The legal financing industry provides non-recourse legal financing to litigants. Sometimes this financing is funded from outside of the firm or from individual lawyer's finances, and then funneled through a third-party company. Financing is often for plaintiffs involved in personal injury, workers' compensation, and civil rights. The industry provides litigants with cash in a lump sum form upfront in exchange for a share of the litigant's future settlement or trial award. While the litigant awaits the resolution of their case, the legal financing industry provides for immediate relief from financial burdens such as mortgage payments, rent, medical bills, educational bills, daily expenses, or even legal fees.
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History
Legal financing is a fairly recent phenomenon, beginning on or around 1997. The American The Legal Finance Association points out that before the emergence of widespread legal financing, many people simply could not afford to use the U.S. court system. In fact, it is new enough that many people do not realize that legal financing exists. Legal finance is often the last resort of lower-income plaintiffs and can be an incredibly valuable tool when used ethically. Lending to plaintiffs began as part of a trend in which banks, hedge funds, and private investors put money into other people’s lawsuits. While every case is different, legal financing companies generally only advance 10% to 15% of the likely settlement. On the other hand, legal financing companies charge between 36% and 150% annually—sometimes higher. Rates vary widely based on the defendants' ability to pay, the merits of the case, the length of the case, and many other factors.
The American Legal Financing Association (ALFA) was established in New York City as a nonprofit in July 2004 and it represents about 20 legal funding companies nationwide for personal injury victims. The organization's main goals are to establish industry standards and to serve as a liaison with the public, government officials, and the media. The legal funding industry has risen to the forefront of marketplace solutions for financially troubled attorneys and their clients. ALFA claims that industry leaders currently review more than 40,000 funding applications per month. ALFA members are believed to have originated approximately 90% of currently outstanding legal fundings. While the ALFA itself is a non-profit organization, most legal funding companies are for-profit organizations.
State legislation
The industry now lends plaintiffs over $100 million a year and remains unregulated in most states. Commentators have noted that the industry is free to ignore laws that protect consumers who borrow from other kinds of lenders. The industry, however, asserts that they are not lenders because plaintiffs are not required to repay the money if they lose their cases. The industry refers to the transactions as investments, advances, financing or funding, as opposed to loans. This is an argument that has persuaded regulators in many states, including New York, that lawsuit lenders are not subject to existing lending laws. To fortify its position, the industry has started volunteering to be regulated—but on its own terms. The companies and lawyers who support the industry have also lobbied state legislatures to establish rules like licensing and disclosure requirements.
In 2003, the Ohio Supreme Court struck down a legal financing agreement. A legal financing company advanced $7,000 to a woman injured in a car accident. The woman prevailed, and the company was allowed to claim over $30,000 of her future winnings. The court refused to allow this, noting that an "intermeddler is not permitted to gorge upon the fruits of litigation". This decision, however, was overturned when, five years later, the Ohio General Assembly voted unanimously to make lawsuit funding legal.
The campaign to influence legal financing laws came from an increasing number of lawyers, judges, and regulators. Some are worried that the legal financing industry is taking too much money away from plaintiffs, where interest rates can exceed 100% with no cap. Legal financing companies defend their positions by pointing out the risks that they face. The money they advance to clients should not be regulated as loans because plaintiffs do not have to pay anything back if they lose their case.
The industry has recently obtained lobbying victories in many other states. In Texas, the industry fought a bill introduced in 2005 that would have subjected litigation financing to the same standards as loans. The bill was ultimately defeated. There was similar success in Ohio, where a bill legalizing lawsuit lending passed in 2008 with little or no opposition In 2009, the industry also defeated efforts by Maryland legislators that would have reined in lawsuit funding. Maine and Connecticut allow litigation funding by statute, and similar legislation is pending in Kentucky. Furthermore, courts in Texas, Florida, New Jersey, Mississippi, Massachusetts, North Carolina, South Carolina, and New Hampshire have allowed litigation funding contracts.