Litigation Funding is Legal, but Regulations Differ State to State
Litigation Funding Is It Legal in the United States. Here at Balanced Bridge, one of the questions we often get asked from prospective clients is whether legal funding is…legal.
Some people suspect there are laws in their state that prohibit any type of legal funding transactions. Others may feel that judges or legal groups like state bar associations may frown on it being used in any circumstance.
The rules and regulations surrounding legal funding are scattered and broad, but we’ll attempt here to address some of the things currently going on in this arena.
Legal Funding and Government Regulation
Over the years as the legal funding industry has grown in size and scope, several state legislatures have tried to enact litigation looking to regulate this funding space. Many of these have focused more on consumer legal lending – plaintiff pre settlement transactions.
Litigation Funding Is It Legal in the United States. Plaintiff pre-settlement funding can often have very high interest rates. Legal funding companies in this space will provide a small amount of financing to a plaintiff with ongoing litigation, typically involving injury or medical malpractice. These transactions are usually non-recourse, meaning if the case does not settle, the funder can not collect what they’re owed. Due to this, plaintiff pre-settlement rates are often very expensive, to account for this percentage of transactions that may default.
State Legislatures and Litigation Funding
Litigation Funding Is It Legal in the United States. Several state legislatures have tried to enact interest rate caps here to limit the charges and costs that consumers could bear on such pre-settlement transactions, citing usury laws in their states. Funding companies have countered that their funding is not a loan, given the non-recourse clause inherent in such financing and the higher risk of default without securitization of any tangible collateral.
Litigation Funding Legislation: 12 States Enact It
Litigation Funding Is It Legal in the United States. Over the last 15 years or so, our research has picked out 12 states that enact some form of legislation, mainly regarding this consumer lending industry (Maine, Ohio, Nebraska, Oklahoma, Tennessee, Arkansas, Indiana, Vermont, Wisconsin, Nevada, and most recently Utah in 2020).
Some of these statutes do cap interest rates, either from usury or other consumer lending laws already in place in such states. Many of these also define legal funding and legal transactions, enact registration requirements for lenders and require disclosures and attorney acknowledgments for such transactions.
Some of these laws in place also ban things like false advertising, referral fees, and attorney or lender interference in the case.
Litigation Funding and Attorney Funding: What’s the Difference?
Litigation Funding Is It Legal in the United States. In terms of funding specifically for attorneys, much of the proposed state legislation does not appear to directly reference it, in terms of what they are trying to regulate. As of late 2021, we have not seen any laws or rules designed to prohibit this attorney funding in any real way.
The attorney funding landscape is filled with a variety of legal financing products geared for attorneys. This can include lines of credit, case cost funding, pre-settlement, and post-settlement funding.
In our experience, the biggest cause for concern with attorney funding involves pre-settlement deals particularly in class action and MDL cases. Judges in certain cases have sometimes ruled that any such funding would need to be disclosed to the court, as concerned parties want to ensure that third-party funders will not have any influence on the determination of the case.
Litigation Funding and Post Settlement Advances
Litigation Funding Is It Legal in the United States. Our firm works mainly with post settlement advances. We provide funds for plaintiff attorneys in situations where a settlement has been reached, but there is a delay until distribution. Reasons for this could include lien resolutions, a wait for final judge approval, or slow-paying defendants.
Post-settlement funding is attained at better rates than pre-settlement options and will fall within usury rates and legislative requirements for all states that we’re aware of. Such funding generally has not needed to be disclosed to courts or opposing counsel since funding is occurring after an agreement has been reached in principle and our company is not deemed to be affecting the litigation in any way.
Litigation Funding Rules and Regulations
Litigation Funding Is It Legal in the United States. Thus, we have not seen any laws or restrictions focusing on the post-settlement transaction space as of now. The focus has mainly been in the consumer legal funding space, with some discussion centering on disclosure of third-party funding in class actions for attorneys.
This is certainly a broad topic, and the post here is just a brief and equally broad outline of some of the rules and regulations currently in place covering legal funding.