Legal Commentary

Lawsuit Loans

By Kenneth Anderson

A side aspect of the earlier-raised Chevron case is that the plaintiffs? side is being financed in considerable part by outside investors, including an investor group in London.  So, for example, somewhere in the filings I read, Steve Donziger acknowledged that apparently the costs of his individual defense in the various suits and countersuits would be covered by the investors backing the lawsuit.

This raises more broadly the issue of investor financing of lawsuits in the United States.  I realized, reading the Chevron documents, that I know next to nothing about it, the incentives and disincentives it creates, or its regulation.  There is probably a cottage industry of academic commentary, but it hasn?t crossed my desk; if anyone wants to point me to articles in the law reviews or SSRN, etc., I?d be curious.

So I was interested to see a short, well-researched account in the business pages of the New York Times today.  ?Lobby Battle Over Loans for Lawsuits,? by Binyamin Applebaum. Good piece, and if you are looking for an introduction to the topic, start there.  The current lobbying battle to which Applebaum?s article refers is over whether such lending should be subject to usury and other lending laws, or whether it should be considered some form of investment activity exempt from such rules:

Lending to plaintiffs is part of a broader trend in recent decades in which banks, hedge funds and private investors have been pumping money into other people?s lawsuits. About a dozen large companies, and many smaller ones, lend plaintiffs about $100 million a year, generally a few thousand dollars at a time, to cover housing, medical care and other expenses. The loans are repaid from winnings, with costs that can exceed 100 percent a year. People who lose their cases owe nothing ...

[C]ompanies argue that they should not be subject to existing consumer protections because the transactions are investments, not loans. They say they must charge high prices to compensate for the risk that plaintiffs will lose ...

The legal status of lawsuit lending has been hotly contested in recent years. Authorities in some states, including Colorado and Maryland, have ruled that the companies must comply with lending laws, which severely restrict the kind of interest rates that can be charged. Authorities in other states, including New York, have ruled that the companies are not subject to those laws, accepting the industry?s argument that the transactions are conditional investments.

Full post as published by The Volokh Conspiracy on March 10, 2011 (boomark / email).