California Bar Issues Formal Opinion on Third-Party Litigation Funding

On October 1, 2020 the California Bar Association published Formal Opinion NO. 2020-204 on Third-Party Litigation Funding.

The bar’s opinion states that attorney and consumer must be fully informed as to the terms and conditions of the contract. Additionally, the lawyer must ensure competence in advising on any litigation funding agreement, and is obligated to obtain a client’s permission before discussing any confidential information with the funding company.

During the comment period of this opinion, the Alliance For Responsible Consumer Legal Funding (ARC) weighed in on the issue by submitting a letter to the review committee. In the letter ARC stated: “The Proposed Formal Opinion properly establishes that a lawyer is under an ethical obligation to decline to represent a client in legal funding negotiations if the lawyer does not have sufficient knowledge and expertise to help the client avoid being exploited in the legal funding relationship.”

In addition, it was stated that this opinion will give consumers additional confidence in the industry: ”By requiring adequate representation in the legal funding negotiation, bad actors will be less likely to survive. As those bad actors are driven out, consumer confidence in legal funding services will rise and the resulting increase in demand for legal funding services will draw even more reputable funders into the market. This, in turn, will create stronger incentives for funders to cater to the price and quality preferences of individual plaintiffs.”

The California Bar Association and the American Bar Association have each released a recent opinion on Litigation Funding. In both opinions, the bars acknowledge a need for the product, and propose best practices for how consumers and attorneys should work with companies that offer financial assistance to consumers in their time of need.

ARC and its member companies continue to ensure that both consumers and their attorneys are fully-informed on the terms and conditions of the contract, and that the only parties that have a say in the prosecution of the case are consumers and their attorneys. These are enforced in the most recent set of Best Practices that ARC and its companies have released.

ARC is very pleased the California Bar Association, the largest State Bar Association in the United States with over 242,000 members, has taken this position on the issue and put forward these important guidelines.

Alliance for Responsible Consumer Legal Funding (ARC) Updates its Best Practices

On August 3, 2020 the American Bar Association House of Delegates passed resolution 111A by a vote of 366-10, regarding the “Best Practices for Third-Party Litigation Funding”. The Best Practices addressed Consumer Legal Funding, Commercial Litigation Finance and Attorney Funding.

In reviewing the Best Practices for Consumer Legal Funding, ARC and its members made the decision to update the set of Best Practices our companies will follow. By following the guidance of the ABA, ARC and its members are setting a new high standard that others in the industry should follow.

The updated Best Practices can be found on the ARC Website

  • Each member agrees the funding agreement will be in writing.
  • Each member agrees the written funding agreement will make clear the non-recourse nature of the investment the funder is making in the claim.
  • Each member agrees the funding agreement will state who is responsible for paying the funder, from what source (e., the recovery after trial or settlement), and when (e.g., after receipt by the attorney of judgment or settlement funds).
  • Each member agrees the funding agreement will be structured so that the consumer, not the funder, retains the right to control the conduct and litigation of their claim.
  • Each member agrees the funding agreement will state: the amount of funding to be provided to the consumer, the future amounts owed or method of calculating the amounts owed to the funder, and provide an independent dispute resolution process.
  • Each member agrees the funding agreement will include a recommendation that a consumer obtains legal advice before entering into the funding agreement.
  • Each member agrees that they will not intentionally provide the consumer funding in excess of the consumer’s needs at the time of such funding.
  • Each member agrees that they will not intentionally over-fund a case in relation to their perceived value of the case at the time of such funding.
  • Each member agrees that they will not advertise false or intentionally misleading information.
  • Each member agrees that they will not offer or pay commissions or referral fees to any attorney or employee of a law firm for referring a consumer to the member.
  • Each member will strive to achieve a rating of B or better with the Better Business Bureau.

On November 16th 2020, ARC will participate in a CLE Webinar with the ABA titled “Consumer Litigation Funding: The Basics, Current Regulatory, Ethical and Confidentiality Issues,” in which these Best Practices and other issues that affect the industry will be discussed.

When consumers and their attorneys are dealing with Consumer Legal Funding companies, they should look for the ARC Logo and ensure they follow the Best Practices of the organization.

Any questions on this or other issues regarding Consumer Legal Funding can be addressed to info@arclegalfunding.org

ABA Adopts Guidance in Third-Party Litigation Funding

On August 3, 2020, The American Bar Association (ABA) House of Delegates, by a vote of 366-10, voted to adopt the resolution for “Best Practices for Third-Party Litigation Funding”. This established a slew of national guidelines that law firms, consumers and legal funding companies should follow.

We applaud the ABA in setting these standards that ARC and its members already follow. Some of the items that they highlight are:

  • The arrangement should be spelled out in writing.
  • The writing should make clear the non-recourse nature of the investment the funder is making in the claim; how the funder will be compensated
  • Who is responsible for paying the funder, from what source (g., the recovery after trial or settlement) and when (e.g., time period after receipt of judgment or settlement funds)
  • The arrangement should be structured so that the client retains control of the litigation, and not the funder.
  • Lawyers should be cautious in making case-related reports or predictions.
  • Funding agreements should state the amount of funding to be provided, the amount or method of calculating the return to the third-party funder, and how and when the proceeds of the party’s recovery are to be distributed among Funding agreements should provide a fair, transparent, and independent dispute resolution process.
  • Funding agreements also should include a recommendation that a party obtain independent legal advice as to whether to enter into the proposed There should also be a confidentiality obligation for the funder that survives termination of the agreement
  • In client-funder financing, the third-party funder and the party should be the sole parties to the funding agreement, in order to avoid any potential attorney conflicts of interest, should the party and the funder disagree on a material issue during the course of the litigation. Many non-recourse finance agreements ask the attorney to promise the funder that the attorney will notify the funder when the case is resolved.
  • Limitations on a third-party funder’s involvement in, or direct or indirect control of, or input into (or receipt of notice of), either day-to-day or broader litigation management and on all key issues (such as strategy and settlement), should be addressed in the funding agreement.
  • Lawyers may want to obtain written acknowledgement that the funder will not seek to control the litigation or the expense.

These items are consistent with the statutes that ARC and its members support in legislation. ARC fully supports proper regulation of the Consumer Legal Funding Industry across the country.

Utah Legislators are the example of how it is done right

In today’s “us vs. them” political environment, it is refreshing to see exceptions in the state of Utah.  I saw one example of people working together in the political environment during Utah’s most recent legislative session.

Utah Representative James Dunnigan introduced a bill (HB 312), with the purpose of creating some guardrails around the Consumer Legal Funding industry. This industry helps needy consumers receive financial assistance on a pending legal claim, as they wait for their case to make its way through the legal process.  This is not a service that many people know about, but it is an important one to consumers who are trying to make ends meet, while waiting for an accident claim to make its way through what is often a long and cumbersome legal process.

To his credit, Representative Dunnigan immediately brought together all of the stakeholders in the industry and crafted a bill that will not only allow this service to be available to the consumers of Utah, it also puts in place strong regulations to protect Utah consumers .

The new statute, which goes into effect on May 12, will require companies in our industry to simply register with the state, clearly disclose all fees associated with their product, and ensure that consumers and state officials have recourse against any company not following the law.  In short, it will essentially eliminate what we call the “bad actors” in the industry.

HB 312, now called the “Maintenance Funding Practices Act”, is a piece of legislation that should be applauded. It took into consideration the needs both of business community, while also ensuring that Utah consumers are fully protected.

In my role as President of the Alliance for Responsible Consumer Legal Funding (ARC), I deal with legislatures all across the country. It is quite rare to see a bill sponsor start the process the way Representative Dunnigan did—hearing all sides of the issue, working to find a careful balancing, and then passing legislation with which everyone can agree.

As an industry, we appreciate both Representative Jim Dunnigan and Senator Curt Bramble (the Senate floor sponsor) for taking the time to look out for both Utah consumers as well as the business community.  We applaud their collaborative approach to solving difficult issues and would love to see this “Utah Approach” to legislation take place in so many other states across the country.

Eric Schuller

President

Put A Ring On It

What is the best way to reduce the amount of companies offering Consumer Legal Funding?

Simple: Put a RATE on it!

In Beyonce’s “Single Ladies (Put a Ring on it),” the lyrics read: “If you like it then you shoulda put a ring on it.” The US Chamber and Insurance Industry are singing a similar tune when it comes to Consumer Legal Funding. However in their song, the lyrics read: “Put a RATE on it.”

They want to put a rate on Consumer Legal Funding because they want the product to disappear from the marketplace, plain and simple.

If you look at the recent passage of an 18% rate cap in West Virginia, which passed earlier this year, the bill has eliminated the Consumer Legal Funding industry from the state. According to the West Virginia Secretary of States website, there are ZERO Consumer Legal Funders registered to operate in the state.

This is a replication of what happened in Arkansas when the state passed a 17% rate cap in 2015. There has been ZERO business there since.

Now let’s compare this to Oklahoma which passed a strong regulatory bill in 2013 that did not include a rate cap. Today, there are 20 companies offering the product in the state. But here is a real interesting fact about Oklahoma: Of the 20 companies offering the Consumer Legal Funding, a full 25% are Oklahoma-based. Check out Oklahoma’s own website.

These are companies paying local taxes, hiring local employees, and growing the local economy. Isn’t that what the US Chamber of Commerce claims it tries to promote? Entrepreneurship, taking a risk and grabbing the American Dream. In fact, the motto of the US Chamber is “The Spirit of Enterprise.” CEO Tom J. Donohue talked about that very spirit in a speech back in 2017 at the AEI’s Summer Honors Program.

Maybe the US Chamber should piggyback off another Beyonce song, “Lemonade,” where she sings “You can taste the dishonesty, it’s all over your breath, as you pass it off so cavalier.”

So which is it? Is the US Chamber for growing the US and local economies or are they for limiting and reducing them?

Just want to know which song to queue up…

What Does it Mean to Live Paycheck to Paycheck?

According to Investopedia: “Paycheck to paycheck is an expression used to describe an individual who would be unable to meet financial obligations if unemployed because his or her salary is predominantly devoted to expenses. Persons subsisting paycheck to paycheck have limited or no savings and are at greater financial risk if suddenly unemployed than individuals who have amassed a cushion of savings.”

According to Forbes, 78% of workers are living paycheck to paycheck. That statistic encapsulates more than just hourly workers. Investopedia states that 25% of American families making $150,000 or more a year live paycheck to paycheck.

So what happens when that paycheck gets interrupted and bills don’t get paid? Answer: consumers fall behind on their mortgage, rent, and credit card payments. As a result, credit scores suffer and the financial spiral grows more severe. A recent article published by The Center for the New Middle Class classified ‘loss of income’ as the number one reason credit scores go down.

For consumers who have suffered a loss of income due to a car accident or other personal injury legal claim, a solution exists: Consumer Legal Funding. Consumer Legal Funding acts as a bridge for consumers to solve their financial dilemmas while waiting for their legal claim to make its way through the system. There are no credit checks, there are no periodic payments while the case makes its way through the legal system. Consumers only have to meet their obligation to the funding company when and if their case settles and only if there is sufficient funds to meet the commitment.

Consumer Legal Funding is not a loan, as it does not have an absolute certainty of repayment. Consumers only have to meet their financial commitment to the funding company when and if they are successful in their legal claim. Therefore, the product is not a loan. It is an opportunity for consumers to sell off a portion of their legal claim (a future asset) as an investment. Like any investment, when consumers look to take advantage of Consumer Legal Funding, they should be fully aware of the cost associated, and the terms and conditions of the contract.

Consumer Legal Funding is a financial transaction that is designed to fill in the gap due to the loss of one’s paycheck as a result of circumstances beyond their control. It is designed to help consumers get the fair and just settlement they deserve, and not be forced into accepting a low-ball settlement offer just because they are living paycheck to paycheck.

Why is There an Assault on the Poorest Amongst Us?

“Millions of Americans Are Just 1 Paycheck Away From ‘Financial Disaster’” was the title in a recent story in Barron’s. The article stated that 51% of working adults in the US would need to access savings to cover necessities if they missed more than one paycheck. That is the equivalent of over 78.2 million Americans.

The story went on to state that roughly two-thirds of households earning less than $30,000 annually and Hispanic households would not be able to cover basic living expenses. That is the equivalent of over 101.2 million Americans.

Consumer Legal Funding is a vital resource for those very Americans. Funding allows the 101.2 million Americans who cannot cover basic living expenses to bridge that gap while their legal claims make their way through the system. With some cases taking several months – if not years – to settle, these Americans need help today. Consumer Legal Funding allows them to pay their mortgages, put food on their tables and keep a roof over their heads while the Insurance industry slow-walks their legal claims.

Perhaps the most chilling revelation here is that the Insurance industry, led by the US Chamber of Commerce, supported legislation to eliminate Consumer Legal Funding in two of the top-10 poorest states in the country: first in Arkansas, where 15.4% of the population lives in poverty, and just last week in West Virginia, where the poverty rate is 17.7%. What is even more striking, is that those are two of the top-10 hungriest states in the US. In West Virginia, 14.9% of the population goes hungry, and in Arkansas the rate is 17.4%. The elimination of Consumer Legal Funding in these two states was implemented merely to increase Insurance industry profits, and force consumers to accept lowball offers (as an aside: State Farm ended 2018 with a net worth of over $100 Billion).

Thanks to the latest legislation that went into effect on June 5, 2019 in West Virginia, residents who need Consumer Legal Funding assistance will no longer be able to access it. Take for example, Patressa from Barboursville, WV, who said: “I am completely broke financially due to a car accident. I have medical needs and doctor appointments that I need to go to.” Now Patressa is among the 1.8 million residents of West Virginia who no longer have access to alternative funds while their cases are pending in the legal system. As a result, Patressa will be forced to accept an offer for less than what she deserves.

One of the most heartbreaking responses to the recent legislation comes from Victoria of Clarksburg, WV, who stated quite candidly that she “needed the money so I could have a place to live.” Who can the 4.8 million Patressa’s and Victoria’s of West Virginia and Arkansas turn to for help? How will they meet their medical needs? How will they find a place to live?

Looking ahead in 2019

As the 2019 Legislative Session begins, we want to take a look at what is the best way to regulate Consumer Legal Funding. Over the past few years, the states have introduced several pieces of legislation with the aim of regulating Consumer Legal Funding. Rather than simply introduce capricious regulations, legislators should familiarize themselves both with the product, and the consumers who need it, before making rash decisions that will impact their constituents for life.

For example, according to CNBC, 78% of full-time workers said they live paycheck to paycheck, up from 75% last year. In addition, 56% of those polled said they were in over their heads with debt and save less than $100 per month for emergencies. Even for those making over $100,000, nearly 10% live paycheck to paycheck, and 59% in that salary range claim to be in the red.

That is why Consumer Legal Funding is so important. When an unexpected tragedy hits, and consumers lack the financial resources to make ends meet while their claim is dragging out, Consumer Legal makes its way through the legal process.

Consumer Legal Funding assists consumers like Jack Daniels from Phoenix, who stated: My budget was already tight, and the injury made things much worse.” Consumer Legal Funding allows consumers like Jack to receive the fair and just settlement they deserve, as opposed to one they are forced to accept just because they are living paycheck to paycheck.

ARC supports proper regulation of the industry like those that have been enacted in Ohio, Maine, Vermont, Oklahoma and Nebraska. What we unequivocally do not support are severe restrictions that have been imposed on the industry, which prohibit the product from being offered. For example, in Arkansas, Consumer Legal Funding is no longer available because of the restrictions that were imposed by the Arkansas legislature in 2015.

We welcome any and all legislators to reach out to us to help properly regulate this important product that allows consumers to keep a roof over their heads and food on the table while their legal claim is in process. As Cathy from Hannibal, Missouri states, “[Consumer Legal Funding] kept me from being homeless.”

Balanced Bridge Funding: The Newest Addition to the ARC Family

The Alliance for Responsible Consumer Legal Funding (“ARC”) is pleased to announce that Balanced Bridge Funding (“Balanced Bridge”) has joined ARC as its newest member.

Joseph Genovesi, Chief Executive Officer of Balanced Bridge, said “We are looking forward to joining ARC and the rest of the ARC members. We believe the organization brings a wealth of value to our company, as well as to the consumer legal funding industry as a whole.”

Rob Johnson, Executive Director of ARC, had this to say: “Balanced Bridge is a major player in the specialty finance and legal funding spaces, and we welcome them to the ARC Family.”

Balanced Bridge specializes in post-settlement advances to both plaintiffs’ attorneys and their clientele. They also offer a law firm line of credit, voucher funding for public defenders, and a first year attorney funding product for brand new lawyers just starting their careers.

Outside the legal funding space, Balanced Bridge provides real estate commission advances, professional athlete funding, fix and flip real estate loans, and government contract advances, among other specialty finance solutions.

The vast majority of consumer legal funding companies focus on pre-settlement funding, as this is where the demand primarily lies. “Although Balanced Bridge only offers post-settlement advances, we strongly believe in ARC’s industry best practices,” said Genovesi. “ARC is without a doubt part of the solution for the consumer legal finance industry, and we’re proud to officially join the ARC Family.”

Cookie Cutter Approach?

 

In a recent article in Property Casualty 360 titled “Risk-based pricing remains the best option for consumers”, the leading advocate for the Property Causality Insurance industry stated that the best option for consumers is to have their insurance rates based on the probability that they will have an insurance claim, i.e. “Risk-Based Pricing”, and not on other factors such as income, race, gender, address, ethnic group, religion, marital status or nationality when determining their insurance scoring. We couldn’t agree more!

What is really interesting is this same group – The Property Casualty Insurers Association of America – are the ones leading the charge with state legislators across the country when it comes to capping the rates on what Consumer Legal Funding companies are able to charge, a measure that would either limit or fully eliminate the product.

They want the industry to follow a cookie cutter approach when it comes to addressing and pricing legal claims, but when it comes to their own product, auto insurance, they want to maintain the capability of pricing based on the probability of outcome, as opposed to a cookie cutter methodology.

Consumer Legal Funding companies NEVER take into consideration income, race, gender, address, ethnic group, religion, marital status or nationality when determining what is the best approach when approving funding for a consumer. They look at the validity of the legal claim and the probability of there being a positive outcome; the same way insurance companies determines the premium that consumers pay each month on their insurance bill.

So we ask again, why is it ok for the insurance industry to take risk into consideration and not the Consumer Legal Funding industry?

The article goes on to state that “Vermont enacted legislation this year with balanced measures to protect consumers and reinforce the risk-based insurance system.” In 2017, Vermont enacted legislation that also regulates Consumer Legal Funding. That piece of legislation clearly states that the consumer MUST be fully informed as to the charges, and that there can be no hidden cost associated with the product that the consumer is not fully aware of. In other words, full transparency to the consumer. No cookie cutter or one-size-fits-all approach.

We fully support the bill that was passed in Vermont.

Perhaps state legislators should give closer inspection to Vermont’s position with regard to the insurance industry, and apply those same principles to Consumer Legal Funding. A risk-based pricing model is indeed one that we should all fully support.