ABA Adopts Guidance in Third-Party Litigation Funding

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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

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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

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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?

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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?

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“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

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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

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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?

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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.

 

New Addition to the ARC Family

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The Alliance for Responsible Consumer Legal Funding (ARC) is pleased to announce that Global Financial Credit, LLC (www.glofin.com) has joined ARC as it newest senior board member.

Wensley McKenney, a founding partner of Global Financial Credit, LLC, said “We are pleased to be joining ARC and the rest of their members. We feel that the values and vision for the industry are well aligned with those of Global.”

“Global brings a wealth of knowledge and experience in the Consumer Legal Funding space and we look forward to working with them.” Stated Rob Johnson, Executive Director of ARC.

Why Do Ticket Resellers and Consumer Legal Funders Exist? Because Springsteen Cares and “XYZ Insurance” Doesn’t

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I buy a ticket to see Bruce Springsteen for $150 and then resell it for $350. Why am I able to do this? Because the face value of a Springsteen ticket is artificially low. Bruce could set a higher price, but chooses not to. It’s a noble yet futile effort on his part to go easy on his fans. I say “futile” because ultimately the market will adjust the price to reflect its true value. As long as there are folks lining up to pay considerably more than face value, third party ticket resellers will remain incentivized to take advantage of the economic opportunity presented therein.

So what about “XYZ Insurance Company”?

Say I’m involved in a car accident where the at-fault driver is insured by “XYZ Insurance.” I make a claim against “XYZ Insurance” to recover for the injuries I’ve suffered in the accident. Reasonable minds agree that my claim is worth between $25K-$35K. However, “XYZ Insurance” offers to settle (“buy”) my claim for only $15K.

Like Springsteen, “XYZ Insurance” is setting an artificially low price, albeit for very different reasons, and thereby creating an economic opportunity for a third party – in this instance a Consumer Legal Funder. Keep in mind, even though “XYZ Insurance” is technically a buyer in this scenario, for much of its history it has been the only possible buyer. As such, it has enjoyed monopoly-like power in terms of price-setting; that is, until the advent of Consumer Legal Funding.

If “XYZ Insurance” objects to the rise of Consumer Legal Funding, it’s because funders have created a market for claims where none previously existed. Think about that. In this new market, “XYZ Insurance” faces competition. That’s good for consumers. It means claimants now stand a much greater chance of realizing the true value of their claims. Absent Consumer Legal Funding, the only buyer of a claim against “XYZ Insurance” is … “XYZ Insurance.”

A market of one is no market at all. Fortunately, Consumer Legal Funding helps establish a robust market, without which, we all suffer.

Dean Lipson

Covered Bridge