Legal Reform & Lawsuit Lending

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1 Legal Reform & Lawsuit Lending

2 TABLE OF CONTENTS Message from the President Emerging Threats To Hospital Claims Management 1 The Dangers of Consumer Lawsuit Lending What Is Consumer Lawsuit Lending? 3 A Growing Phenomenon But at what cost? Increasing Litigation Costs and diminishing recoveries 4 Crowding Court Dockets 6 Undercutting Client Control Over Cases 7 Diminishing Attorneys Professional Independence 7 Destroying Client Confidences 7 What Can Be Done? Recent Moves by the Industry 8 The Alignment Approach 9 References 10

3 MESSAGE FROM THE PRESIDENT EMERGING THREATS TO HOSPITAL CLAIMS MANAGEMENT Hospitals throughout Illinois have long struggled with unbalanced legal jurisdictions that have favored plaintiffs in civil lawsuits. The American Tort Reform Association (ATRA) labels such areas judicial hellholes. Illinois Cook, Madison, St. Clair and McLean counties make regular appearances on ATRA s annual ranking of the most unfavorable jurisdictions in the nation, an unwelcomed and disparaging distinction that shows resistance to positive reform. Cook County is the center of litigation in Illinois, hosting 65 percent of the state s lawsuits while serving as home to just 41 percent of its population. This disparity has widened over the past 15 years, when Cook County represented 44 percent of the state s population and 46 percent of its lawsuits. O Hare International Airport is not just busy with tourists but also with lawyers bringing claims from across the state, across the country, and even from abroad. Lawsuits filed in hyperlitigious Cook County include claims that a dolphin at a zoo splashed water at spectators and that fire engine sirens are too loud. The medical-legal climate in which a health care organization operates can have a significant impact on its operations and expenses and can encourage litigation-minded patients. The Metropolitan Chicago Healthcare Council (MCHC) is committed to monitoring developing issues that could further impact our region s legal climate. One emerging issue that may further strain hospitals claims management is lawsuit lending, a trend that has been sweeping across the U.S. In this practice, predatory lending companies target plaintiffs who are considering filing or have filed a lawsuit with an offer of an award-based cash advance loan. This loan is to be repaid, with interest out of any money awarded along with an additional percentage of any money awarded to the plaintiff, once their case is settled. Plaintiffs tied to a lawsuit lender may be pressured to take their case to court instead of settling, drastically increasing costs for the defendant. Aggressive lenders may also pressure the plaintiff to drag out proceedings as they push for a larger settlement. 1

4 In 2010, legislation to exempt lawsuit lenders from Illinois consumer loan regulations was introduced to the Illinois General Assembly but was roundly rejected by the state House of Representatives. However, even with that legislative victory, lenders were not deterred, and we expect to see more lawsuit lending activity in the future. In 2013, legislation was introduced in Illinois that would provide reasonable interest rate caps and additional consumer protections. That legislation remains pending at this time. An overtly litigious climate, which can be exacerbated by trends like lawsuit lending, is detrimental to our region by increasing health care costs, causing providers to practice defensive medicine and funneling precious hospital resources away from patient care and innovation and into claims management. Kevin Scanlan President/CEO Metropolitan Chicago Healthcare Council 2

5 THE DANGERS OF CONSUMER LAWSUIT LENDING WHAT IS CONSUMER LAWSUIT LENDING? A consumer lawsuit lender is a company that loans money to plaintiffs who have filed a lawsuit, or who are about to file a lawsuit, in exchange for a share of any money the plaintiff wins in the lawsuit or obtains through settlement. The lenders generally seek out plaintiffs who have filed lawsuits and offer to pay them up front cash to cover immediate living or medical expenses in exchange for a portion of whatever award they may later receive in their lawsuit. The types of plaintiffs that consumer lawsuit lenders typically target are personal injury cases, and consumer lawsuit lending is thus of particular interest to health care providers. Lawsuit lending may target those who are injured and unable to work and may have substantial medical bills, those who have no financial support, and those who are desperate for cash. The lenders then offer to lend a portion of the expected settlement, and charge interest on this loan, with rates as high as 150 percent interest annually. Even when the plaintiff wins or settles the case, he or she often recovers no money, because the entire amount of the award or settlement goes to pay the plaintiff s attorneys and to repay the lawsuit lender. What really separates consumer lawsuit lending or, crash cash from other types of credit is that it is non-recourse. This means that if the plaintiff loses the case, he or she is not obligated to repay the loan. The lawsuit lending industry goes to great lengths to tell regulators and the public that consumer lawsuit loans are not real loans but are instead non-recourse financing. This is how, in many states, consumer lawsuit lenders have skirted usury and fair-lending laws. But their advertisements sing a different tune. Indeed, a simple internet search using the term lawsuit loan turns up a flurry of paid advertisements from member companies of the lawsuit loan industry, with headlines such as lawsuit loans for less. The internet is not the only place the lawsuit lending industry engages in savvy and aggressive marketing tactics. They also advertise on late-night and mid-day television, targeting consumers who are out of work and may be desperate for cash. 3

6 A GROWING PHENOMENON BUT AT WHAT COST? Consumer lawsuit lending is a growing phenomenon in the United States, especially in cases alleging personal injury, and it is playing an increasingly visible and increasingly harmful role in U.S. litigation. Lawsuit lending is a serious problem. It increases litigation costs, crowds court dockets, and impedes the administration of justice. If that weren t dangerous enough, if left unchecked, consumer lawsuit lending threatens to erode client control over lawsuits, diminish the professional independence of attorneys, and depress the provision of candid legal advice. INCREASING LITIGATION COSTS AND DIMINISHING RECOVERIES The biggest problem with consumer lawsuit lending especially for health care providers who may be defending personal injury cases is that it dramatically reduces litigation recoveries while increasing the cost of litigation. As a direct result of consumer lawsuit lending, defendants may have to pay more money to plaintiffs to end lawsuits, and the plaintiffs then have to pay that extra money to the lawsuit lenders. The defendants lose, the plaintiffs lose. The consumer lawsuit lenders are the only winners. The press has caught wind of these abuses. Recently, the New York Law Journal 1 reported on a Brooklyn man named Elwin Francis who borrowed $27,000 from consumer lawsuit lenders Law Bucks and Case Cash in connection with a trip-and-fall case. When Francis lawyers settled his case for $150,000, the lawsuit lenders took almost $100,000 almost two-thirds of the settlement and more than three times what they had lent. After Francis lawyers took their cut for fees and expenses, Francis was left with $111. Francis later claimed his lawyers never told him he would receive almost nothing from the $150,000 settlement, and soon after receiving his settlement check, he sued his lawyers for malpractice for not advising him of the consequences of his lawsuit loans. Last year, The New York Times 2 ran a story about a plaintiff named Ernesto Kho, who borrowed $10,500 from a consumer lawsuit lender called Cambridge Management Group, in connection with a personal injury suit arising from a car accident. Two years later, he settled his case for $75,000 and owed Cambridge $35,939, or 48 percent of his recovery and more than three 1 New York Law Journal: Francis v. Mirman, 29993/ The New York Times: Lawsuit Loans Add New Risk for the Injured business/17lawsuit.html?_r=2&scp=1&sq=lawsuit&st=cse& 4

7 times what he had borrowed. The New York Times 3 also reported on an unnamed plaintiff who borrowed money against a lawsuit arising from a 1995 car accident. The plaintiff won $169,125 at trial in 2003, and the lender claimed it was owed $221,000, or 130 percent of the recovery. In a famous case from Ohio, a plaintiff borrowed $6,000 from a consumer lawsuit lender Interim Settlement Funding. Less than a year later the case was settled for $100,000. Interim Settlement Funding demanded that the plaintiff turn over $19,600 a return to the lender of more than 225 percent on its loan. 4 Examples of abuses by consumer lawsuit lenders abound, though some of them have been thwarted by vigilant judges. For example, in the federal Vioxx Products Liability Litigation 5 a number of claimants who were eligible for the settlement program established by Merck & Co., Inc. obtained loans against their settlements from lawsuit lender Oasis Legal Finance. When they received their money from the program and proceeded to settle up with the lender, some were surprised to receive demands for amounts that equaled and in some cases even exceeded their recovery. Oasis sought to enforce liens on the borrowers settlement distributions, but the judge noted that such loan arrangements were barred by the terms of the resolution program. One of the claimants who had borrowed money from Oasis later told the court: I believe that it was usury at the time of the signing of the contract, the interest rate that they charged. The funds that the money we received and the fees, it was hurtful. It has caused more debt for us and hardship. She called the interest charged by Oasis, which the judge noted was 100 percent per year outrageous [and] excessive. She also complained that when she and her husband, who had taken Vioxx, sought relief from Oasis, they refused to work out any kind of negotiation. In the end, Oasis recovered little more than the amounts advanced, but only because the judge was actively involved in the settlement distributions. 5 3 The New York Times: Investors Put Money on Lawsuits to get Payouts 4 Rancman: 5 Vioxx Products Liability Litigation:

8 CROWDING COURT DOCKETS Another problem caused by consumer lawsuit lending is that it drags out litigation and increases the length of time cases remain pending on court dockets. Because consumer lawsuit lending increases the costs of litigation requiring more money to settle cases so plaintiffs can keep some of what they receive plaintiffs who have borrowed from lawsuit lenders tend to reject early settlement offers in hopes of holding out for more money. The result is that cases stay open longer, taking up valuable court time and judicial resources, as well as defendants time and money. Importantly, the reason for this delay is not because cases involving consumer lawsuit lending are necessarily stronger than other cases, or that defendants in cases involving lawsuit lending are slow to offer reasonable settlements. It is instead because plaintiffs who have borrowed money from lawsuit lenders must turn over to the lenders such a large portion of any award they receive from the defendant. In a typical contingency fee arrangement, a plaintiff stands to recover about 70 percent of any settlement reached with the defendant, with the remaining amount going to the plaintiffs lawyer. But when a consumer lawsuit lender is involved, the plaintiff may owe so much money to the lender that he or she ends up emptyhanded unless the settlement is exorbitant. Thus, the lenders profit motive not the underlying strength or weakness of the plaintiff s case is what drives the litigation. For example, in a famous case from North Carolina, a woman sued the owner of the Charlotte Hornets basketball team for sexual harassment 6. Unbeknownst to her lawyers, she took out a $200,000 consumer lawsuit loan. As her case progressed, the defendant offered her up to $1 million to settle. Her lawyers advised her to take the offer, but she refused to settle for anything less than $1.2 million. Her lawyers were unaware that she had agreed to repay the lawsuit lender that much money and couldn t accept a settlement offer for anything less. She forced her lawyers to go to trial and lost. Later, when her lawyers learned what had happened, they sued the consumer lawsuit lender for interfering with their case and won. 6 See Weaver, Bennett & Bland v. Speedy Bucks, Inc., No. 1:00CV249, Judgment (W.D.N.C. July 26, 2002). 6

9 UNDERCUTTING CLIENT CONTROL OVER CASES In addition to delaying the resolution of cases, the consumer lawsuit lenders profit motive also undercuts plaintiff control over cases. In a real sense, the consumer lawsuit lender is a gambler who bets on the success of the plaintiff s case. If the plaintiff recovers substantially through settlement or a damages award, the lawsuit lender wins big. But, if the plaintiff loses, the lawsuit lender recovers nothing. This fact leads lawsuit lenders to seek control over strategic decisions in litigation to try and prosecute lawsuits in their own interests, even if those interests diverge from those of the plaintiff. Consumer lawsuit lending thus undermines the bedrock principle that a party to a lawsuit has the ultimate decision-making authority. DESTROYING CLIENT CONFIDENCES Finally, because consumer lawsuit lending injects a third party into the traditional attorney-client relationship, it can destroy client confidences and chills the provision of candid legal advice. Typically, in order to evaluate a plaintiff s claim, a lawsuit lender will ask to evaluate confidential, and possibly privileged, information belonging to the plaintiff. As confirmed by a recent federal court decision, if the plaintiff elects to provide the information to the funding company, any attorney-client privilege protecting it will likely be waived. Concerns about privilege waiver could also discourage attorneys from providing their clients with full and candid advice particularly in writing out of concern that the lawsuit lender will demand to see the documents, which will then have to be produced to the opposing party in discovery. DIMINISHING ATTORNEYS PROFESSIONAL INDEPENDENCE Consumer lawsuit lending also raises the risk that lenders and plaintiffs lawyers will develop relationships with each other that interfere with attorneys relationships with and duties to their clients. Attorneys may end up steering clients to favored lawsuit lenders, even if they are not in the best interests of the client. 7

10 WHAT CAN BE DONE? As recognition of the dangers of consumer lawsuit lending has spread, so too have calls for regulation to guard against the dangers. Two broad regulatory regimes are competing for acceptance. The first is being promoted by the lawsuit lending industry itself, which purports to rein in bad apples, when in fact the industry s proposal would legitimize the entire industry. The second is being promoted by legal reform advocates like the U.S. Chamber Institute for Legal Reform, which is advocating for legislation that would protect consumers and curb lending abuses by bringing lawsuit lending into alignment with existing state law. RECENT MOVES BY THE INDUSTRY Over the last few years, lawsuit lenders have pushed legislatures in a number of states to enact the industry s own model legislation, sometimes called the Nonrecourse Civil Litigation Act. Some of these efforts were spearheaded by the American Legal Finance Association (ALFA), the trade organization of the consumer lawsuit lending industry. Lawsuit lenders introduced model bills for the Nonrecourse Civil Litigation Act in Alabama, Arkansas, Illinois, Indiana, Kentucky, Maryland, Minnesota, Nevada, New York, Rhode Island, and Tennessee. All of these efforts failed and rightly so. The lawsuit lenders contend that their bills protect consumers, but on close inspection, nothing could be further from the truth. On the surface, the bills appear to be procedure-focused legislation aiming to protect consumers against deceptive trade practices. For instance, these bills would, if enacted: require lawsuit lenders to be licensed and bonded; prohibit lawsuit lenders from referring consumers to particular lawyers; and require that the loan agreement state that if the consumer recovers nothing from the litigation, then the loan does not have to be repaid. 8

11 Dig a little deeper, however, and the model bills for the Nonrecourse Civil Litigation Act reveal themselves as the industry s self-interested attempt to protect itself from oversight. For example, most of the bills: would have exempted consumer lawsuit lenders from state fair-lending laws; would not have capped the interest rates lawsuit lenders can charge consumers; and would have left state authorities largely powerless to enforce their provisions. In short, the model bills promoted by the industry would not have established a mandatory standard of conduct for lawsuit lenders that could be enforced by the state authorities. Instead, if enacted, these bills would have legitimized consumer lawsuit lending without protecting consumers from the dangers inherent in this practice. THE ALIGNMENT APPROACH The lending industry s Nonrecourse Civil Litigation Act is being challenged by model alignment bills promoted by the U.S. Chamber Institute for Legal Reform (ILR) and other civil justice reform groups. ILR s model alignment bill aims to make consumer lawsuit lending in any state subject to the same fair-lending or usury laws already in force in that state. Essentially, the alignment bill would do away with the fiction that consumer lawsuit loans are not loans within the meaning of state laws. Thus, if enacted in a state, an alignment bill would cap the interest rate consumer lawsuit lenders could charge at the same amount applicable to other lenders and would require lawsuit lenders to offer their consumers the same disclosures as other lenders. In addition, to further protect consumers, the alignment bill would require lawsuit lending arrangements to be disclosed to a court, so that judges would have an understanding of how the presence of a lawsuit lender might affect the case in front of him or her. And, to protect defendants like health care professionals in negligence cases, the alignment bill would require consumers to turn over to the defendants a copy of their loan contract. This would put defendants on notice that a lawsuit lender not an injured plaintiff might be calling the shots in the litigation. Consumer lawsuit lending poses a number of dangers for consumers, for defendants, and for the administration of civil justice. Because such lending often appears in personal injury cases, the danger it poses is of particular concern to the health care community. Strict regulation of consumer lawsuit lending, which brings it in line with other allowed forms of consumer loans, is necessary to guard against these dangers. 9

12 REFERENCES: Binyamin Appelbaum, Investors Put Money on Lawsuits To Get Payouts, New York Times (Nov. 14, 2010). Binyamin Appelbaum, Lawsuit Loans Add New Risk for the Injured, New York Times (Jan. 16, 2011). Christine Simmons, Client Sues Firm after Funders Recover Most of His Settlement, New York Law Journal (July 19, 2012). In re Vioxx Products Liability Litig., Case 2:05-md EEF-DEK, Hrg. Tr., Doc. No (E.D. La. Dec. 21, 2009). Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217 (Ohio 2003). See Weaver, Bennett & Bland v. Speedy Bucks, Inc., No. 1:00CV249, Judgment (W.D.N.C. July 26, 2002). 10

13 The Trusted Voice and Resource for Healthcare This report was produced in collaboration with the U.S. Chamber Institute for Legal Reform METROPOLITAN CHICAGO HEALTHCARE COUNCIL. ALL RIGHTS RESERVED.