There is a kernel of truth in the personal injury plaintiff bar’s refrain that third-party litigation funding (TPLF) allows the prosecution of meritorious lawsuits that might otherwise be foregone. But this valuable function has been eclipsed by TPLF’s devolution into an albatross around the neck of New York’s civil court system that ensnares litigants in a morass of needless and costly litigation while jeopardizing plaintiffs’ hard-won recoveries, and simultaneously creating an unsightly mess of undisclosed conflicts and serious ethical breaches. This development should surprise no one with any sense of history or just how lucrative the TPLF industry has become. At the turn of the century, as the time-honored doctrines of champerty and maintenance were cast aside by special interests, no anticipatory measures were taken to address this new frontier, leading to the proverbial “Wild West” of TPLF now existing. As the horses have already bolted, our courts, legislature, counsel, and litigants are now faced with the task of returning them to the stable.
While TPLF impacts all sectors of litigation, this Comment is focused on consumer litigation finance in the personal injury sector,1 and particularly in New York.
The Problem of Third-Party Litigation Funding
TPLF agreements take many forms. However, in a common TPLF agreement, the funding entity or company makes a cash advance to the plaintiff on a non-recourse basis for the purpose of prosecuting the action, paying for interim medical treatment, or sustaining a disabled plaintiff until he obtains compensation. In exchange, the funder receives a portion of the plaintiff’s eventual award. So far, so good.
As the TPLF market has grown, however, the practice has advanced from merely financing litigation to influencing it, typically by hampering settlement. Plaintiffs saddled by burdensome funding agreements (often accruing eye-popping sums of interest over years of litigation) seek greater recoveries to satisfy their obligation to the funder without exhausting their own compensation2. Over the life of a case, the high fees and interest rates charged by lenders can “significantly cut into [a plaintiff’s] recovery amount,” and a plaintiff may be forced to reject a fair settlement offer to “seek extra money to make up the amount that has to be repaid” (GAO at p. 20).
The high interest rates may also incentivize a plaintiff to reach a premature and inequitable agreement, simply to stymie the growing mountain of interest. And as interest piles up, a plaintiff’s negotiation posture becomes more obstinate. What a plaintiff might accept in the early stages of a case quickly becomes unpalatable as plaintiff’s obligation to the litigation funder dwarfs his or her recovery. This outcome is virtually unavoidable, however, as a defendant typically must wait to obtain sufficient discovery on liability and damages before valuing a case and making a settlement offer. The unwillingness of some courts to order the production of TPLF information in discovery has exacerbated this problem, as defendants are seldom privy to the existence or terms of these agreements and, consequently, cannot accurately value their cases. Hence, cases that should settle go to trial. And once at trial, plaintiff counsel must generate outsized verdicts to secure adequate compensation for their clients while satisfying the funder’s claim. Indeed, the undeniable correlation between TPLF’s rapid growth and the meteoric rise of nuclear verdicts in the last decade is not coincidental.
The result of this confluence of perverse incentives is less settlement, more litigation, more frequent and astronomical nuclear verdicts, and, paradoxically, more meager recoveries for plaintiffs – because the funders have extracted the value from their cases via excessive interest. As with all abuses of the legal process, the benefits are concentrated among the special interests – here, the litigation funders, plaintiff attorneys and, yes, defense attorneys who handle the protracted litigation created by TPLF agreements. In some cases, TPLF enables fraudulent or frivolous lawsuits. The costs, meanwhile, are borne directly by defendants and their insurers, as well as all courts and litigants in the form of greater litigation delays and inefficiencies, and by all New Yorkers in the form of higher prices and insurance premiums. In many cases, costs are also borne by the injured plaintiffs themselves who recover a fraction of the settlement they could have received earlier. Make no mistake, funding companies’ profits derive from, and increase exponentially with, time (delay).
As TPLF is doubtless a matter of grave public concern, New York’s legislature has begun to examine the issue. (Of course, examine is a generous phrase as the Senate proposed legislation in every cycle since 2017 but the corresponding Assembly bill has never made it out of committee). This is, of course, troublesome where the true extent of the problem has been largely obscured by the utter lack of transparency or data; in other words, public concern is high even despite an ability to discern the mere tip of the iceberg.3 Notwithstanding this, even the bill stalling in committee is one that focuses primarily on greater disclosure of litigation funding terms to plaintiffs. As we demonstrate below, however, this is a solution in search of a problem; it will do nothing to alleviate the delays, costs, and inequities that TPLF currently imposes on New York and its civil court system. But first, a brief explanation of the status quo and some surrounding context.
Why TPLF Has Gone Unchecked in New York
Many litigation funding agreements are “contingent,” meaning the plaintiff must repay the lender only if he recovers money damages. The First Department interpreted the language of one such TPLF agreement as an “investment,” rather than a loan, and, by making this distinction removed it from the ambit of New York’s usury laws4. See Cash4Cases, Inc. v. Brunetti, 167 A.D.3d 448, 449 (1st Dep’t 2018) (holding that a TPLF agreement involving a $76,930 sum accruing annual interest of 45.93% was not a loan “because the repayment of principal is entirely contingent on the success of the underlying lawsuit.”).
Armed with this sole fact-specific precedent, litigation funding companies have indefatigably maintained that the debate is over and that the law gives them carte blanche to advance funds at compounding annual rates of interest as high as 100%. In response, the New York defense bar has largely capitulated, accepting TPLF as a nettlesome but inevitable fact of litigation.
This defeatism is uncalled for. Neither the Court of Appeals nor the remaining Departments of the Appellate Division have weighed in, leaving the issue ripe for further litigation in the majority of New York State.5
Aside from this, Cash4Cases is not, as the TPLF lobby claims, a blank check. Unlike most claims with TPLF agreements, the issues of liability and damages in Cash4Cases were hotly disputed and involved significant lender risk. As the decision makes plain, contingency is what purportedly distinguished the specific TPLF agreement before the court in that case from a loan. Where a TPLF agreement lacks contingency, it is a loan subject to New York’s usury laws6. See Echeverria v. Est. of Lindner, 7 Misc. 3d 1019(A) (N.Y. Sup. Ct. Nassau Cnty. 2005) (holding that TPLF agreement was not a contingency but a loan subject to vitiation under New York’s usury laws because the strict liability imposed on the defendant by Labor Law § 240(1) made the plaintiff’s recovery a “sure thing”); Case Cash Funding, LLC v. Gilberg, 55 Misc. 3d 144(A) (App. Term. 2d Dep’t 2017) (denying plaintiff’s motion for summary judgment in lieu of complaint and rejecting Case Cash principal Greg Elefterakis’ affirmation in support that characterized the loan as “non-recourse” because it was “ambiguous as to whether the loan is a nonrecourse loan, since, as Elefterakis remarked in his moving affidavit, it includes a statement that, in the event that the recovery from the Lawsuit is inadequate to cover the loan, defendant will be responsible for such payment: a statement indicative that the loan may have been a recourse loan, despite contrary statements which are also included in the Agreement.”).
No New York decision has rejected the reasoning in either Echeverria or Case Cash and, in fact, each comports with the contingency distinction created in Cash4Cases. See Fast Trak Investment Company, LLC v. Sax, 962 F.3d 455, 466 (9th Cir. 2020) (“no New York appellate or high court has addressed a defense of usury in cases involving litigation financing agreements where, similar to those here, the purported lender’s risk of non-payment is arguably miniscule.”).
Thus, where a plaintiff obtains TPLF after the imposition of strict and absolute liability on the defendant, both Cash4Cases and Echeverria instruct that the agreement should be analyzed as a standard loan agreement. The reasoning of Echeverria can be extrapolated to cases in which a defendant’s liability is, by law, automatic or near automatic, such as rear-end collision cases or Labor Law § 240(1) cases involving falls from ladders or scaffold collapses, or pedestrian knockdown cross-walk cases involving the light in the pedestrian’s favor. Put simply, the more likely a plaintiff’s liability victory, the more likely his or her TPLF agreement will violate New York’s usury prohibitions.7 This can be one tool in the arsenals of defense counsel seeking pertinent TPLF information to solicit judicial intervention in cases where a usurious funding agreement impairs fair and timely resolution of the action.
A second tool is an issue strangely not raised or briefed in Cash4Cases, but one later observed by the Fast Trak Court in certifying these unanswered questions of law to the New York Court of Appeals: “we are bound by New York law to analyze the transaction and determine its ‘real character.’ If the transaction’s character is in fact the lending of money at a usurious rate, a defense of usury may be sustained even if the transaction fails to meet the legal requirements of a ‘loan’ under section 5-501.” Supra at 467, citing Meaker v. Fiero, 145 N.Y. 165, 169 (1895); see also Adar Bays, LLC, 37 N.Y.3d at 334 (“When determining whether a transaction is a loan, substance—not form—controls. Several factors help distinguish loans from equity purchases and joint ventures, which are not subject to the usury laws.”).
A third and related issue is the doctrine of unconscionability,8 which has been described as “primarily a means with which to protect the ‘commercially illiterate consumer beguiled into a grossly unfair bargain by a deceptive vendor or finance company’”. Gillman v. Chase Manhattan Bank, 135 A.D.2d 488, 491 (2d Dep’t 1987), quoting Equitable Lbr. Corp. v. IPA Land Dev. Corp., 38 N.Y.2d 516, 523 (1976); see New York’s Uniform Commercial Code (UCC) § 2-302.9
These potential issues should be more than sufficient to trigger a defendant’s entitlement to disclosure of the TPLF agreements.
The Discoverability Problem: A Path Forward
The root of the TPLF problem is the judiciary’s unwillingness to compel disclosure of TPLF information. New York courts have largely rejected defendants’ efforts to do so in personal injury actions on the basis that it is not “material and necessary” to their defense. Fortunately, this obstructionism has come from the state’s lower courts.10 There is thus ample opportunity to create favorable law in the Appellate Division and, ultimately, the Court of Appeals, especially given the infirmities in the prevailing lower court view.
The mechanical application of the materiality doctrine is both misguided and anomalous. New York courts and litigants well recognize, for instance, that a defendant’s insurance coverage information, while inadmissible at trial, is vital to a plaintiff’s litigation course and facilitates settlement. See CPLR 3101(f). Indeed, “[t]he primary motivation for this kind of disclosure provision is to facilitate and encourage settlement.” Krogh v. K-Mart Corp., 108 A.D.2d 966, 967 (3d Dep’t 1985); Spotlight Co. v. Imperial Equities Co., 107 Misc.2d 124, 126 (App. Term, 1st Dep’t 1981) (noting that the purpose behind section 3101(f) “was to accelerate settlement of claims by affording the plaintiff knowledge of the limits of defendant’s liability policy”). There can be no real dispute that the purpose of such disclosure is to encourage settlement and is not aimed at developing evidence to be presented at trial. Indeed, “[e]vidence that a defendant carries liability insurance is generally inadmissible due to its potential for prejudice, as a jury’s awareness of insurance coverage might make it easier for it to render an adverse verdict against the defendant.” Gbadehan v. Williams, 207 A.D.3d 418, 419 (1st Dep’t 2022), citing Salm v. Moses, 13 N.Y.3d 816, 817-18 (2009) (emphasis added). This comports with the principle that “settlement of disputes through negotiation and compromise is a venerable and important public policy.” Academy St. Assoc. v Spitzer, 50 A.D.3d 271, 277 (1st Dep’t 2008), citing White v. Old Dominion S.S. Co., 102 N.Y. 660, 662 (1886) and Mitchell v. New York Hosp., 61 N.Y.2d 208, 214 (1984).
The same is true for pre-trial discovery of collateral source information such as Social Security Disability and Survivor Benefits, pension information, no-fault insurance files, and lien information such as Workers’ Compensation benefits. See, e.g., Graziano v. Cagan, 105 A.D.3d 701, 702 (2d Dep’t 2013); Firmes v. Chase Manhattan Automotive Fin. Corp., 50 A.D.3d 18, 36 (2d Dep’t 2008); Fleming v. Bernauer, 138 Misc. 2d 267 (Sup. Ct. 1987); Eaton v. Chahal, 146 Misc. 2d 977 (Sup. Ct. 1990). Even though not admissible at trial, these forms of pre-trial discovery are permitted as an ultimate valuation aid in furtherance of New York’s strong public policy favoring settlement. 11 It would be absurd to foreclose discovery of these materials until after trial.
Confoundingly, the judicial preference for liberal discovery vanishes when it comes to TPLF information. This double standard by which TPLF companies, despite holding a direct and expanding stake in plaintiffs’ recoveries, are immune from discovery not only undermines settlement and judicial economy but conflicts with other well-accepted discovery practices undertaken in furtherance of these policy goals. Just as a defendant’s liability insurer is an interested non-party whose identity and coverage information are discoverable, TPLF companies hold a direct financial interest in the outcome of the litigation that should subject them to discovery. Moreover, because their stakes accrue interest and, consequently, are ever increasing, the funding companies’ influence over the litigation, specifically their veto power over settlement, mounts as the case proceeds.12 In other words, the more protracted the litigation, the more critical is the production of TPLF information. It follows that a defendant should be entitled to this information so that it can accurately forecast how the plaintiff’s swelling obligation will impact the parties’ litigation course and ability to reach a settlement. The salutary effects of this reform would be immediate and momentous.
The first step to obtaining discovery of TPLF agreements is educating the courts. Defense counsel should draw the foregoing analogy to insurance, collateral source, and lien information and point out that TPLF information parallels this discovery, would be equally conducive to facilitating settlement, and informs a defendant’s litigation course. All the policy aims undergirding mandatory insurance disclosure apply with greater force to TPLF. Moreover, a good-faith basis already exists for seeking this discovery. New York’s Uniform Commercial Code (UCC) requires TPLF companies to register their agreements with the New York Department of State. These publicly-available UCC filings contain the name and address of the plaintiff and the funding company, thereby providing grounds for discovery of material TPLF information, including the amount of loan, the agreement’s terms (e.g., the interest rate and the funder’s contractual authority over settlement) and the funding company’s personnel.
Next, relying on the above TPLF precedent (Cash4Cases and Echeverria and Fast Trak) and UCC § 2-302, defense counsel should argue that TPLF agreements executed after liability has been determined against the defendant (or where the risk of non-recovery is miniscule) are not contingencies but loans subject to New York’s usury statutes and the unconscionability strictures of the UCC. Accordingly, the defendant and the court are entitled to know whether the plaintiff has entered an unenforceable and potentially criminal TPLF agreement that will frustrate counsel’s good-faith efforts to reach an equitable settlement.13 Even where a plaintiff has secured funding before the liability determination, discovery is still necessary to ensure that the agreement is, in fact, contingent and, therefore, compliant with New York’s anti-usury statutes. See Case Cash Funding, LLC v. Gilberg, supra. Such information also bears directly on whether plaintiff’s counsel has discharged his ethical obligation “to not counsel a client to engage, or assist a client, in conduct that the lawyer knows is illegal or fraudulent.” NY Rules of Professional Conduct 1.2(d). Defense counsel should also point to the pending legislative effort to regulate TPLF as evidence that the practice is a significant public policy concern requiring judicial redress.
The second step in combatting the pernicious effects of TPLF is to bring the funders out of the shadows and into the courtroom. As personal injury trial advocates can attest, judges frequently demand that a representative from the defendant’s insurer attend settlement conferences. The reason for this is obvious: the insurer controls the settlement offer. Why, then, should a court omit and guarantee the anonymity of the party controlling the settlement demand? A litigation funder holding a compounding-interest claim against plaintiff’s recovery and with the authority to waive14 a portion or all of said interest obligation exerts considerable, if not total, control over the plaintiff’s settlement position. It would be unthinkable to prohibit a plaintiff’s attorney from communicating with a defendant’s insurer, yet this is the predicament with which defendants are faced vis-à-vis TPLF firms. Such secrecy conflicts with CPLR 3409, which authorizes courts in medical, dental and podiatric malpractice actions to “order parties, representatives of parties, representatives of insurance carriers or persons having an interest in any settlement to also attend in person or telephonically at the settlement conference.” (emphasis added); see also 22 NYCRR 202.56(c)(3). A similar requirement often applies in general liability cases, pursuant to a court’s local rules or a judge’s Individual part rules.15 Secrecy renders these directives toothless. The only way to ascertain whether plaintiff has exclusive control over his claim is through disclosure of the litigation funding agreement. That the agreement, or some portion of it, might be privileged, is not a categorical bar to disclosure. See Priest v. Hennesy, 51 N.Y.2d 62 (1980) (holding that “even where the technical requirements of the [attorney-client] privilege are satisfied, it may, nonetheless, yield in a proper case, where strong public policy requires disclosure.”).
New York’s trial courts should exercise this authority. Directing litigation funders to appear for court-ordered settlement conferences would enable judges to exert the same salutary pressures on them that they do on the litigants. It would also allow defense counsel to negotiate directly with all adverse stakeholders. More broadly, involving litigation funders in court conferences would go a long way in eliminating the anachronistic and cartoonish perception of defendants as greedy corporate behemoths bent on depriving hapless plaintiffs of their just due. The defense bar should impress upon the judiciary that our adversaries are not injured construction workers and pedestrians, but hedge funds and other well-capitalized financial firms with robust portfolios of high-yielding funding agreements – hardly the David-versus-Goliath narrative that the plaintiff bar has successfully woven over the last half century.16
TPLF Parasitism and Fraud in New York Civil Cases
To advance these arguments, we recommend that defense counsel refer to the following cases as instructive examples of the real-world havoc wrought by TPLF. Many additional examples will be posted to a repository on our firm’s website in the coming weeks and months, and as more are provided to us by colleagues and readers of this Note (something we strongly encourage).
In 2017, after the City of New York settled a lengthy dispute with personal injury plaintiff Theresa Guss, it was dragooned into further litigation over the distribution of the settlement funds in Airmont Associates, LLC v. Guss.17 The City had settled the case for $2.1 million, which, following attorneys’ fees and Medicare and Medicaid dedications, should have left Ms. Guss with $1,094,000. Emphasis on should have – Ms. Guss never saw a penny. She had taken out two TPLF loans (1) a 2006 loan from PIF Portfolio Acquisition LLC for $2,750.00, and (2) a 2007 loan from Law Bucks LLC of $11,186.00 with two further advances totaling $5,630.00. These loans – a total principal of $19,566.00, grew at obscene rates such that each individually swamped Ms. Guss’s $1,094,000 recovery. The $2,750.00 loan grew at a 79.38% annual rate, and was already $1,141,000 by 2016, let alone the March 2017 settlement date. The Law Bucks loans increased at an even more grotesque 98.95% annually – and had grown to $1,162,000 by April 2014, and therefore would have been over $5 million in early 2017. (These outsized annual rates were blandly described as 4.99% monthly and 5.9% monthly rates – but did not mean, as in common parlance, annual rates of that amount that merely compound monthly.) Ms. Guss died in 2018 with no funds distributed; the City of New York did not escape the purgatory of additional litigation until August of 2023 (six years after having purportedly bought its peace by settlement).18
Regrettably, Ms. Guss’ example is not an outlier. Case Cash Funding LLC v. Puryear, Index No. 5069911/2013, Affidavit In Support of Motion for Summary Judgment In Lieu of Complaint, NYSCEF Doc. No. 5 (Sup. Ct. Kings Cnty. Jan. 1. 2014) (affidavit of principal Greg Elefterakis seeking payment of about $268,000 for a funding of $160,000 provided 15 months prior plus over $80,000 in attorney’s fees); Sacco & Fillas LLP v. Tantao, Index No. 23806/2020E (Sup. Ct. Bronx Cnty Oct. 2, 2020) (in decision on priority of liens of respondent’s $100,000 settlement, addressing Case Cash’ $6,350 loan which ballooned to $83,810 but denying relief based on Case Cash’s default); Prime Case Funding LLC v. Farrugia, Index No. 656718/2022, Complaint, NYSCEF Doc. No. 2 (Sup. Ct. New York Cnty. June 9. 2022) (alleging that 2015 loans of $44,375 grew to be over the $446,000 recovered in settlement by June 2022); Ilkhomov v. 133 Greenwich Street Associates LLC, Kings County Sup. Ct. Index No. 508494/2015 (Kings Co. 2021) (plaintiff received a series of loans from Green Legal Funding between June 2016 to August 2017 amounting to $80,850 and from Lawcash between September 2019 and August 2020 totaling $109,614. When plaintiff eventually settled for $825,000, which, after attorneys’ fees, left him with $550,275, the liens from the initial $190,000 TPLF agreements totaled $536,000, which consumed nearly plaintiff’s entire recovery. The TPLF companies eventually accepted a reduced payoff amount that left plaintiff with an approximately $105,000 recovery from his $825,000 settlement, but only after extensive motion practice and court intervention to address the validity of the liens.).19
The lesson of these cases is that TPLF agreements not only erode plaintiffs’ recoveries but do so at the expense of New York’s civil litigants and court system. More frustrating is that this colossal waste of time and judicial and party resources is avoidable through assiduous and timely disclosure of TPLF agreements and early and mandatory involvement of the TPLF companies in the underlying litigation. This should be a proverbial “no-brainer” where the enemy of our court system is delay, but the TPLFs’ leverage and profits increase exponentially with greater delay.
Worse, there is a glaring pattern of TPLF companies financing fraudulent personal injury actions and participating in illicit kickback and referral schemes. Recently, New York City litigation funder Adrian Alexander was sentenced to three years in prison for his role in financing a $31- million-dollar fraud scheme based on staged trip-and-fall accidents20. His co-conspirators were, among others, an attorney who recruited homeless plaintiffs to fake the accidents and a physician who performed surgeries on them to increase the value of the case. Alexander operated an MRI facility that provided unnecessary tests to the plaintiffs and made “incentive” payments to those who agreed to surgery. He also paid co-conspirator attorneys referral fees for inducing the plaintiffs to sign litigation funding agreements. His companies extended medical funding at rates of up to 50% and personal funding at rates as high as 100%.
But this case is not unique21. Only a year earlier, a Michigan “medical funder” was ordered by the federal court for the Eastern District of New York to pay $1.3 million in fines and restitution for his role in convincing women to undergo unnecessary surgeries to remove transvaginal mesh implants as a pretext to pursue civil claims against the implant manufacturers22. In exchange for funding the plaintiffs’ medical care, the funder, Wesley Barber, received a portion of the eventual recoveries. He also made referrals to collaborating surgeons in exchange for kickbacks. Florida surgeon Christopher Walker was convicted for paying such kickbacks to Barber and was likewise ordered to pay $866,000 in fines and restitution. Both men avoided prison terms.23
While these cases are notable for both the scale and turpitude of the frauds, they provide an additional insight into the sordid relationship that often exists between litigation funders and medical providers. It is well known that a cottage industry of paid medical experts has grown up around personal injury litigation and, with it, a grave moral hazard whereby “hired gun” physicians are incentivized to provide treatment and perform surgeries with the understanding that they will then testify in support of plaintiffs at trial in exchange for repeat referrals and retentions by plaintiff attorneys. TPLF – specifically, medical funding – adds another layer of moral hazard to this equation by providing immediate cash payments to these physicians while litigation is still underway. Moreover, because litigation funding companies owe no ethical or fiduciary duty to the plaintiffs, they are far more likely to refer them to providers that will administer medical care with the aim of maximizing the funders’ recoveries (and, hence, the physicians’ kickbacks) rather than to physicians who will faithfully discharge their Hippocratic duties. The above cases confirm that this perverse incentive structure is not theoretical. TPLF companies have seized on a pre-existing network of attorneys and physicians working hand in glove to generate excessive personal injury awards and have introduced a calamitous element of corruption and fraud into this alliant industry. As discussed, legislative attempts to stop these kickbacks and screen out the bad actors in the unregulated TPLF space have stalled for the last six years.
It is incumbent on defense counsel to call courts’ attention to the startling rash of delays and frauds occasioned by undiscovered TPLF. These examples should provide another basis for discovery of TPLF information, as well as inquiry by defense counsel on cross-examination into the relationships between a plaintiff’s physicians and/or medical experts and TPLF companies.
TPLF Spawns Conflicts of Interest and Usurps Plaintiffs’ Settlement Authority
Liberal discovery of TPLF information would have the additional benefit of permitting courts to review the myriad forms of TPLF agreements and ensure that no conflict exists between plaintiff’s counsel and the funder. It is an open secret that there is, in too many cases, an incestuous relationship between TPLF companies and plaintiff counsel. This is a radical shift from only two decades ago when plaintiff attorneys would routinely bemoan the rare occasions on which their clients entered into such agreements and smacks of an extremely lucrative “can’t- beat-‘em-join-‘em” solution to this predicament.
A few examples of why transparency must be mandatory should suffice for present purposes. The decision in S.D. v. St. Luke’s Cornwall Hosp., 63 Misc 3d 384, 409 (Sup.Ct., Orange Co. 2019) arose out of a brain-damaged infant medical malpractice litigation brought by a prominent Bronx plaintiff firm that resulted in pre-trial and mid-trial settlements with various defendants. During the course of several submissions in connection with the infant compromise order, the court complained regarding the plaintiff’s counsel’s “lack of transparency” in failing to “reveal significant information”; “Indeed, it was not until counsel made his third submission and appeared before the court for a hearing that the court was able to piece together a complete picture of the amount of legitimate disbursements sought.” Id. The court ultimately discovered the existence of an improper funding agreement and – even worse, plaintiff’s counsel’s relationship with the TPLF company owned by his brother. The court voided the funding agreement pursuant to its “inherent authority to approve or disapprove disbursements and fees in infant compromise cases”,24 and held: “The court is concerned about the ethical issues created by plaintiff’s counsel’s referral of clients to a funding company owned by his brother, also a lawyer, without revealing that relationship. Moreover, even when that relationship is revealed, the court maintains a healthy skepticism concerning the propriety of the referral.” Id.
Similarly, in the matter of In re Cellino, 21 A.D.3d 229, 230 (4th Dep’t 2005), the two principals of a prominent Buffalo plaintiff firm were each sanctioned for first extending loans to their personal injury client through a company that they owned in violation of DR 5-103(b) (prohibiting a lawyer from advancing or guaranteeing financial assistance to a client beyond the expenses of litigation) and further sanctioned because they subsequently also “arranged for the establishment of, funded and controlled the company owned by [one of the principal’s] cousin and that they did so in order to continue loaning money to clients”, which constituted a circumvention of DR 5-130(b) and thus a violation of DR 1-102(a)(2) (circumventing a disciplinary rule through actions of another). The Court concluded that the conduct of these plaintiff attorneys also violated DR 1-102(a)(5) (engaging in conduct prejudicial to administration of justice), DR 1-102(a)(7) (engaging in conduct that adversely reflects on fitness as lawyers), DR 5-101(a) (accepting or continuing employment if exercise of professional judgment may be affected by their own financial interests), DR 5-104(a) (entering into business transaction with client if they have differing interests therein and if client expects them to exercise professional judgment therein for protection of client without disclosing terms of the transaction to client in writing and obtaining consent of client to those terms and to their inherent conflict of interest in the transaction), and DR 1-102 (engaging in conduct involving dishonesty, fraud, deceit or misrepresentation).
The foregoing cases provide ample justification for transparency and disclosure of TPLF.25 The ongoing opacity of TPLF makes a mockery of these ethical rules.
Another example of the need for transparency arose, of all places, from a trade secrets litigation in the Eastern District of New York between two competing “third-party” litigation service companies, “IME Watchdog” and “IME Companions”. These companies hold themselves out as objective third parties who accompany individual plaintiffs to personal injury IMEs (“independent medical examinations”) to serve as note takers and potential disinterested witnesses to the defendant’s retained doctor’s medical examination of the plaintiff so they can provide countervailing testimony to the doctor’s account of the examination. As the District Court’s decision reveals, IME Companions was financed and owned in part by several principals of a litigation funding company called Case Cash Funding, including Greg Elefterakis,26 a former attorney27 and the uncle of the principals of a prominent Manhattan plaintiff firm. See Case Cash Funding, LLC v. Gilberg, 55 Misc. 3d 144(A) (N.Y. App. Term. 2017) (confirming his status as principal); IME Watchdog, Inc. v. Gelardi, 2022 WL 1525486 (E.D.N.Y. 2022) (confirming Elefterakis’ status as principal of “IME Companions” along with his two business partners and principals from Case Cash – Roman Pollak and Anthony Bridda – and establishing that his nephews’ firm was IME Companions’ first client). Such family or other entanglements raise potential conflicts of interest requiring, at minimum, disclosure and judicial review of TPLF given the “healthy skepticism” with which New York courts view them.28
The current state of anonymity regarding TPLF agreements prevents the courts from “fulfill[ing] their statutory obligations to check for conflicts of interest.” Publicola v. Lomenzo, 54 F.4th 108, 112 (2d Cir. 2022) (citing 28 U.S.C. §§144, 455). Disclosure would reveal whether plaintiff’s counsel is involved in the TPLF transaction or has any interest in (or relationship with) the TPLF company, which would allow the court to determine whether this involvement breaches applicable professional conduct rules (NYC Bar Report 2020 at 21).29 See, e.g., S.D. v. St. Luke’s Cornwall Hosp., supra; In re Cellino, supra.
This reasoning also applies to defense counsel and the judiciary. As mentioned, the TPLF market is rapidly expanding and comprises sophisticated financial firms, many of which operate in a host of credit markets beyond litigation funding. As this growth continues, it is inevitable that conflicts will arise between attorneys on both sides, judges, and the firms advancing litigation funding to plaintiffs, requiring prompt disclosure to avoid ethical breaches. This, of course, should be no more controversial than a judge’s disclosure of a familial relationship to a defendant or his ownership of stock in a defendant corporation. One can well imagine the parade of horribles that would ensue if such conflicts went undisclosed, yet this is exactly what the judiciary invites by refusing to order production of TPLF information.
Indeed, disclosure is essential to avoid even the mere appearance of impropriety. Plaintiff attorneys holding no interest in TPLF entities will, of course, welcome disclosure and transparency, as well as the invalidation of predatory or extortionate agreements impairing their client’s (or their own) recoveries. Conversely, those plaintiff attorneys with an improper interest or relationship can be fully expected to offer shrill and indignant resistance to disclosure and transparency that is commensurate with their degree of improper interest. Again, insurance carriers provide a useful comparison. It is well-settled that once an insurance company assumes control over the defense of a suit, “it has a duty under New York law to act in ‘good faith’ when deciding whether to settle such a claim, and it may be held liable for breach of that duty.” Pinto v. Allstate Ins. Co., 221 F.3d 394, 398 (2d Cir. 2000). Additionally, when conflicts of interest become apparent, “the insurer’s desire to control the defense must yield to its obligations to defend the insured.” Penn Aluminum, Inc. v. Aetna Cas. & Sur. Co., 61 A.D.2d 1119, 1120 (4th Dep’t 1978). Importantly, “[t]he duty of ‘good faith’ settlement is an implied obligation derived from the insurance contract.” Pavia v State Farm Mut. Auto. Ins. Co., 82 N.Y.2d 445, 452 (1993). Whether a TPLF entity owes such a duty to the plaintiff can only be ascertained through disclosure of the funding agreement. This would allow courts to determine whether the plaintiff’s interests are protected and would also ensure that settlement negotiations are not simply an exercise in maximizing the TPLF’s potential profits at the expense of the plaintiff’s right to compensation.
This is an especially vital consideration given the frequency with which TPLF agreements take settlement authority out of plaintiff’s hands. Many funding agreements require “the [funder]’s consent when taking steps to pursue or resolve the lawsuit, such as making or responding to settlement offers.” (NYC BAR FORMAL OPINION 2011 – 2 at 7).30 The funder, “to protect its own interest in maximizing the fee it may earn…[may object] to accepting a settlement offer that does not meet the company’s expectations regarding the return on its investment.” Id.31 Permitting the litigation funder to control any aspect of settlement, without informing the court and all other interested parties violates the hoary axiom that a defendant has the right to know the identity of the true adversary. See Senft v. Manhattan R. R. Co., 24 Abb. N. Cas. 64, 68 (Superior Court of New York, General Term, 1889) (“A defendant also has a right to know who is the real party in interest”).
In recognition of these effects, one federal court overseeing the settlement of a mass products liability suit in the Northern District of Florida recently went so far as to not only require disclosure of existing TPLF agreements, but to prohibit further such agreements without prior court approval.32 Judge M. Casey Rodgers opined that “it is important that CAE Claimants are not exploited by predatory lending practices, such as interest rates well above market rates, which can interfere with their ability to objectively evaluate the fairness of their settlement options.”33 Notably, Judge Rodgers emphasized that federal courts are often able to review TPLF agreements, highlighting the importance of disclosure in guarding against the “predatory” TPLF practices she identified above:
Despite the absence of a disclosure requirement in the Federal Rules of Civil Procedure, federal judges can and do still obtain information about third-party litigation funding arrangements in cases filed in their courts. For example, the Advisory Committee on Civil Rules has observed that judges can obtain information about third-party funding when it is relevant in a particular case. Additionally, some federal courts have formalized a requirement that litigants disclose information about their third-party litigation funding arrangements. See
U.S.D.C. D.N.J. Local Civ. Rule 7.1.1, Disclosure of Third-Party Litigation Funding; U.S.D.C. N.D. Cal., Standing Order for all Judges of the Northern District of California on the Contents of Joint Case Management System, § 19 (eff. Nov. 1, 2018).
For these reasons, the migration towards routine civil discovery of TPLF information is already well underway at both the federal and state level. New York courts should follow suit for all of the cogent reasons articulated above. Failing to do so may invite further legislative intervention and inaugurate draconian reforms that threaten to sharply curtail or stamp out the practice altogether.
What Will Happen If Courts Do Not Act
We need not speculate about what awaits the TPLF market should New York courts remain inert. Numerous states have vociferously cracked down on the practice in legislative campaigns that will serve as models for likeminded New York legislators if judicial relief is not forthcoming. Montana, for instance, recently enacted a new law requiring TPLF companies to register with the Secretary of State, prohibiting usury fees, limiting the funders’ share of a plaintiff’s recovery, and requiring full disclosure of agreement terms. The law also imposes a continuing obligation on plaintiffs and their counsel to disclose TPLF agreements “without awaiting a discovery request” to the court, defendants, and their insurers. West Virginia and Wisconsin likewise mandate automatic disclosure of TPLF agreements. See W. Va. Code Ann. § 46A-6N-6 (2019); Wis. Code § 804.01(2)(bg) (2018). Maine, Nebraska, Ohio and Oklahoma also regulate the practice. Me. Rev. Stat. Ann. tit. 9-A, §§ 12-102 to 12-107; Neb. Rev. Stat. §§ 25-3301 to 25- 3309; Ohio Rev. Code Ann. § 1349.55; Okla. Stat. Ann. tit. 14-A, §§ 3-801 to 3-817). Indiana also recently required disclosure of consumer TPLF agreements (H.B. 1124 – 2023). Several states have enacted interest rate caps: in 2015, Arkansas subjected TPLF to the usury statute rate of 17% and West Virginia has capped the “annual fee” on TPLF agreements at 18% of the original amount advanced. See Ark. Code § 4-57-109; W. Va. Code Ann. § 46A-6N-6 (2019).
Quite simply, the foregoing establishes that TPLF is a significant problem requiring prompt action. We believe disclosure is preferable to legislative action, but one of the two is assuredly on its way.
Authors: The primary author of this Alert is Chris Theobalt of Kahana Feld, with assistance from his Kahana Feld colleagues and co-authors Tim Capowski, Jack Watkins, Sofya Uvaydov, and Michael Curtis, and research support from Adam Amirault in our Buffalo office.
Special Thanks: We also acknowledge the tremendous support and collaboration from all of our many friends and colleagues in the claims and litigation industry (on both sides of the aisle) and court system, with extra special thanks to Jasen Abrahamsen (LBB&S), Tanya Branch (QPWB), Jeff Van Etten (PVR&K), Randy Faust and Kristina Milone (TM), and Jeff O’Hara, Abigail Rossman, and Catherine Bryan (CF).
Initially published in the NYCIJ (https://www.nycji.org/research)
Endnotes:
1 This article does not address litigation funding of commercial claims that generally includes sophisticated corporate entities, far different financial implications, and far different standards of review and oversight.
2 U.S. Gov’t Accountability Office, GAO-23-105210, Third-Party Litigation Financing: Market Characteristics, Data and Trends, 1 Dec. 2022 at 11, 18 (Available online at https://www.gao.gov/assets/gao-23-105210.pdf) (finding that that TPLF agreements “may create incentives for parties not to reach settlement” and observing that the TPLF market doubled between 2017 and 2021).
3 The draft proposed legislation tacitly recognizes this concerning data shortfall by virtue of its annual reporting requirements to be imposed on TPLFs. See https://www.nysenate.gov/node/8377070 (§ 899-LLL).
4 New York courts have also refused to prohibit TPLF as champerty, which requires the champertous party to have purchased the right to bring the lawsuit from the original plaintiff. Under a number of TPLF agreements we have reviewed, the plaintiff retains the right to recover and remains the steward of the litigation, at least nominally. Depending on the specific language of the TPLF agreement, however, this is yet another concern warranting full
transparency and disclosure. See Case Cash Funding, LLC v. Gilberg, 55 Misc. 3d 144(A) (App. Term. 2d Dep’t 2017).
5 For illustration, it was widely accepted in New York federal courts that loans with stock conversion options at significant discount rates did not constitute usury because the conversion option was “too uncertain at time of contracting.” When the question was eventually certified to the New York Court of Appeals, the high court did not agree. See Adar Bays, LLC v. GeneSYS ID, Inc., 37 N.Y.3d 320 (2021).
6 It bears noting that New York’s statutory prohibitions on usury contain generous carveouts that exempt many law loans from their strictures. Loans exceeding $250,000 are exempt from the ban on civil usury (defined as an annual interest rate exceeding 16 percent) and loans greater than $2.5 million are beyond the scope of the criminal usury ban (applying to annual rates over 25 percent). Likewise, in 2004, the legislature amended New York’s champerty statute to remove any purchase of $500,000 or more from the statute’s scope. This makes sense if one assumes, as the legislature likely did, that multi-million-dollar loans are typically executed between sophisticated commercial entities with comparable bargaining power. But in the TPLF context, this carveout creates a perverse outcome: plaintiffs who require greater funds, which are typically those plaintiffs with significant medical and financial burdens, often unable to work, are at the mercy of the lending companies. In other words, those least able to bear the financial burden of usurious TPLF agreements are most exposed to them under the current law.
7 The TPLF lobby simply demands that legislators and the public take it on faith that predatory rates are necessary because of the high risk of their loans, despite that a vast majority appear to be low- or minimal-risk propositions and have been thoroughly vetted to ensure this.
8 While this issue was nominally raised in Cash4Cases, its resolution can be safely limited to the specific facts of that particular transaction and the language of that particular agreement.
9 “§ 2-302. Unconscionable Contract or Clause (1) If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.”
10 The only instance addressed at the appellate level is significantly distinguishable; it involved a commercial dispute where a litigant sought discovery relating to funding provided by a key witness in the case on the basis that it reflected on her and his other adversaries’ testifying witnesses’ credibility. See Worldview Ent. Holdings, Inc. v. Woodrow, 204 A.D.3d 629, 630 (1st Dep’t 2022) (affirming denial of litigant’s motion to compel where it failed to explain “how discovery about litigation financing and witness payments would support or undermine any particular claim or defense.”).
11 The same obtains for discovery of even confidential settlement agreements that may potentially impact the subsequent trial and are therefore within the broad ambit of “material and necessary”. See Mahoney v. Turner Construction Co., 61 A.D.3d 101 (1st Dep’t 2009) (citing cases).
12 By “veto power”, we do not confine our definition to the literal ability to turn down a settlement offer as many TPLF agreements expressly provide that they have no control over a plaintiff’s ability to settle. Rather, we also include indirect veto power by agreeing or refusing to agree to a lower payback amount or reduced interest when such interest is significant. For all practical purposes, the power is functionally equivalent.
13 These measures will inure to the benefit of the plaintiff and – assuming they are uninvolved in the funding transaction – the plaintiff’s counsel who is otherwise placed in an untenable negotiation position by the bloated and increasing funding obligation.
14 Some plaintiff counsel have attempted to downplay the deleterious impacts of TPLF agreements on settlement by insisting that their mammoth interest components are waivable and, thus, illusory. If true, this only confirms the well-founded suspicion that there exists a conflict-ridden wink-and-a-nod relationship between plaintiff counsel and TPLFs requiring urgent judicial scrutiny and that the written TPLF agreements are parchment facades masking this unethical alliance.
15 For example, in New York County, Judge John J. Kelly’s part rules provide that the Court “may require representatives of insurance carriers, or other persons having an interest in any settlement to appear in Court” for trial. (https://www.nycourts.gov/legacypdfs/courts/1jd/supctmanh/Rules/part56-rules.pdf) (emphasis added).
16 Yet additional bases for demanding and receiving such discovery is to rebut the improper but ubiquitous David- versus-Goliath trope utilized by too many plaintiff counsel during questioning or summation, or to rebut the assertion that plaintiff’s lack of treatment was due to lack of funds. While these tropes should never be permitted in the first instance, the demand for TPLF discovery (if opposed and denied) should provide additional ammunition for a defendant seeking relief whenever these improper tropes are resorted to.
17 All factual information for the following two paragraphs is derived from the electronic docket of (1) Airmont Associates, LLC v. Guss, New York County Supreme Court, Index No. 654858/2017, including Affirmation in Support of Motion for Summary Judgment In Lieu of Complaint, NYSCEF Doc. No. 3; and (2) Law Bucks LLC v. Monaco & Monaco LLP, New York County Supreme Court, Index No. 654987/2017, including NYSCEF Doc. No. 16.
18 A 98.95% annual interest rate is, in essence, an annual doubling. This cannot help but call to mind the famous wheat-and-chessboard story – of unknown origin but first recorded in the 13th century by Ibn Khallikān. The story goes that a king’s vizier invented the game of chess, and that the king, impressed, offered him gold and silver. Instead the vizier asked to be paid a single grain of wheat for the first square of the board, two grains for the second, four grains for the third, and so on. The king agreed, thinking it a paltry amount. As the counting began, however, panic set in, and the king rapidly learned he was unable to muster the required amount. The vizier, of course, laughs off the debt, saying not all the wheat in the world could pay it. This was true – the total would be some 18.5 quintillion grains of wheat, or 18.5 with 17 zeroes following, which is more wheat than has been produced not since Ibn Khallikān’s time to the present day, but since Julius Caesar’s.
Ms. Guss’s 98.95% loan grew from just over $16,000 to over $5 million in early 2017. Today it would be worth some $640 million. By 2030 it would be worth over $40 billion. By 2040 it would be worth more than the present world GDP.
19 In late 2023, our firm consulted on a case in which the plaintiff’s attorney disclosed to the defendants that his client had obtained a principal sum of $188,653 in 2014, which had grown to $7 million, inclusive of the interest component, by the time of our involvement. This significantly exceeded the settlement value of the case and, whenever and however concluded, this case will undoubtedly provide yet another disturbing example to our ever- growing list.
20 United States v. Constantine, United States District Court for the Southern District of New York, No. 1:21-cr- 00530; Southern District of New York | New York Litigation Funder Convicted In Trip-And-Fall Fraud Scheme Sentenced To 36 Months In Prison | United States Department of Justice; N.Y. feds allege litigation funder horror story | Reuters Southern District of New York | New York Attorney And Doctor Convicted Of Defrauding New York City-Area Businesses And Their Insurance Companies Of More Than $31 Million Through Massive Trip-And-Fall Fraud Scheme | United States Department of Justice
21 Another similarly-orchestrated TPLF-financed fraud scheme appears to be coming to light in a pending New York state personal injury action. See Lezly Ortiz v. 1983 Gourmet Deli Corp., New York Co. Index No.: 154587/2020. According to one defendant’s filings in that case, the plaintiff is a member of a 12-plaintiff ring pursuing separate trip-and-fall lawsuits, all of whom are “related by blood, marriage, or romance” and reside in the same apartment unit. All plaintiffs claim in their separate actions to have sustained catastrophic soft-tissue injuries requiring significant medical treatment and invasive surgeries “provided by the same group of doctors and facilities and…most if not all were funded by high interest legal funding loans, often despite having available medical insurance.” NYSCEF Doc. No. 91 paras. 11-12 (emphasis added). Strikingly, according to this filing, the treating physicians in these cases “refused to take the plaintiffs’ health insurance and provided treatment on lien or paid through legal funding. The treatment rates charged by these physicians and facilities were well above rates that would have been charged through health insurance.” NYSCEF Doc. No. 91 para. 13. If true, this episode is the poster child for mandatory, early, and comprehensive disclosure of TPLF information in New York personal injury actions. It is difficult to imagine a starker example of the moral hazard and potential for fraud enabled by undisclosed TPLF intervention.
22 United States v. Barber, U.S. District Court for the Eastern District of New York, No. 1:19-cr-00239; https://www.reuters.com/legal/government/medical-funder-ordered-pay-13-mln-transvaginal-mesh-fraud-scheme- 2022-05-09/
23 Though beyond the scope of this writing, it scarcely bears mentioning that the jarring laxity of the punishments in these cases (a three-year prison sentence in the former and no prison time in the latter) doubtlessly contributes to the proliferation of TPLF fraud schemes and must be reformed if meaningful progress is to be made in this domain.
24 S.D. v. St Luke’s Cornwall therefor also stands for yet another basis to obtain TPLF discovery in all cases where competency or capacity is at issue.
25 See, e.g., Matter of Izzo, 155 A.D.3d 109, 111 (2d Dep’t 2017) (sanctioning plaintiff attorney for impermissibly advancing and/or guaranteeing financial assistance to a client, including an assignment of his legal fees from over 20 personal injury cases to a lender); Matter of Moran, 42 A.D.3d 272, 273 (4th Dep’t 2007) (sanctioning plaintiff attorney who “funded through intermediaries more than 200 loans to his clients”); Matter of Fitzgerald, 149 A.D.3d 267, 269 (4th Dep’t 2017) (sanctioning plaintiff attorney because “the misconduct herein [loaning personal injury clients money] involved numerous loans over an extended period of time”).
26 Case Cash Funding Teams Up With Golden Pear Investments, (Jan. 21. 2011) available at https://www.newswire.com/news/case-cash-funding-teams-up-with-golden-pear-investments-114849
27 In re Elefterakis, 238 A.D.2d 7 (2d Dep’t 1997).
28 Case Cash v. Gilberg also supplies a good-faith basis entitling defendants to standard discovery of such “entanglements” of ownership and investment interests of plaintiff firms involving such purported “objective” and “third-party” litigation IME vendors going forward, along with, at a minimum, an interested witness charge.
29 “The following Rules are relevant to the ethical framework surrounding commercial or direct-to-consumer litigation funding: Rule 1.1 – Competence; this may relate to ethical considerations for lawyers contemplating business arrangements with non-legal organizations and crowdfunding[;] Rule 1.2 – Scope of representation and allocation of authority[;] Rule 1.4 – Communication[;] Rule 1.5 – Fees and division of fees[;] Rule 1.6 – Confidentiality[;] Rule 1.7 – Conflicts of interest[;] Rule 1.8 – Duties to current clients[;] Rule 1.9 – Duties to former clients[;] Rule 1.10 – Imputation of conflicts of interest[;] Rule 1.13 – Organization as client[;] Rule 3.1 – Non-meritorious claims and contentions[;] Rule 5.4 – Professional independence of a lawyer[;] Rule 5.5 – Unauthorized practice of law[;] Rule 7.2 – Payment for referrals” Id. at 21.
30 https://www2.nycbar.org/pdf/report/uploads/20072132-FormalOpinion2011-2Third-partyLitigationFinancing.pdf at 7.
31 The American Bar Association disapproves of such arrangements and recommends that funding agreements be drafted to ensure that the plaintiff retains “control of key litigation decisions, including with respect to settlement.” ABA at 12-13. This is yet another basis for discovery and judicial review of TPLF agreements.
32 See also https://caselaw.findlaw.com/court/us-3rd-circuit/1994586.html (judicial scrutiny and curbing of predatory lending practices surrounding the NFL Players’ Concussion Settlement).
33 The decision can be found here 3M-Case_Management_Order_No_61_Third-Party_Litigation_Funding.pdf (uscourts.gov)
