Proposed Litigation Finance Regulation in New York
Even though New York has an administrative regulation that guarantees transparency in litigation finance transaction, there is a movement in the state for additional regulation, which could greatly limit the availability of litigation funding, even for sophisticated commercial parties. Advocates of the proposed legislation rely on the same old, shop-worn arguments: that litigation finance prolongs meritless litigation and discourages settlement. But a clear view of the realities of litigation finance shows that such proposed regulation would do more harm than good.
There are two different proposals that will be submitted to the New York Assembly in its next term. The first is promoted primarily by a tort-reform business group, the Lawsuit Reform Alliance of New York. The Alliance supports a bill that is sponsored by State Sen. Rob Ortt of Niagara Falls and that would limit litigation financing fees to 16% annually, or 25 percent for certain lenders licensed in the state.
Another bill, sponsored by Assemblyman Michael Simanowitz of Queens, does not impose any limits on fees, but it would require transparency about fees from financing companies and would prohibit finance companies from basing their fees on the amount of the recovery. In particular, it would require finance companies to draft financing agreements with disclosures about fee structure, repayment terms, rights of rescission. In addition, the Assembly bill would require financing companies to be licensed by the state.
The Assembly bill is less problematic than the version supported by the Alliance, but both have the potential to dramatically limit the availability of litigation financing in New York. In particular, strict limits on litigation financing could discourage lenders from doing business with small or mid-sized commercial clients. One litigation finance company has been encouraging legislators to consider amendments to the bills that would carve out exceptions for commercial litigation financing.
The proposed New York legislation demonstrates the hazards of taking a ham-fisted approach to regulation. This is particularly worrisome when proposed legislation would sweep broadly, applying a single set of rules to both individual consumers and business enterprises, each of which has very different concerns and needs with respect to litigation financing transactions. The one thing that all litigants need in any financing transaction is clear disclosure rules, which New York already guarantees through a consent order implemented by the state Attorney General’s office. Beyond disclosure rules and transparency guarantees, it would be wise for New York legislators to be careful so that regulation does not have the perverse effect of limiting access to justice for both consumers and business enterprises.
Works Cited: Josepha Velasquez, Tort-Reform Group Champions Bill to Regulate Certain Litigation Funders, New York Law Journal (July 20, 2017) available at http://www.newyorklawjournal.com/id=1202793528219/TortReform-Group-Champions-Bill-to-Regulate-Certain-Litigation-Funders?mcode=0&curindex=0&curpage=ALL
