The Business Council of New York State opposes A.7891-A (Towns) / S.5389-A (Kruger), which would regulate lawsuit lenders that provide a cash advance to a consumer that may commence litigation or is engaged in pending litigation for a percentage of a recovery plus interest.
For the following reasons, The Business Council believes that the unethical practice of third-party lawsuit lending should be prohibited in New York State. The reality of lawsuit lending is that litigation finance companies essentially engage in predatory “payday loans.”
This legislation stems from a 2005 settlement between former Attorney General Eliot Spitzer and nine companies that exploited consumers by not fully disclosing the financial terms of agreements. The nine companies agreed to a settlement without admitting to have violated any law or otherwise committed any wrongful or improper act. In addition, the nine companies agreed to pay $45,000.
There are a number of ethical questions that have been raised about third-party lawsuit lenders in relation to attorney-client relationships. The questions include an attorney's duty of client loyalty, confidences, independence, and maintenance of funds. The fact that an attorney has agreed to take a case demonstrates the value to the lawsuit lender, since the attorney is already betting their time and money on an outcome.
Third-party lawsuit lenders have a significant financial investment and hedge their bets on a favorable outcome for the plaintiff. This will tempt the lenders to pressure the consumer to reject a settlement offer that does not reimburse the investment. Therefore, the “investors” motivations to seek confidential information and influence strategy pose serious ethical problems for the consumer and will inflate settlements and prolong litigation.
This legislation claims to strengthen consumer protections by legitimizing a business that often preys on individuals that are injured, unemployed or in dire financial circumstances. Consumers would pay a one-time fee, plus interest, of a potential award rather than agreeing to a sensible settlement.
The Legislature should scrutinize this legislation closely by first asking itself the threshold question of whether these arrangements at their core are even ethical or appropriate. For the reasons stated in this memorandum, The Business Council of New York State opposes A.7891-A (Towns) / S.5389-A (Kruger).