Last year, we reported on Georgia Supreme Court’s decision in favor of legal funding. Since then, similar judicial decisions from other jurisdictions have followed suit. New York, for instance, which ruled that high interest (usage) rates on lawsuit cash advances are not usurious because they are not loans, was similar to earlier Georgia rulings.
An Appellate Division, First Department panel ruled in December in Cash4Cases v. Brunetti that “the repayment of principal [was] entirely contingent on the success of the underlying lawsuit” and thus not a loan.
They went on to rule that the interest (usage) rates at issue were not unconscionable because the terms of the agreement were “unreasonably favorable to [the] plaintiff.”
The justices added that the lawsuit’s plaintiff, Brunetti, “received funds with no guaranteed obligation to repay, except from the proceeds, if any, recovered in his personal injury action,” and wrote that “although the interest (usage) rate was high, given the contingent nature of the transaction, the agreement was not overly unfavorable to [the] defendant.”
I’ve written about how legal funding is classified and why consumers should care before, but these recent rulings have made an even finer point on the clear benefits of legal funding.
Why the Legality of Legal Funding Matters for Plaintiffs
In October last year, the Georgia Supreme Court affirmed the earlier judgment of the Georgia Court of Appeals that neither the PayDay Lending Act nor the Georgia Industrial Loan Act apply to legal funding transactions, and thus recognized the fundamental differences between pre-settlement advances and loans.
For plaintiffs, this means continued access to critical funds in a timely manner to fight for a fair settlement or trial.
When the Georgia Supreme Court affirmed their judgement last year, ALFA, or the American Legal Finance Association, which represents leading consumer legal funding companies across the country and promotes fair, ethical, and transparent funding standards in the industry, released a statement that summed it perfectly:
“Access to consumer legal funding helps level the playing field for victims pursuing justice through the courts. A pre-settlement advance offers immediate financial relief to victims for use on non-legal expenses—including groceries, medical bills, student loans, and rent.
For victims facing powerful defendants with the ability to slow-walk a case, legal funding helps relieve financial pressure and prevent the premature abandonment of [a] case.”
These recent affirmations and rulings – across multiple states – mean that everyday people can still get the funding they need to see their cases through to a fair settlement instead of accepting the first or a lesser settlement simply to make ends meet. It is a fact that most Americans do not have enough savings to wait for a fair settlement. Often, these cases involve plaintiffs who have been injured and who are not currently working. So, in addition to not having money saved or the ability to secure personal financing, they also no longer have a regular paycheck coming in. The financial burdens are very real, and without access to funding, insurance companies can take advantage of their financial position and force settlement values below what they’re worth.
In this article on the top three reasons to use pre-settlement funding, I broke down the math on an initial offer versus two different settlement amounts, Settlement A and Settlement B, when pre-settlement funding is made available. Underwriting and risk management are keys to the legal funding business. Calculating advance rates and anticipated settlements to help assure the best outcome possible for plaintiffs and attorneys are the ways funding companies add value to the inherently disadvantaged position these plaintiffs are in.
Because repayment is contingent on the success of the lawsuit, interest (usage) rates are higher than traditional loans – but, to be clear, there is no comparison between the two. In most states, to be a loan, the law requires that repayment be guaranteed by the person receiving the loan or secured by assets that are owned by the recipient of the loan. Litigation funding, on the other hand, is non-recourse. Meaning, if the plaintiff in a case does not recover anything, neither does the legal funding company. Also, if the plaintiff receives less than the amount owed, the funding company will only receive partial repayment and the remaining balance will be written off. It’s a calculated risk, and an investment on the part of the funding company in the anticipated value of the case – and, nothing is guaranteed.
“Going to court to sue is not a simple procedure. You have to go through a lot of trouble to do it.”
George Lakoff, Professor of Neurolinguistics at the University of California at Berkeley, said this at the end of the 2011 documentary Hot Coffee, and no truer words have been said about our legal system:
“Going to court to sue is not a simple procedure. You have to go through a lot of trouble to do it. Going to court to gain justice is heroic. That idea has to be out there. That when you ‘win a case,’ you win it for other people as well as gaining justice for yourself.”
To stand a chance against big companies and insurance companies in court, let alone to be successful against them, most people need help. Litigation financing is the lifeline to a fair settlement and preserves everyone’s rightful access to a trial by jury – their Seventh Amendment right, in fact.
I have been relieved and pleased to see affirmations and rulings in Georgia and in other states preserving this critical right to access legal funding for plaintiffs in need.