Against Settlement Factoring? The Market in Tort Claims has Arrived
Adam F. Scales
Washington and Lee University - School of Law
Wisconsin Law Review, Vol. 2002, No. 4
Ours is said to be a settlement culture. Litigation is a wasteful exercise to be avoided. Ours is also a market culture, where nearly all decisions are ultimately tested by the logic of the marketplace. There is a small, but enormously interesting area where these two cultures have unevenly coalesced: a public policy of subsidizing settlement is being undermined by the very market forces the policy was partly designed to circumvent. At this point, it appears that the market has triumphed again, as it repeatedly has at the border of public policy and individual choice. But the policy continues, even as it feeds the market logic that has resulted in its undoing.
This article details the new life cycle of a tort claim. Barely twenty years ago, this cycle was, conceptually speaking, a short one. A successful legal claim was reduced to a settlement or judgment against a tortfeasor. Insurance exerted a gravitational influence on whether and against whom claims might be brought, the willingness of courts to entertain novel claims, and the promptness of payment to the tort victim. From the tort-law perspective, this is important, but secondary. Tax law was likewise a shadowy presence; while its impact was substantial (and not altogether salutory from a tort-law perspective), it was hardly a prime mover of settlement it would become.
Through a combination of increased financial sophistication, changing views about the moral basis of tort law, and an uneven political commitment to undo the revolution in tort liability, the tort claim life cycle has evolved. A newly-generous tax code permitted tort litigants to turn less into more, and thereby improve the benefits of settlement to both parties. Moreover, this innovation spurred the creation (or more precisely the novel adoption) of insurance products designed to protect successful plaintiffs from themselves, while not coincidentally limiting the costs to their injurers. A tort claim, after being reduced to settlement, might be incorporated into a series of periodic payments. At this point, the expressed policy of facilitating such settlements, whatever its merits, was working to perfection.
But public policy, whatever its merits, cannot endure unscathed in a market culture. That culture has creatively assimilated these tort, tax and insurance-based arrangements into the universe of commodities such as pork belly futures, delinquent auto loans, and other generic receivables. We might question whether our society's general commitment to alienability of property extends to those rights initially conferred by the State as a matter of corrective justice, and then subsidized by the State in the name of other goals. This, then, is the story of how a tort claim winds up on Wall Street.
Accepted Paper Series
Date posted: October 28, 2003
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