Why Litigation Finance Is Not Like Payday Lending

The critics of litigation financing often like to equate making investments in legal claims with issuing “payday” loans.  Through this equation, they contend that litigation financing is an exploitative practice in which uninformed, helpless individuals make unfair bargains with powerful, moneyed interests who are only interested in enriching themselves at the individuals’ expense.  There are several important why this equation is misleading and unfair.

First, litigation financing is not a loan.  When a consumer receives a cash advance from a payday lender, his obligation to repay the principal and interest is absolute.  When a plaintiff receives an advance against her recovery in a case, she has an obligation to pay it back only if she actually gets a recovery.  If she does not prevail in the case, her obligation to the litigation financier is at an end.  This conditional obligation to repay is what makes litigation finance an investment rather than a loan.

Second, the plaintiffs who receive litigation financing are not subject to exploitation with respect to the terms of the financing transaction.  The typical consumer at a payday loan store does not have an attorney to advise him, but the plaintiff does.  The financing transaction is a subsidiary part of a larger litigation effort that is directed by the plaintiff and her legal counsel.  If the financing transaction does not work in the context of that larger effort, the plaintiff’s lawyer will likely advise against it.

Third, the litigation financing transaction gives the plaintiff more leverage, not less.  The recipient of a payday loan loses bargaining leverage when he takes the consumer loan, placing himself at the mercy of the lender and starting a chain of dependency.  But the plaintiff who receives financing has more options and more leverage in settlement negotiations.  Litigation financing empowers plaintiffs.  Payday loans do not have the same effect for the borrowers.

Litigation financing offers opportunities to change the landscape of litigation and mitigate some of the imbalances of power that have characterized it for too long.  No wonder that those who have an interest in preserving the existing balance of power are eager to mischaracterize litigation finance as “lawsuit lending” and lump it together with payday lending.  But this mischaracterization cannot stand up to the facts, and it will not stop the benefits of litigation finance from reaching more litigants every day.

 Topics:  litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, consumer protection

 Works Cited:

Martin Merzer, Cash Now Promise of Lawsuit Loans Under Fire, Fox Business (April 19, 2013) available at http://www.foxbusiness.com/features/2013/03/29/cash-now-promise-lawsuit-loans-under-fire.html