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Key Takeaways from LFJ’s Special Digital Event: “Investor Insights into Consumer Legal Funding”

April 15, 2021

Key Takeaways from LFJ’s Special Digital Event: “Investor Insights into Consumer Legal Funding”

Litigation Finance News
This past Tuesday, Litigation Finance Journal hosted a special digital event, “Investor Insights into Consumer Legal Funding.” The panel discussion featured a trio of institutional investors, including Ben Kaplan (BK), co-founder of C9 Partners, Don Plotsky (DP), co-founder of Uinta Investments, and Michael Morris (MM), Managing Director of Northleaf Capital. Dan Avnir (DA), Managing Director of Bryant Park Capital moderated the discussion.  The panel covered a wide range of ground on Consumer Legal Funding as an asset class. Below are some key takeaways from the event:             DA: What types of investments do you target across the legal funding marketplace? BK: We target investments in operating companies. Operating companies with direct or indirect exposure to underlying consumer litigation assets which can include funded assets, with medical liens being the core focus. DP: We’re looking to basically get investment exposure to the asset—the way we do it is typically in some sort of structured transaction where we’re providing liquidity to the funding company. We’re definitely not plaintiff-facing…we’ll also buy cases directly and partner with funding companies that might be too large for their balance sheets. MM: We’re about a 15 billion dollar AUM, operating a range of strategies across the credit to equity continuum to get exposure to underlying assets. Generally, we’re looking to deploy $25-200 million or so, in some sort of partnership form with the funder.  DA: What can you say about your experience with collections these days? Have there been any variants, as compared to pre-COVID levels? BK: Interesting questions, pre-COVID versus post-COVID. Again, what I’m sharing is from the viewpoint of medical liens where there’s probably more volatility in and around that asset class depending on geography and a myriad of other circumstances—the nature of the treatment whether it’s surgery or MRI. To summarize, when COVID hit, there was actually, we experienced across a few different areas, a massive acceleration. At the outset of COVID, the takeaway is that there was an acceleration of collections. What I would say is that COVID has advanced…what we’re starting to see now is a backlog of cases attributable to court closures and other issues, that I would say at the beginning of 2021 has started to slow down collections a bit. Insurance companies have taken more of an aggressive posture with respect to litigation and they’re fighting those a little bit more aggressively. So I think we’ve seen an acceleration early on in COVID, and a bit of a slowdown in early 2021. DA: Don, what are you seeing out there from the funders you’ve been partnering with? Are trials in most states delayed? DP: In many cases, if not most typically, there’s some sort of settlement involved, rather than necessarily a trial verdict. But we’ve definitely noted an extension of maturity of the assets in the portfolio. Statistically, we would look at an 18-month duration to a three-year final type of profile on the assets that we buy, and we’re seeing things really creep out there beyond three years. Some of the assets that we own, we expected to have gotten greater cash flows than we received so far. We hear from the funding companies that business has definitely slowed down 20 or 30%, and we’re noting the extension of the portfolio. That certainly seems to be COVID-related. DA: What are your current return expectations across these assets that you’re investing in? Have the results lived up to the expectations you had? MM: There are two different lenses through which to look at it. I think in the space overall, in the two primary areas of the US…I do think over the last several years going back even before COVID, you seen some return compression at the asset level. As more money has come into the space, the search for yield that you can’t help but read about, it has made its way into the space a bit. DA: Are you seeing origination levels still down across the board as compared to pre-COVID levels, or are we beginning to see an uptick as of late? DP: Again, we’re not plaintiff-facing, so we don’t have people coming through the door. What we do see is fairly steady activity from the funding companies we deal with. What I’ll point out, is that more so than the actual volume of cases, it’s the condition of the financial markets surrounding this asset that are really driving supply. DA: What is the typical ROI target for a facility to a pre-settlement funding company? What information would you look to review in consideration of a facility? DP: From an investment perspective, we’re looking for a low-to-mid teen preferred rate of return…so in terms of total return on investment, we would hope to get perhaps slightly higher than that. When you look at all the components of the net return to investors, you also have to take into account that there are enormous cash flows here. We look to deliver 10-12% net annual return to our investors, and after that, 15% IRR. MM: For us, we’re sort of looking for kind of the best run cleanest plain vanilla senior debt, to make high single digits, and go up from there. DA: On pre-settlement funding side, if a group starting an origination platform today, what would you say would be the biggest challenges and opportunities? BK: I think the greatest opportunity is probably that there exists enough people who have been involved with businesses that have become institutional at this point, that there’s some good talent out there in terms of people who really know how to run a business and manage balance sheets and understand the industry. I think it’s an opportunity as the industry has grown…there’s better human capital out there.

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Consumer Legal Funding Is Not a Loan, Courts and Economists Agree

By John Freund |

The debate over whether consumer legal funding should be classified as a loan continues to surface in regulatory and policy circles, but legal doctrine and economic analysis consistently point in the opposite direction. Consumer legal funding is a non-recourse financial transaction tied to the outcome of a legal claim. If the consumer does not recover in their case, they owe nothing. This defining feature alone places the product outside the traditional boundaries of consumer lending, which requires repayment regardless of outcome and typically involves credit underwriting, collateral, and enforceable debt obligations.

An article in the National Law Review explains that courts and legislatures across the United States have repeatedly recognized this distinction. Rather than viewing consumer legal funding as borrowed money, courts have treated these arrangements as the purchase of a contingent interest in a future settlement or judgment. Because repayment is entirely dependent on case success, judges have found that the economic substance of the transaction does not resemble a loan, nor does it fit neatly within existing consumer credit frameworks.

Judicial decisions from multiple jurisdictions underscore this point. Courts have emphasized that consumers face no personal liability, no collection efforts, and no obligation to repay from their own assets. These factors are incompatible with the legal definition of a loan, which presumes a fixed obligation to repay principal and interest. As a result, attempts to recharacterize consumer legal funding as lending have largely failed when scrutinized under established legal standards.

From an economic perspective, consumer legal funding plays a distinct role in the civil justice system. It provides liquidity to plaintiffs who may be facing prolonged litigation and financial pressure, often helping them avoid accepting premature or undervalued settlements. Treating these transactions as loans could impose regulatory requirements that are poorly suited to non-recourse funding and risk limiting consumer access to a product designed to mitigate imbalance between individual plaintiffs and well-resourced defendants.

Consumer

Legal-Bay Hails New York Litigation Funding Act as Industry Milestone

By John Freund |

Legal Bay has praised New York Governor Kathy Hochul for signing the New York Litigation Funding Act into law, describing the legislation as a landmark step that finally provides a clear regulatory framework for consumer litigation funding in the state. The new law represents a significant development for an industry that has operated for years amid legal uncertainty in one of the country’s most active litigation markets.

A Legal Bay press release notes that the legislation establishes a comprehensive set of consumer protections and regulatory standards governing litigation funding transactions in New York. Legal Bay characterized the law as the product of more than two decades of policy development and sustained advocacy efforts by industry participants and consumer access to justice groups. The company emphasized that the statute provides long needed clarity by formally recognizing consumer litigation funding as a non recourse financial transaction rather than a traditional loan.

Under the new framework, funded plaintiffs are only required to repay advances if they obtain a recovery in their legal claims. Supporters of the law argue that this distinction is critical in protecting consumers from additional financial risk while ensuring that individuals with meritorious claims are able to cover basic living expenses during the often lengthy litigation process. Legal Bay highlighted that litigation funding can help plaintiffs avoid accepting early settlements driven by financial pressure rather than the merits of their cases.

Legal Bay also acknowledged the role played by New York lawmakers in advancing the legislation through the state legislature, noting that the law strikes a balance between consumer protection and preserving access to funding. According to the company, the statute promotes transparency, fairness, and stability in a market that continues to grow in both size and sophistication.

Consumer

New York Enacts Consumer Litigation Funding Act Impacting Litigation Finance

By John Freund |

New York has enacted a new Consumer Litigation Funding Act, establishing a formal regulatory framework for third party litigation funding transactions involving consumers. The law, signed by Governor Kathy Hochul in December, introduces new registration requirements, disclosure obligations, and pricing restrictions aimed at increasing transparency and limiting costs for funded claimants.

As reported in Be Insure, litigation funders must register with the state and comply with detailed consumer protection rules. Funding agreements are required to clearly disclose the amount advanced, all fees and charges, and the total amount that may be owed if the case is successful.

Consumers must initial each page of the agreement and are granted a ten day cooling off period during which they may cancel the transaction without penalty. The law also prohibits funders from directing litigation strategy or interfering with the professional judgment of attorneys, preserving claimant and counsel independence.

One of the most significant provisions is a cap on the total charges a funder may collect, which is limited to 25 percent of the gross recovery. Prepayment penalties are unenforceable, and attorneys representing funded plaintiffs are prohibited from holding a financial interest in a litigation funding company. For the first time, consumer litigation funding in New York is brought under the state’s General Business Law, replacing years of relatively limited oversight with a comprehensive statutory regime.

Supporters of the legislation argue that the law addresses concerns about excessive costs and abusive practices while providing clarity for an industry that has operated in a regulatory gray area. Industry critics, however, have raised questions about whether pricing caps could restrict access to funding for higher risk claims.