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Lawsuit Lenders: Borrowing Money Secured by Potential Settlements and Verdicts is a Bad Idea.

Litigating plaintiff’s cases on behalf of someone who has suffered injury - whether at the hands of a citizen, corporation, or government representative - is a very difficult enterprise. In addition to defense lawyers who are paid by the hour and will do anything to prolong a case, plaintiffs are often confronted by hostile trial judges, appellate courts, and even juries who are seemingly quick to categorize all plaintiffs as freeloaders looking for a free pay day.

This is especially true in Connecticut, the “insurance state,” where state statutes and rules of procedure are famously crafted to favor insurance companies and prevent high jury verdicts. Facing down these opponents is hard enough for a victim who is further burdened by financial loss and the inability to earn income because of the injuries suffered. The last thing such plaintiff’s need is to be further victimized by a new breed of shark circling the waters in the form of “litigation funding companies” also known as “LFCS.” This business was infamously founded by a Nevada predator known as Perry Walton. He is known to have threatened defaulting customers by telling them that “he worked for loan sharks” and that anyone “who screwed with these people would end up in the desert, dead.” In 1997 he was convicted of extortionate debt collection and was sentenced to 18 months of probation.

In 1999 Walton started “Future Settlement Funding Corporation” which provided money to plaintiffs in lawsuits at astronomical rates. To get around state laws he characterized the transaction as an “advance” on future proceeds rather than a loan. Once the lawsuit settled his company would get paid a typically enormous sum oftentimes in excess of the settlement or verdict. Walton went on to train hundreds of people in well-paid seminars about how to run these schemes on unwitting plaintiffs.

Incredibly, litigation funding contracts can run as high as 120 percent with 60 percent the annual average. These rates are typically justified on the grounds of being “high risk” according to one industry trade group, although this same group admits that default rates are less than 4 percent, a very low rate for unsecured lending. In many cases even when the consumer wins or settles the case, the entire amount of the award or settlement is used to pay the lender after the attorney is paid according to the U.S. Chamber or Commerce.

This issue is discussed in a very insightful way in Attorney John Barylick’s excellent book “Killer Show” about the Rhode Island Station Night Club fire. In addition to the above, he also points out that the dirty secret of these operations is that attorneys are involved in them as case enforcers and evaluators and perhaps even as silent investors. Since lawyers are barred by ethical rules from lending money to clients for their personal use, enabling lending of usurious rates to powerless litigants violates the spirit of the ethical rule. As Barylick and other critics further point out, these companies need to be regulated so that usury laws are brought to bear thereby capping interest rates and creating transparency.

These groups are easy to find: they are all over the television and on the internet with attractive ads. I have had direct experience with this industry in a case I handled a few years ago. I strongly advised my client to have nothing to do with several groups who were chasing him down in a major personal injury case. Against my advice he signed a contract for a limited “advance” which by the time the case had resolved had incurred nearly 75% in interest charges. Since the time of that case I do everything possible to discourage client involvement with these groups.

The fact that this barely legal business is allowed to exist as an unregulated body is due to great lobbying influence. The time has come to either abolish these groups or strictly regulate them. As stated by Matt Fullenbaum, director of legislation for the American Tort Reform Association, a conservative outfit, “the lenders acknowledge that litigation funding is meant for the desperate, which necessarily means that this industry is designed to prey on the most vulnerable.”