Litigation financing has been around for decades. However, it is more pervasive in recent economic times. What is litigation financing? It's when lenders provide upfront loans to claimants in exchange for an interest in the outcome of their claim or litigation.
Claimants who need money before their claims can be resolved often fall prey to these lenders. They often charge exorbitant interest and fees that can make claim resolution more difficult the longer that litigation goes on. The loans are non-recourse, meaning that if the claimant recovers nothing, they owe nothing.
The non-recourse nature means that these lenders are going to be sure their gamble is a good one. Because of that, the applications for these loans contain numerous questions regarding liability and damages. Lenders will also continue to investigate their investments by talking to claimants, their attorneys, witnesses, as well as reviewing medical records.
Once the loan is funded, the pressure is on to collect as quickly as possible. The sooner the claimant settles the case, the sooner the lender is repaid. The loans encourage this by charging high interest rates and fees. Dragging out the claim causes the balance due to accumulate quickly, oftentimes beyond the value of the claim.
In one case, a loan of $5,600 carried an effective annual interest rate of 79.38 percent, escalating the balance due to almost $20,000. The lenders put pressure on all sources of recovery to resolve the case. They essentially turn into debt collectors. Therefore, it is no surprise when the lenders begin calling carriers to find out the status of the litigation and to apply pressure to resolve the claim.
There are many opinions regarding the appropriateness, legality, and efficacy of these loans. This post does not take a position on those issues. However, it is clear that they have a significant impact on the investigation and defense of a claim—whether or not in litigation. Your defense counsel needs to be able to uncover and deal with these loans in litigation.
These loans also have a significant effect on the effort to resolve a claim even where there is clear liability. Be aware of these effects when you run across a lawsuit loan. Also, be aware that you may not always know when these loans are in place. So if there is an unexplainable impasse, be suspicious. Here are a few of the effects on claim resolution:
The Negotiating Brick Wall – No claimant is going to resolve a claim for less than they owe on a loan. It becomes impossible to negotiate on some level because of this. The longer these loans are outstanding, the higher the brick wall gets because of sometimes usurious rates and fees.
Lenders Contacting Claims Handlers – Claims handlers work in a hectic environment with many different files coming across their desks each day. It can be entirely disruptive to be interrupted by funding companies requesting updates on the status of the claim.
They Encourage Litigation – If a claimant can convince a lender to make a loan, then they have essentially already made their recovery and have no incentive to cooperate in the resolution of the claim. In fact, if they try the case and lose, they have still won because they have the loan proceeds and the lender has no source of recovery. The plaintiff thus has the incentive to role the dice at trial.
Discourage Compromise Settlements – The loan is usually for the full value of the damages, regardless of liability. If liability is disputed, there is no opportunity to resolve the claim for anything less than full value in the spirit of compromise.
Make your defense counsel aware of the effects of these loans. Educate them on the impact on negotiation and require them to ask for them in basic discovery. A simple question asking for the name, file handler, loan number, and loan terms for any such loan is easy to add to standard interrogatories.
In the event that this basic discovery is resisted, defense counsel need to be able to articulate the reasons these loans should be discoverable. Below are three arguments that weigh in favor of making these loans discoverable to all parties in litigation:
Applications Speak Directly to Liability and Damages – Applications for loans ask about the liability and damage issues in the claim. Statements that are made by the claimants in these applications likely contain evidence that is not only discoverable, but also admissible at trial—especially if a claimant testifies differently at trial or in a deposition. If the applications are notarized, then they maybe considered a "sworn statement" by the claimant in many jurisdictions.
Loan Files Lead to Discoverable Information – In order to fund only loans that have a high chance of being repaid, lenders conduct their own investigations into claims. This may reveal additional treating physicians, lost-wage information, other lien holders, etc. While this same information may be available in basic discovery, if lenders have already obtained records from doctors, statements from witnesses, or sought opinions from doctors, that information may be more complete than what you are able to obtain in initial discovery before taking depositions of treating physicians.
Public Policy to Encourage Settlement and Discourage Litigation – Courts historically and in almost all circumstances discourage litigation and resolution by trial and encourage litigation. Litigation finance does exactly the opposite. By creating a bar over which the case must settle, they give a big disincentive for plaintiffs to compromise, despite facts that might dictate otherwise. This public policy weighs heavily toward defendants discovering the existence of these loans and the details behind them. If everyone knows what the obstacles to settlement are, settlement is always more likely. Furthermore, the lender is really the party whose interest is at stake in the litigation. There have been instances of judges allowing a defendant to add the lender as a "real party in interest" in the litigation and encouraging them to participate in the compromise necessary to get a case resolved.
In summary, the litigation finance industry is pervasive but it is not always visible. Claims professionals need to be aware of the impact that these lenders have on claims resolution and what they can do about it. They also need to educate defense counsel about these loans and discover them in litigation, if it has not been done prior to filing suit.
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