as a loan ironically ends up harming plaintiffs, the very people it alleges to protects. It ends up protecting the insurance companies who for years have systematically underpaid injury claims, because no one has held them accountable. Now companies that finance plaintiffs have arisen to hold them accountable: it is no longer viable to draw out litigation until a plaintiff has no other choice but to accept the low offer. These companies and their lobbyists are terrified of a future where they must pay what they owe.
And they should be. That future is fast approaching.
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