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Probate Funding: A Useful Option for So Many (Part 2 of 4)

June 4, 2018

Probate Funding: A Useful Option for So Many (Part 2 of 4)

The following is Part 2 of our 4-Part series on Probate Funding by Steven D. Schroeder, Esq., General Counsel/Sr. Vice President at Inheritance Funding Company, Inc. since 2004. Part 1 can be found here. Comparing Assignments with Loans: Apples Are Not Oranges As previously stated, there has been some recent criticism of the companies engaged in Probate funding.[1] An Article entitled: “Probate Lending” started and ended with the premise that Probate Assignments are in fact disguised loans and should be regulated as such. Despite the predetermined conclusion by one author, in fact, the law treats Assignments and Loans quite differently and those distinctions are significant.[2]
  1. What is an Assignment?
An Assignment is a term that may comprehensively cover the transfer of legal title to any kind of property. Commercial Discount Co. v. Cowen (1941) 18 Cal. 2d 601, 614; see also In re: Kling (1919) 44 Cal. App. 267, 270, 186 P. 152. When valid consideration is given, the Assignee acquires no greater rights or title than what is assigned. In other words, the Assignee steps in the shoes of the Assignor’s rights, subject to any defenses that an obligor may have against Assignor, prior to Notice of Assignment. See Parker v. Funk (1921) 185 Cal. 347, 352, 197 P. 83.  See also Cal. Civil Code §1459; Cal. Code of Civil Procedure §369. An Assignment may be oral or written and no special form is necessary provided that the transfer is clearly intended as a present assignment of interest by the Assignor. If only a part of the Assignor’s interest is transferred, it may nevertheless be enforced as an equitable Assignment. See McDaniel v. Maxwell, (1891) 21 Or. 202, 205, 27 P. 952. It has been held that any expectancy may be assigned or renounced. See Prudential Ins. Co. of America v. Broadhurst 157 Cal. App. 2d 375, 321 P. 2d 75. Similarly, a beneficiary may assign or otherwise transfer his or her interest in an Estate prior to distribution. See Gold et. al., Cal Civil Practice: Probate and Trust Proceedings (2005) §3:86, p. 3-78. Probate Assignments are those taken prior to the completion of probate administration for which an heir/beneficiary transfers a portion of his/her expected inheritance in the estate in consideration of a cash advance (i.e. the purchase price).
  1. What is a loan?
A loan agreement is a contract between a borrower and a lender which governs the mutual promises made by each party. There are many types of loan agreements, including but not limited to: “home loans”, “equity loans”, “car loans”, “mortgage loan facilities agreements”, “revolvers”, “term loans” and “working capital loans” just to name a few. In contrast to Assignments, loans do not transfer legal title and instead are contracts in which the borrower pays back money at a later date, together with accrued interest to the lender. A loan creates a debtor and creditor relationship that is not terminated until the sum borrowed plus the agreed upon interest is paid in full. Milana v. Credit Discount Co. (1945) 27 Cal. 2d 335, 163 P.2d.869. In order to constitute a loan, there must be a contract whereby the lender transfers a sum of money which the borrower agrees to repay absolutely; together with such additional sums as may be agreed upon for its use.[3] The nature of a loan transaction, can be inferred from its objective characteristics. Such indicia include: presence or absence of debt instruments, collateral, interest provisions, repayment schedules or deadlines, book entries recording loan balances or interest, payments and any other attributes indicative of an enforceable obligation to repay the sums advance. Id, citing Fin Hay Realty Co. v. United States 398, F.2d 694, 696 (3d Circ. 1968). Also, unlike Assignments, lenders typically insist upon several credit worthy factors prior to funding. For example, the “borrower” makes representations about his/her character including creditworthiness, cash flow and any collateral that he/she may pledge as security for a loan. These creditworthy representations are taken into consideration because the lender needs to determine under what terms, if any, they are prepared to loan money and whether the borrower has the wherewithal to pay it back, generally within a certain time frame. In cases of Probate Assignments, an Advance Company rarely considers creditworthiness of the Assignee, because it is not he/she who is responsible to satisfy the obligation. That obligation falls upon the Estate or Trust fiduciary. In addition, Probate Assignments cannot be deemed to be a loan if the return is contingent on the happening of some future event, (i.e. Final Distribution). Altman v. Altman (Ch. 1950) 8 N.J. Super.301, 72 A.2d 536., Arneill Ranch v. Petit 64 Cal. App. 3d, 277, 134 Cal. Rptr. 456, 461-463 (Cal. Ct. App. 1976).  True Probate Assignments, executed in consideration of an advance, have no time limit for payment, nor do they accrue interest post-funding. Furthermore, an assignee is not required to make periodic interest payments and in the vast majority of cases no payment at all. Moreover, although loans are often secured against real property, Assignments in Probate should not be secured. Estate Property is generally not owned or distributed to the heir at the time the Assignment is executed. A critical distinction between Probate Assignments and loans, is that when an Assignment is executed, there is no unconditional obligation that the Assigned amount be paid and/or when it might be paid. Once assigned, the Assignor owes no further obligation to the Assignee over those rights sold/assigned. And, the Assignee has no recourse against the Assignee/Heir should the heir’s distributive share be less that what he/she assigns. In other words, to “constitute [a] true loan [] there must have been, at the time the funds were transferred, an unconditional obligation on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment.”  Geftman v. Comm’r 154 F3rd 61, 68 (3d Cir. 1998) quoting Haag v. Comm’r 88.T.C. 604, 615-16, 1987 WL 49288 aff’d 855 F. 2d 855 (8th Cir. 1987). Many jurisdictions in addition to California, recognize that the absolute right to repayment or some form of security for the debt as the defining characteristics of loan.[4] While the structure and elements slightly vary, the following is a side by side comparison of some of the basic distinctions of loans and Assignments in Probate Funding:
LoansAssignments
Tenor: This is the time limit for repaying the loan as well as the interest rate charge.Tenor: No time limit for payment. No interest accrues.
Obligor on the Assignment: The Borrower is contractually obligated to repay.Assignee on the Assignment: Assignee/Heir does not pay anything.  A third party (i.e. administrator pays the Assignment.
Recourse: The Borrower is unconditionally obligated.Recourse: In absence of fraud, the Assignee has no recourse should his interest be less than what is assigned or even $0.00.
Interest Payment and Capitalization: The interest rate charge for the loan and time limit for interest payment. It also stipulates conditions under which unpaid Interest will be added to the outstanding loans.Interest Payment and Capitalization: Interest does not accrue post funding and the Assignment is fixed.
Penalties: Late payments are typically subject to penalties and/or trigger default.Penalties: No payments are due.  No Default deadlines for payment imposed on Assignee/Heir.
Creditworthiness: Essential for approvalCreditworthiness: Not essential
Default: Foreclosure is an option; a borrower could bear default.Default: No penalty no matter when Assignment is paid. Assignments are not secured. Foreclosure is not an option.
Moreover, given the uncertain time frame for recovery and absence of recourse against the Assignee/Heir, it would be impossible to assign an interest rate or make a Truth in Lending (“TILA”) disclosure, 15 U.S.C. §1601 (2012). Since the purpose of the TILA is to assure meaningful disclosure, the simplicity of an Assignment eliminates any necessity of making interest rate disclosures as required by interest bearing loans. When the Assignor sells a portion of his/her interest for a fixed sum Assignment, what additional disclosures are necessary? In short, there are many significant differences between Probate Assignments and Loans. Courts and Legislatures throughout the country have recognized these distinctions and have considered them when regulating or providing necessary review over either product. Stay tuned for Part 3 of our 4-Part series, where we discuss California’s regulation of Probate Funding, and how such regulation can serve as a model for other jurisdictions. Steven D. Schroeder has been General Counsel/Sr. Vice President at Inheritance Funding Company, Inc. since 2004. Active Attorney in good standing, licensed to practice before all Courts in the State of California since 1985 and a Registered Attorney with the U.S. Patent and Trademark Office.  —- [1]  David Horton and Andrea Chandrasenkher, supra (2016) 126 Yale 105-107.  Professors Horton and Chandrasekher analogized Litigation Funding to the ancient doctrine of champerty even though acknowledging California has never recognized the doctrine, See e.g. Mathewson v. Fitch, 22 Cal. 86, 95 (1863). [2] The conclusions in Probate Lending were debunked, by Jeremy Kidd, Ph.D. Associate Professor of Law, Mercer, Probate Funding and the Litigation Funding Debate, See Wealth Strategies Journal, August 14, 2017. [3] 47 C.J.S. Interest and Usury; Consumer Credit Section 123 (1982). [4] See In re Nelson’s Estate (1930) 211, Iowa 168; Dobb v. Yari, (NJ 1996), 927 F. Supp 814; Turcotte v. Trevino (1976) 544, S.W. 2d 463; quoting.47 C.J,S. Interest and Usury; Consumer Credit Section 123 (1982); Turcotte v. Trevino 544 S.W.2d 463 (1976), Cherokee Funding, LLC v. Ruth (2017) A17A0132; “…New York recognizes the absolute right of repayment or some form of security for the debt as the defining characteristic of a loan.   Its courts have explicitly stated that ‘[f]or a true loan it is essential to provide for repayment absolutely and all events or principal in some way to be secured…’ MoneyForLawsuits VLP v. Row No. 4:10-CV-11537]. Thus, a transaction that neither guarantees the lender an absolute right to repayment nor provides it with security for the debt is not a loan, and as a result, cannot be subject to New York’s usury laws…”   (emphasis added). “…In Brewer v. Brewer, 386 Md. 183, 196-197 (2005), the Court of Appeals held that “redistribution agreements are permissible and, so long as they comply with the requirements of basis contract law, neither the personal representative nor the court has any authority to disapprove or veto them.  See also In re: Garcelon’s Estate 38 P. 414, 415 (Cal. 1894), Haydon v. Eldred, 21 S. W.457, 458 (Ky 1929). See Massey vs. Inheritance Funding Company, Inc. Court of Appeals, 7th Dist (TX), 07-16-00148-CV.

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Legal Bay Highlights Uber’s “Woman Driver Only” Option as Rideshare Sexual Assault Litigation Grows

By John Freund |

Legal Bay LLC, a national provider of pre-settlement funding and lawsuit loans, is highlighting Uber's introduction of a "Woman Driver Only" option as rideshare sexual assault litigation continues to expand across the country.

According to PR Newswire, the policy change comes as more than 3,000 sexual assault lawsuits against Uber move through federal court as part of a multidistrict litigation. A federal jury in Arizona recently awarded $8.5 million to a passenger in what is considered the first major bellwether verdict in the MDL.

Legal analysts estimate that individual settlements in rideshare sexual assault cases may range from approximately $50,000 to over $1 million, depending on severity and evidence. CEO Chris Janish described rideshare litigation as "one of the fastest-growing areas of sexual assault litigation and mass tort law."

Legal Bay provides non-recourse pre-settlement advances to plaintiffs in active lawsuits, meaning repayment is only required if a case results in a successful outcome. The company's announcement underscores the growing intersection of consumer legal funding and mass tort litigation, as plaintiffs navigating lengthy MDL timelines increasingly seek financial support while their cases proceed.

Consumer

New York Consumer Litigation Funding Act Called a First Step in Combatting Predatory Lending

By John Freund |

New York's Consumer Litigation Funding Act, set to take effect June 17, represents a significant regulatory intervention in an industry that has operated largely without oversight — but advocates say it does not go far enough.

As reported by Bloomberg Law, Rachel McCarthy and Tabitha Woodruff of the Milestone Foundation argue that while the new law establishes important baseline protections, it leaves critical gaps that could continue to harm vulnerable plaintiffs. The authors point to annual percentage rates in the consumer legal funding industry ranging from 30 to 124 percent, substantially higher than typical credit card rates. In one illustrative scenario, a family borrowing $10,000 at 50 percent monthly compounded interest could owe approximately $43,475 after three years.

The law caps a litigation funder's recovery at 25 percent of the gross settlement or judgment, requires plain-language contracts, mandates a 10-day rescission period, establishes state registration requirements, and prohibits interference with settlement decisions and misleading advertising.

However, the authors note that the legislation does not cap the interest rates funders can charge, nor does it impose rules or restrictions on the types of fees that may be assessed. They argue that these omissions leave room for the most predatory practices to continue even under the new regulatory framework.

The piece frames the New York law as an important first step while calling for additional reforms targeting interest rate caps and fee structures to fully protect consumers who turn to litigation funding while awaiting resolution of their cases.

Consumer

Equal Justice Requires Equal Staying Power: Why Consumer Legal Funding Helps Fulfill the Promise of the American Legal System

By Eric Schuller |

The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).

“Equal justice under law is not merely a caption on the facade of the Supreme Court building, it is perhaps the most inspiring ideal of our society.”

— Lewis F. Powell Jr.

Few phrases better capture the promise of the American legal system than “Equal Justice Under Law.” Carved into the stone above the entrance to the United States Supreme Court, those words symbolize the belief that every person, regardless of wealth, status, or background, stands equal before the law.

But as Justice Lewis F. Powell Jr. observed, those words must represent more than an inscription on a building. They must be an operational principle, a reality experienced by everyday people who rely on the legal system to resolve disputes and obtain justice.

In practice, however, the ideal of equal justice often collides with an uncomfortable truth. Litigation takes time. Legal claims, particularly personal injury claims, can take months or years to resolve. During that time, the injured person frequently faces mounting financial pressure. Medical bills accumulate. Income may be lost due to the injury. Rent, utilities, and everyday expenses continue regardless of the progress of a legal case.

Meanwhile, the opposing party is often backed by a large insurance company or corporate defendant with deep financial resources and the ability to delay litigation for extended periods.

This imbalance creates a fundamental tension in the civil justice system. If one side can afford to wait and the other cannot, the outcome of a case may be influenced not by the merits of the claim, but by financial pressure. Consumer legal funding emerged as a practical solution to this problem.

At its core, consumer legal funding helps preserve the promise behind Justice Powell’s words by helping injured individuals maintain financial stability while their legal claims proceed.

The Economic Reality of Litigation

Civil litigation is rarely quick. Personal injury claims often require extensive investigation, medical treatment, negotiation with insurance companies, and in some cases trial preparation.

For injured plaintiffs, this process can be financially devastating. Many individuals involved in serious accidents cannot return to work immediately. Others face large medical expenses that accumulate before a settlement or judgment is reached.

Even individuals who previously had stable financial lives may suddenly find themselves struggling to pay for basic necessities.

Insurance companies and large defendants, by contrast, face no such pressures. Insurers are structured to manage litigation risk over long periods of time. They have legal departments, litigation budgets, and the ability to delay or extend negotiations.

This difference in financial endurance can shape the dynamics of settlement negotiations.

When an injured person faces the possibility of eviction, unpaid medical bills, or an inability to provide for their family, the pressure to settle quickly increases dramatically. The settlement decision may become less about fairness and more about survival.

This is where consumer legal funding plays a crucial role.

Consumer Legal Funding: Supporting Plaintiffs During Litigation

Consumer legal funding provides monies to plaintiffs with pending legal claims, typically personal injury cases. These funds are designed to help cover everyday living expenses while a case is ongoing.

Importantly, consumer legal funding is structured as non-recourse funding. Repayment occurs only if the plaintiff successfully resolves the case through settlement or judgment. If the case is unsuccessful, the consumer does not owe repayment.

This structure reflects the reality that the funding company is accepting risk tied to the outcome of the legal claim.

The purpose of the funding is not to finance litigation strategy or influence legal decisions. Rather, it helps injured individuals pay for basic necessities such as housing, food, transportation, and medical needs while the legal process unfolds.

In this way, consumer legal funding functions as a financial stabilizer during one of the most vulnerable periods in a plaintiff’s life.

Restoring Balance in Settlement Negotiations

The civil justice system assumes that parties negotiate settlements based on the merits of the case, the strength of the evidence, and the applicable law. In reality, financial pressure can significantly influence settlement behavior.

When plaintiffs face immediate financial hardship, they may feel compelled to accept settlements that do not fully reflect the value of their claims.

Insurance companies understand this dynamic. The longer a case continues, the greater the financial strain on many injured plaintiffs.

Consumer legal funding helps address this imbalance by giving plaintiffs the ability to withstand financial pressure during the litigation process.

By helping consumers remain financially stable, consumer legal funding allows settlement decisions to be based more on the actual merits of the case rather than immediate economic desperation.

In essence, it helps ensure that the legal process functions as intended.

The Role of Consumer Legal Funding in Access to Justice

Access to justice is often discussed in terms of legal representation. Ensuring that individuals have access to attorneys is unquestionably important. Contingency fee arrangements have long helped individuals pursue claims they might otherwise be unable to afford.

However, legal representation alone does not solve the financial challenges that plaintiffs face during litigation.

Even when attorneys represent clients on contingency, plaintiffs must still manage everyday living expenses while their cases proceed. Medical treatment may prevent them from working. Insurance disputes may delay compensation.

Without financial support, many plaintiffs find themselves in impossible situations.

Consumer legal funding addresses this gap. It supports the plaintiff personally, rather than the litigation itself.

This distinction is important. The funds are not intended to create lawsuits or encourage unnecessary litigation. Instead, they allow individuals with legitimate claims to endure the legal process required to resolve those claims fairly.

This support can make the difference between a plaintiff pursuing justice and abandoning a claim prematurely due to financial hardship.

Consumer Legal Funding and the American Tradition of Risk Sharing

The structure of consumer legal funding aligns with other widely accepted financial arrangements that involve risk sharing.

For example, insurance companies accept risk every day when they issue policies. If an insured event occurs, the insurer pays the claim. If it does not, the insurer retains the premiums.

Similarly, venture capital investors accept risk when they fund startup companies. If the company succeeds, the investor benefits. If it fails, the investor absorbs the loss.

Consumer legal funding operates on a similar principle. The funding company provides monies with the understanding that repayment depends on the success of the legal claim.

This risk-based structure distinguishes consumer legal funding from traditional lending, where repayment is required regardless of outcome.

The contingent nature of repayment reflects the uncertain nature of litigation itself.

Protecting the Integrity of the Civil Justice System

Critics sometimes argue that consumer legal funding interferes with litigation or encourages lawsuits. In reality, the opposite is often true.

Consumer legal funding does not determine whether a lawsuit is filed. That decision is made by the plaintiff and their attorney based on the merits of the case.

Funding companies review cases carefully before providing funds. The evaluation process often includes reviewing case documentation, attorney involvement, and the likelihood of a successful resolution.

This evaluation process means that funding companies generally support claims that already have legal merit and professional representation.

Rather than encouraging frivolous litigation, consumer legal funding tends to operate within the existing framework of legitimate claims.

Its primary impact is helping plaintiffs remain financially stable while the legal system runs its course.

Preserving the Meaning of “Equal Justice Under Law”

Justice Powell’s words remind us that the promise of the legal system extends beyond formal procedures. Equal justice requires more than access to a courtroom. It requires that individuals have a realistic ability to pursue their claims without being forced into premature settlement by financial hardship.

In many cases, the difference between a fair settlement and an inadequate one is time.

Insurance companies can afford time. Corporations can afford time.

Injured individuals often cannot.

Consumer legal funding helps bridge this gap. By providing financial support during the litigation process, it allows plaintiffs to remain engaged in their cases and pursue outcomes that reflect the true value of their claims.

This role aligns directly with the broader principles of fairness and equality embedded in the American legal tradition.

Funding Lives, Not Litigation

Consumer Legal Funding: Funding Lives, Not Litigation.

This phrase captures the essence of the product. The purpose of consumer legal funding is not to finance lawsuits or drive litigation strategy. It is to help real people navigate the difficult period between injury and resolution.

Behind every legal claim is a person whose life has been disrupted. There are families dealing with lost income, individuals recovering from serious injuries, and households struggling to meet everyday expenses.

Consumer legal funding recognizes these realities.

It provides a practical tool that helps injured consumers maintain stability while the legal system works toward a resolution.

Conclusion

Justice Lewis F. Powell Jr. reminded us that “Equal Justice Under Law” must represent more than an inscription on a courthouse wall. It must be a living principle that guides how the legal system operates.

For many injured plaintiffs, the greatest obstacle to justice is not the law itself, but the financial pressure that arises while a case is pending.

Consumer legal funding helps address this challenge. By providing financial stability during litigation, it allows plaintiffs to remain in the process long enough for their claims to be evaluated fairly.

In doing so, it supports the very principle Justice Powell described.

Equal justice cannot exist if only those who can afford to wait are able to pursue it. Consumer legal funding helps ensure that justice is determined by the facts and the law, not by who runs out of money first.

And in that sense, it plays a meaningful role in turning one of America’s most inspiring ideals into a practical reality.