Is Consumer Litigation Funding a Loan?

Is Litigation Funding a Loan?

Proponents of lawsuit funding will argue until they are blue in the face that litigation funding is not a loan. Opponents of lawsuit funding have been working overtime to try and classify such products as a loan, more specifically within the confines of State Legislators.

We will discuss why the classification between the two is important in a later blog post but we will go into more detail in this post on why lawsuit funding is not considered a loan. According to a recent publication by professor Victoria Shannon Sahani lawsuit funding should not be considered a loan for the following reasons:

  • Obligation – There is no absolute obligation for the funded client to repay the funding company. If the client is the claimant, the client pays if the case is won. If the client is the defendant, premium payments end as soon as the case settles and if the defendant loses, the funding company will not receive a success fee.
  • Non-recourse – This is a term that means if the client loses the case, the funding company cannot peruse the client’s other assets unrelated to the litigation. If the case is lost, no money is owed.
  • Riskiness –  In comparison with a traditional collateral-based lender, a lawsuit funding company is taking on more risk and in return seeking a higher rate of return on funding amounts.
  • Multilateral – Funding in the lawsuit industry is a multilateral transaction while the credit card industry funding is a bilateral transaction
  • Shahani argues that consumer legal funding does not contain any of the characteristics of a traditional collateral-based lender, as illustrated in the chart below:

    Characteristics Loan Legal Funding Personal repayment obligation YES NO Monthly or periodic payments YES NO Risk of collection, garnishment and/or bankruptcy YES NO

    by John Freund – LitigationFinanceJournal.com

    Why does Clarification between the two Matters?

    While litigation funding may not be allowed in every state it is worth mentioning that no state has classified the product as a loan. In fact, some states have declared that litigation funding is a purchase and unequivocally not a loan. Freund points out the following states as examples:

    • Indiana – A recent statute states, “Notwithstanding section 202(i) of this chapter and section 502(6) of this chapter, a CPAP[1] transaction is not a consumer loan.”
    • Nebraska – State legislature has declared, “Non-recourse civil litigation funding means a transaction in which a civil litigation funding company purchases and a consumer assigns the contingent right to receive an amount of the potential proceeds of the consumer’s legal claim to the civil litigation funding company out of the proceeds of any realized settlement, judgement, award, or verdict the consumer may receive in the legal claim.”
    • Vermont – “Consumer litigation funding means a non-recourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgement obtained from the consumer’s legal claim.”
    • Georgia – Court of Appeals stated, “Unlike loans, the funding agreements do not always require repayment. Any repayment, under the funding agreement is contingent upon the direction and time frame of the Plaintiffs’ personal injury litigation, which may be resolved through a myriad of possible outcomes, such as settlement, dismissal, summary judgment, or trial.”

    To put is simply differentiating the two is necessary because if litigation funding were to be characterized as a loan according to state legislatures consumers would be subjected to state laws that regulate loans. This could limit access to financial assistance for those plaintiffs that are in dire need.