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Let’s Set The Record Straight: Consumer Legal Funding is Not Litigation Finance

February 20, 2024

Let’s Set The Record Straight: Consumer Legal Funding is Not Litigation Finance

The following piece was contributed by Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding (ARC). Consumer Legal Funding, in its various forms, is pretty mundane. It covers living expenses, such as rent, food, clothes and keeping the lights on. It might even enable a family to provide Christmas or birthday gifts for their children. In every case, its sole purpose is to help individuals and families alleviate the cash-flow problems that arise in the wake of an accident or other tragic circumstances, while the individuals and families are seeking compensation for their situation. It has nothing to do with financing of the litigation. What is happing is that groups and individuals who are not taking the time and effort to know the differences between the two different products and are lumping them together. They are saying all transactions where a party to litigation receives any monetary resources from a non-party are considered Third Party-Litigation- Financing (TPLF). It paints a bleak picture of “foreign adversaries . . . undermining U.S. national economic and security interests through the infiltration of the American litigation system,” and it is the end of the free world as we know it. Consumer Legal Funding is nothing like that, it helps a consumer meet their financial obligations while their legal claim is making its way through the justice system. It does not pay for deposition cost. It does not pay for legal fees or expenses. Most of the time the funds go to help a consumer who has had a car accident bridge the financial gap, but there are other times where it goes to help a person who was wrongfully convicted and spent nearly two decades of their life in prison for a crime they did not commit. Consumer legal funding helped them get their life back in assisting with living expenses while they got the justice they so justly deserved. It helped a Police Officer pay to keep a roof over their family’s head while they had their day in court after being wrongfully discharged. Then the case of a single mother of three who was going back to college to make a better life for her children and had to move out of their home because of a toxic mold infestation. She used consumer legal funding to pay for a mobile home so she and her three children could live in a safe, toxic-free, environment while the situation was fixed. There is the case when a 16-year-old was made a quadriplegic due to medical negligence. The family had to modify their home to make accommodations to care for their loved one. Consumer legal funding was the only way they were able to take care of their teenager while the case made its way through the long legal system. Another was a woman was involved in a car accident and her teeth were shattered because of the accident. She used consumer legal funding to get a new set of teeth. She said, “it gave me my smile back”. Finally, there have been times where consumer legal funding was used to help pay for funeral expenses of a loved one that was tragically killed in an accident. Sadly, some families had no other means of taking their loved one to their final resting place if it had not been for consumer legal funding. But what is happening are those groups and individuals that do not take the time, or want to take the time, to learn what consumer legal funding really is. They hear terms like, “corrupting the legal system”, “leads to filing frivolous litigation” and the latest is “foreign governments are leading to international sabotage of our courts”. Then charge ahead saying “the sky is falling; the sky is falling”.
  • How does giving money to a single mother so she can have her children live in a toxic free environment lead to “international sabotage”?
  • How does allowing a person who spent nearly 2 decades of their life living in 48 square foot space corrupting the legal system?
  • How does allowing a person to get their smile back lead to frivolous litigation?
Litigation Financing is just that “financing of the litigation”. It is used to pay for lawyers. It is used to pay for depositions. It is used to pay for expert witnesses. It is used to pay court costs. None of which consumer legal funding does. In fact, in the legislation that we have promoted we specifically state the funds we provide to a consumer cannot be used for those purposes. Don’t be fooled by someone who is throwing out buzz words that make one think we are on the brink of judicial destruction by confusing Consumer Legal Funding with Litigation Financing. They both may be fruit. But one is an apple and one is an orange. Eric Schuller President Alliance for Responsible Consumer Legal Funding
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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.