NY Courts Weigh Limited Litigation Finance Disclosure Rules

The New York State court system is weighing a proposal that would require disclosure of litigation financing agreements in certain personal injury and wrongful death settlements.

The proposal, which was published by the New York Unified Court System in April, captured the attention of Uber Technologies Inc., the US Chamber of Commerce Institute for Legal Reform, and insurance groups, with wide support for adopting the proposal or expanding it to include most or all civil litigation.

Supporters say it would be an important first step to bringing transparency to the litigation financing space. Currently, both defendants and litigants can file a motion for discovery to see if the other party has entered into any such agreements. The proposal would require plaintiffs in specific cases to disclose the information as soon as they petition for a settlement approval.

The legal funding industry says the disclosure requirements are vague and could give a leg up to defendants.

“The problem with this rule and other types of proposals” is that it doesn’t clearly state whether it’s referring to litigation financing or consumer legal lending, said Eric Schuller, president of the Alliance For Responsible Consumer Legal Funding, a coalition of businesses that advocate for and provide legal funding to litigants.

Consumers who get funds to pay for everyday expenses like rent and bills, as opposed to litigation costs, shouldn’t be forced to automatically disclose that information, he added.

The court declined to comment. The committee will discuss potential revisions at its next meeting in September, after which the proposal could be adopted.

Absence of Legislation

New York legislators have tried for years to pass legislation requiring disclosures, registration, and reporting of financing agreements.

In the absence of that legislation, the court system’s Advisory Committee on Civil Practice is taking some matters into its own hands by proposing requirements for plaintiffs and their attorneys in wrongful death cases or personal injury actions involving a minor or an incapacitated person to disclose when they’ve entered into a financing agreement. The information should be shared when the litigant files a petition asking the court to approve a settlement.

The proposed rule, which would apply to a “limited set of cases,” also would prohibit attorneys from charging or receiving interest on any money litigants get from settlements, without the court’s approval.

It is intended to be broad enough to include financing agreements affecting disbursements or attorney fees and other financial agreements that affect how much money can be recovered by injured plaintiffs, the Office of Court Administration wrote in its memo attached to the proposal.

It’s a relatively novel—and needed—proposal in New York, said the Advisory Committee on Civil Practice’s co-chair George Carpinello.

The committee’s primary concern is funding agreements where, especially in cases dealing with minors, the interest rate on the agreement is “so high that it eats up the benefit,” said Carpinello, a partner at Boies Schiller Flexner LLP.

Types of Financing

The proposed rule frequently refers to “litigation financing” or “other agreements,” but the proposal’s description is “more akin to consumer legal funding” that would cover everyday expenses, Schuller said.

Consumer legal funding should be dealt with through discovery, Schuller said, and it should be up to the judge to decide whether those agreements are appropriate.

But Abbie Eliasberg Fuchs, a member at Harris Beach PLLC, said there’s “little difference” between litigation financing and consumer legal funding.

“Unfortunately, plaintiffs and their representatives tend to view both types of financing as something that the defendants will have to deal with as any part of settlement instead of something that will diminish the plaintiff’s ultimate recovery,” Fuchs said.

Carpinello also specified the rule isn’t intended to regulate financing for attorneys, where a company offers a plaintiff’s attorney money to take on a case with the expectation that if the plaintiff wins, the company will get a portion of the money.

The New York State Trial Lawyers Association opposes parts of the proposal, but said in comments that it is well-intentioned, acknowledging that a “few unscrupulous lenders have taken advantage of the lack of rules and regulations” in the litigation financing sector.

The association specifically took issue with the inclusion of wrongful death actions and a requirement that financing agreements be disclosed to the defendant, rather than just the court.

“There is no special need to subject potential distributees in wrongful death actions to the disclosure and review of” a litigation financing agreement, the association said.

Carpinello said there’s a legitimate question about whether wrongful death should be included, and that the committee is examining the issue.

‘Falls Short’

Fuchs said the disclosure requirements would help level the playing field between defendants and plaintiffs, and hopes the disclosure rules are expanded.

“The disclosure rules should apply to all recipients of litigation financing and legal funding, not just cases involving a subset of plaintiffs. This is likely the first step in the disclosure rules,” Fuchs said.

Several other organizations, including insurance groups and the New York City Law Department, submitted written comments asking for the proposal to be expanded. Of the 31 comments submitted, 29 supported the proposal or called for expanding it.

“OCA’s willingness to shine a light on the opaque practice of litigation financing is a positive step in the right direction. We hope, however, that this is just the first step toward broader disclosure requirements for all litigation finance deals in courtrooms across the state,” wrote Consumers for Fair Legal Funding, a New York group that advocates for stronger regulations on the third-party litigation financing industry.

Uber, which is a member of Consumers for Fair Legal Funding, said the proposal “falls short” of what’s needed to provide “transparency and fairness in civil litigation.” The rule should apply to all civil actions and require disclosure of the entire litigation funding agreement, rather than just the terms of the agreement and documentation, wrote Uber Senior Policy Manager Hayley Prim.

Even if the finalized proposal stays limited to a narrow subset of settlements, it could help demonstrate some of the benefits of transparency, said Kristina Baldwin, vice president of American Property Casualty Insurance Association, which also is a member of Consumers for Fair Legal Funding.

“We hope this is a step in the right direction, a foot in the door,” Baldwin said.

However, Carpinello said he thinks there’s little support for expanding the proposal to all litigation.

“We’re talking about the funding that goes to the client; that the client is induced to take on now in return for the financing company taking a big chunk of their recovery when they win,” he said. “Sometimes that’s helpful and useful, sometimes appropriate. Other times, it’s not appropriate at all because of the interest rate or the terms.”