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Tort-Reform Group Champions Bill to Regulate Certain Litigation Funders

New York Law Journal, July 20, 2017

By: Josefa Velasquez

ALBANY - Despite the legislative session concluding for 2017 late last month, a tort-reform business group is already pushing for a bill that would regulate the third-party consumer litigation funding industry.

The Lawsuit Reform Alliance of New York is spending the next five months pushing lawmakers to regulate firms that advance funds to people who are awaiting legal settlements.

The litigation lending industry arose in the 1990s as part of a trend in which investors, including hedge funds, individuals and banks bet on the outcome of other people's lawsuits, while at the same time lending to plaintiffs. Only about 11 states have regulated any aspect of it, according to Reuters.

The Alliance is pushing for a bill, sponsored by Republican state Sen. Rob Ortt of Niagara Falls,S03911A, which would cap the interest rate for the consumer litigation lending industry at 16 percent, which is New York's civil usury cap, or 25 percent for certain lenders licensed in the state.

Meanwhile, the Democratic-dominated Assembly is proposing its own bill, A06827A, to regulate the industry. While the bill, sponsored by Assemblyman Michael Simanowitz of Queens, doesn't cap the interest rate, it would require transparency about fees from lending companies.

In February, state Attorney General Eric Schneiderman's office and the federal Consumer Financial Protection Bureau—signaling that the bureau may move to regulate the industry—sued RD Legal Funding and its founder over allegations that the New Jersey-based litigation funding company scammed ill 9/11 responders and National Football League players who were receiving payouts for concussion-related injuries (NYLJ Feb. 7).

The lawsuit claimed that the company charged annual interest rates as high as 250 percent, as well as high fees on the advances and collected millions of dollars in interest and fees. RD Legal Funding also has been the subject of an administrative proceeding by the federal Securities and Exchange Commission on allegations of misrepresenting its assets to investors. (In turn, the company filed a complaint against the SEC in federal court in Newark, New Jersey, asking for an injunction against the case.)

The lawsuit against RD Legal Funding should be a "wake-up call" to lawmakers in Albany, said Tom Stebbins, the executive director of the Lawsuit Reform Alliance of New York.

"To end the abuse and predatory practices, these lenders should be subject to consumer protection laws just like every other financial institution. Injured New Yorkers cannot continue to be victimized by these legal loan sharks. We hope to see the Legislature come to an agreement on a reasonable interest rate cap and pass a bill in the next session," Stebbins said in an email.

"This legislation instructs companies to submit applications to the secretary of state, who awards licensure and registration of companies pursuant to character and fitness determinations. Additionally, it mandates financing companies to disclose their fee structure, repayment terms, rights of rescission and outlines various prohibitions, which will better educate consumers to the terms of their contract," the Assembly bill memo said.

The amount to be paid to the lending company, according to the Assembly bill would be a predetermined amount based on the intervals of time from the funding date through resolution date. The amount that the lending company would receive, according to the bill, would not be determined as a percentage of the recovery from the legal claim.

The Alliance employes three in-house lobbyists, according to disclosures filed with the state's ethics panel. In January and February of this year, according to the most recently available monthly lobbying report, the Alliance spent roughly $7,400 on compensation for bills related to tort reform, civil justice and liability issues.Meanwhile, two business-backed organizations, the Business Council of New York State Inc. and the National Federation of Independent Business, also have lobbied in support of regulation of the consumer litigation funding industry. In a memo in support of Ortt's bill, the Business Council called legal lending "problematic" because it can lead plaintiffs to reject settlements because they need more money to pay off the loan.

"Lawsuit lending in and of itself is problematic in that it can distort a plaintiff's decision-making process when it comes to tort claims. Some plaintiffs, for example, may opt to reject reasonable settlement offers because they will ultimately need more money to pay off a high interest loan, thus jeopardizing any recovery at all. It also greatly increases costs for defendants who are forced to endure unnecessarily prolonged and costlier litigation," the Business Council's memo said.

NFIB's New York director, Mike Durant, said in an email that the organization supports the bill because it would "subject lending agreements to consumer protection interest rates and that attorneys would be prohibited from receiving referral fees from a lending company that is in connection with a plaintiff's funding."

Lobbyists for pharmaceutical giant Pfizer Inc. and the Washington-based American Insurance Association also have lobbied lawmakers in support of reforming the litigation funding industry, according to disclosures with the Joint Commission on Public Ethics.

"Regulating this industry is an important tort reform measure because it will help protect consumers and keep judicial system costs low," said Alison Cooper, AIA's vice president for state affairs in the Northeast region.

Lobbying Against Regulation

While the Senate and Assembly bills have no counter legislation in the opposite House and they didn't come to a vote on the floor, there also has been behind-the-scenes lobbying against the bills that would regulate the litigation funding industry.

Oasis Financial, an Illinois-based litigation financing company—which also operates under the name Alliance for Responsible Consumer Legal Funding—hired one of Albany's premier lobbying firms, Albany Strategic Advisors, in October 2016 at a rate of $4,000 per month, according to lobbying disclosures filed with the state's ethics panel.

The American Legal Finance Association, a Washington-based trade group representing legal litigation funding companies, also has been lobbying lawmakers in Albany to oppose the bills. The trade group hired the lobbying firms Hill, Gosdeck & McGraw for $10,000 a month and the Vidal Group for $4,000 a month.

Australia-based commercial litigation funder IMF Bentham Ltd. retained the lobbying firm Bolton St. Johns to lobby against both the Senate and Assembly bills at a rate of $6,000 per month.

David Kerstein, an investment manager in Bentham's New York office, said the way the legislation is written could affect the commercial litigation funding business, which provides funding to businesses for litigating breach of contracts, trade secrets or patent disputes, rather than the consumers who are in court over issues such as medical malpractice or personal injury.

"We were trying to talk to folks to shape the legislation a little differently so it would carve out commercial funding transactions," Kerstein said, noting that a rate cap is a "problem" for the firm.

Kerstein said that his firm seeks high returns, about three times the amount of money it invests, because of the "risky" investments. "If we invest in the wrong matter, and the matter loses, we lose millions," he said.

Allowing small- and midsized businesses access to these loans will allow them to "access justice and level the playing field with the big guys." Kerstein added.