Investigating, preparing and prosecuting a legal claim in personal injury matters is an extremely costly process that often requires years to successfully resolve.
Meanwhile, there is often a significant imbalance between the financial capabilities of individual claimants and those of corporate/insured defendants, allowing better-resourced parties to slow-walk litigation until the plaintiff runs out of resources and is forced to either settle unfavorably or abandon the case entirely.
Consumer litigation funding provides one way to level the playing field. Put simply, consumer litigation funding is a nonrecourse cash advance to a plaintiff with a pending personal injury case to cover personal needs like rent, car payments, food and medical care. These are not loans; if the case is lost, the plaintiff owes nothing.
The regulation of consumer litigation funding transactions does not fall under federal jurisdiction. Therefore, each state is responsible for protecting its citizens through a regulatory framework that ensures injury victims in need of financial help do not fall prey to bad actors.
It is crucial that lawyers representing personal injury plaintiffs understand the challenges that currently exist in states like New York, where greater regulation and oversight are needed to protect their clients from those who seek to exploit their pursuit of civil justice.
New York is one of a handful of states that lacks the regulation and oversight necessary to preserve the integrity of its consumer litigation funding industry. This leaves injury victims, and the attorneys who represent them, vulnerable to predatory contracts and abusive practices that ultimately undermine successful case outcomes.
But this year, New York Sen. Jeremy Cooney, D-Rochester, and Assembly Member Latrice Walker, D-Brooklyn, introduced the Consumer Litigation Funding Act (S.B. 4146-B/A.B. 7655-B), which puts forth a robust regulatory framework that would ensure this option remains safe and accessible to clients pursuing credible personal injury claims in New York. The following analysis outlines the provisions included in this legislation.
Establishing Prohibited Practices
Some attorneys are hesitant to recommend consumer litigation funding to their clients out of concern that the funder will exert undue influence on the conduct and prosecution of the case. While reputable consumer litigation funding contracts are written to prohibit the funder from controlling strategy, settlement or other litigation-related decision making, the Consumer Litigation Funding Act would explicitly prohibit funders from engaging in practices that could undermine the integrity of the legal system and impose strict civil penalties for violations.
Prohibited practices include paying, offering, or accepting referral fees or anything of value to attorneys, law firms and medical providers, among others, for referring consumers. The bill prohibits funders from making any decisions with respect to the conduct of the underlying legal claim and explicitly provides that decision making is the sole right of the plaintiff and their attorney.
Last, the bill would prohibit a funder from “advertising materially false or misleading information regarding its products or services.”
Under the bill, a finding that the conduct of a company violates these prohibited practices “waives [the funder’s] right to recover both the funded amount and any … charges” in that particular case. The funder would also “be liable for a civil penalty of not more than five thousand dollars for each violation.”
Mandating Uniform and Easy-to-Read Contracts
The Consumer Litigation Funding Act would also require that all contracts adhere to a standard format that uses plain, easy-to-read wording in the plaintiff’s primary language and includes a 10-business-day right of recission. Not only does this prevent personal injury claimants from entering into deceptive contracts, but it also assures attorneys that their clients understand the transaction agreement and the amount that will be deducted from their settlement to repay the funder if, and only if, the case is successful.
The bill would require prominently displayed notices, bolded and outlined by a box, regarding the plaintiff’s consumer rights, including a separate prominently displayed schedule of all amounts that could be owed if the plaintiff receives compensation in their claim, including the maximum amount they could owe.
The bill would also mandate that contracts “contain a written acknowledgment by the attorney” affirming that “the attorney has reviewed the mandatory disclosures” with the plaintiff and, among other requirements, that the attorney does not provide “any tax, public or private benefit planning, or financial advice” regarding the transaction. Failure to adhere to this requirement voids the contract.
Requiring Licensure and Registration
When a client is in need of consumer litigation funding, attorneys may suggest a funding company and are then required to cosign the client’s transaction agreement. However, because New York does not currently require funders to obtain a license or register their business with the state, it can be extremely difficult for both attorneys and clients to distinguish between companies.
The act would require registration by the funder, which would include all information necessary for the state to evaluate the character and fitness of the applicant company. To obtain licensure under this act, the state would require that each funding company submit proof of a $50,000 surety bond to demonstrate financial suitability.
If the bill is passed, all registered funding companies would be required to annually report the amount of funding transacted, a “summation of funded amounts in dollar figure,” and the “annual percentage charged to each consumer where repayment was made.” The regulator would be required to make the report available to the public each year.
Conclusion
The legislation, which is currently being considered by the New York Senate’s Consumer Protection Committee, would help ensure a safe, ethical and transparent consumer litigation funding industry in the state. Lack of regulation and oversight in New York has provided an environment without explicit rules, causing injury victims to be exposed at a sensitive and vulnerable time, undermining the purpose of the industry. This has created unnecessary challenges for plaintiffs and attorneys seeking viable financial solutions.
Laws that mirror the Consumer Litigation Funding Act have been successfully implemented in several other U.S. states, including Oklahoma, Vermont, Indiana, Utah, Nevada and Tennessee. Now is the time for New York to prioritize comparable regulatory reform to effectively protect injury victims while still preserving their funding options as plaintiffs.
Alan S. Ripka is a senior partner at Alan Ripka & Associates LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
