The New York Times Weighs in on “Lawsuit Loans”

By A. Antonow
Published: November 16, 2010

The New York Times recently ran an article, “Investors Put Money on Lawsuits to Get Payouts,” about the lawsuit funding industry. The article was interesting for a number of reasons. The fact that the subject is rarely tackled in mainstream media certainly made the piece stand out. Binyamin Appelbaum, author of the piece, acknowledges that lawsuit funding is becoming more common and is in fact a direct descendant of the practice of contingency fees, which, like lawsuit funding, were designed to narrow the bridge between wealthy defendants and injured plaintiffs with fewer resources. The New York Times article, however, does make a few interesting claims that do not necessarily reflect the practices common in the industry:

1) Appelbaum refers to lawsuit “loans” several times and to “interest” that is quoted as 18% at one firm and even higher at another lending company. This is despite the fact that what lawsuit funding companies offer is in fact not a loan. A loan is a borrowed amount of money which needs to be repaid with interest. Lawsuit funding is non-recourse, meaning that it is only repaid if and when a case is settled out of court or won. It’s unusual that Appelbaum never refers to the non-recourse nature of lawsuit funding and in fact implies that plaintiffs and their attorneys need to repay their so-called lawsuit loans regardless of the outcome of a case.

2) Appelbaum claims that lawsuit funding influences cases. He claims that a Fresh Del Monte Produce should not have reached trial but was pushed ahead by an investor. He also asserts that claims against BNSF Railway by Texas residents may be seen as an example of the “excesses” of lawsuit funding. He also cites the case of MC Mojave Construction, which funded and initiated lawsuits without plaintiff’s consent. However, The American Legal Finance Association (ALFA), an organization designed to bring in standardized best practices to the industry, asks its members to agree “that they will not take any step to…Interfere or participate in the consumer’s litigation, and/or attempt to influence the consumer’s litigation.” Appelbaum does not mention ALFA in his article, the many lawsuit funding companies that belong, or the agreements and standards that ALFA sets.

3) Appelbaum claims that lawsuit funding is depriving plaintiffs of settlements. He refers to an unnamed, unidentified woman who allegedly owed lawsuit funding companies $221,000 after winning only $169,125 in her suit. This is despite the fact that most funding companies offer funding for only a percentage of the expected settlement (to ensure that this does not happen) and despite the fact that ALFA expects members to “not intentionally over-fund a case in relation to their perceived value of the case at the time of such advance.” This is yet another example where the article seems to confuse traditional loans and lawsuit funding. Traditional loans do allow lenders to overextend themselves, but lawsuit funding companies generally do set a ceiling on funding amounts, precisely to avoid the problem that Appelbaum describes.

4) The New York Times article claims that “Lenders also seek detailed information about cases, which can jeopardize client confidentiality.” It’s an interesting claim, for a few reasons. Most lawsuit funding companies go to great lengths to protect client confidentiality. After all, if they released private information, they would lose clients. As well, it’s interesting that lawsuit funding companies are singled out for breaches of “client confidentiality” when many third parties gain information about a court case. Expert witnesses, private investigators, police authorities – there are many parties involved in a typical case, and all these parties have access to private information about the case and the plaintiffs involved.

5) The New York Times article asserts that “Law firms are generally obligated to repay loans even if they lose. In reality, however, firms that make less than expected often struggle to make the required payments…” At no point does the article mention that lawsuit funding is a non-recourse form of funding and that law firms are forwarded money based on groups of cases to ensure that they can cover lawsuit funding costs from the outcome of these cases.

The New York Times article is interesting and well-written. Appelbaum does a good job of describing the importance of lawsuit funding. However, he does seem to see funding as a form of high-interest loan and does tend to focus on negative stories of lawsuit funding. Not one of the personal anecdotes in his article come from a happy lawsuit funding client – and as ALFA would be happy to tell Mr. Applebaum, there are plenty of such clients across the country. It’s commendable that Mr. Appelbaum wishes to expose the abuses of a few, but it would have been very refreshing if he had emphasized some of the stories of happy clients, too.

Tags: Lawsuit Advance, Lawsuit Cash, Lawsuit Funding, Lawsuit Loans, News

This entry was posted on November 16, 2010 at 2:38 PM and is filed under Legal Finance, Opinion. You can follow any responses to this entry through the RSS 2.0 feed.