A recent development in the field of personal injury law is the arrival of “pre-settlement” funding companies. These businesses, often funded by banks, hedge funds, and private investors, offer personal injury plaintiffs with on-going cases a non-recourse sum of money, in exchange for repayment on successful completion of the case, at a very high rate of interest. Some estimates place the amount of money involved at $100 million per year, in a scenario where the funding companies are not subject to laws that protect people who borrow from most other kinds of lenders. This industry is largely unregulated, and caters to a clientele of very needy people at a desperate time in their lives. This combination creates a great potential for abuse. In fact, some attorneys have referred to this practice as “legal loan-sharking”.
A recent article in The New York Times looked at this industry, and found that some plaintiffs are paying interest rates in excess of 100% per year, because the companies are not subject to laws that cap interest rates. Two examples were cited in the article. In the first example, a man borrowed $9,150, and then settled his personal injury claim eighteen months later for $27,000. Unfortunately, he owed $23,588 to the funding company. In the second example, a man borrowed $10,500, and was required to repay $33,939 when he settled his case two years later. These interest rates seem outrageous, but the funding companies respond that they are only repaid if the case is successfully completed, and therefore they are absorbing the risk of the litigation. Efforts to regulate this industry have largely failed, based on that same argument, although Colorado recently brought suit against two funding companies for violating state lending laws. “It looks like a loan and smells like a loan and we believe that these are, in fact, high-cost loans,” John W. Suthers, the state’s attorney general, said in a recent interview.
Stark & Stark advises our clients not to enter into these arrangements, although we provide the necessary information to the funding companies if the client signs an authorization allowing it, and signs an acknowledgment of the advice they were given regarding the funding advance.