Who is funding shadow lawsuits?

The American legal system, as illustrated by the iconic Lady Justice statue, is supposed to be a level playing field. The reality is far more complex, however, with numerous factors tipping the balance in favor of those with resources and power.

One of these factors is the booming lawsuit lending industry — a shadowy, unregulated, and often predatory practice that threatens to upend equilibrium in the legal system.

Third-party litigation funding (TPLF) is more than just a financial aid for disadvantaged plaintiffs. It has become a shady influence, often dictating the outcome of cases to the detriment of their equitable and timely resolution. A recent white paper published by the New York law firm Kahana Feld highlights the dark underbelly of lawsuit funding and its negative influence on New York courts.

It is far past time for lawmakers to establish reasonable guardrails for this out-of-control industry, which is generating billions of dollars for investors — often at the expense of vulnerable individuals. Sensible reform will preserve a critical funding stream for plaintiffs while also protecting them from unscrupulous lenders who are manipulating the legal process.

The high fees and exorbitant interest rates charged by funders have a disturbing consequence: incentivizing plaintiffs to reject reasonable settlements in pursuit of larger recoveries to cover these out-of-control costs. This not only prolongs litigation but also hampers the possibility of timely and just settlements.

Transparency, a cornerstone of justice, is conspicuously absent in current TPLF practices. Defendants, and often the courts themselves, are left in the dark about the existence and terms of these funding agreements. This lack of disclosure hinders defendants’ ability to accurately value and settle cases, undermining the fairness of the legal process.

The Kahana Feld white paper cites several troubling examples of an industry desperately in need of reform.

In a Bronx medical malpractice case involving an infant, the plaintiff’s attorney referred the case to a funding company owned by his brother without disclosing the relationship. In Buffalo, two principals of a plaintiff firm were sanctioned for extending loans to a client through a company they owned.

Sadly, these are not isolated incidents. They are indicative of a broader pattern of undisclosed conflicts of interest and lack of arm’s length transactions between attorneys and funders.

Even more alarming are the predatory practices of unscrupulous lenders. Some funding agreements feature annual interest rates exceeding 100%, egregiously consuming plaintiffs’ monetary recoveries. Increasingly, lenders are targeting individuals desperate for cash with nowhere else to turn because they are unbanked and without a financial safety net, such as wrongfully convicted former inmates who are almost certain to receive significant civil settlements.

The involvement of TPLF companies in fraudulent activities, such as financing staged accidents and participating in illicit schemes, adds a criminal dimension to these concerns.

A glaring example was Adrian Alexander, a New York City litigation funder, who in 2023 was sentenced to three years in prison for his role in a $31 million fraud scheme based on staged accidents. His co-conspirators included an attorney who recruited homeless individuals to fake accidents and a physician who performed unnecessary surgeries to inflate the value of the cases.

TPLF agreements often usurp the plaintiff’s control over their case. Funders, driven by profit motives, exert undue influence over settlement decisions, prioritizing their financial gain over fair compensation for plaintiffs.

The solution lies in a simple interest rate cap along with greater transparency, disclosure, and early judicial review of TPLF agreements. While awaiting action in Albany, New York courts can take proactive measures to expose potentially predatory funding agreements, fraud, conflicts of interest, and the erosion of plaintiffs’ authority over their lawsuits. Compelling routine disclosure of these agreements in discovery can be a significant step toward reform.

The evidence is clear: TPLF, in its current form, poses a significant challenge to the integrity of New York’s legal system. Court officials and lawmakers must both do their part by promulgating clear disclosure rules and enacting consumer protections. Only then can we preserve the civil justice system and ensure vulnerable plaintiffs aren’t taken advantage of by sophisticated legal lenders and the hedge funds that back them.

Let’s let in the sunlight and protect our most vulnerable from predatory lawsuit lending. In the immortal words of Justice Louis Brandeis, “if the broad light of day could be let in upon men’s actions, it would purify them as the sun disinfects.”