The Mysterious Market for Post-Settlement Litigant Finance

34 Pages Posted: 30 Jul 2021 Last revised: 27 Sep 2021

See all articles by Lynn A. Baker

Lynn A. Baker

University of Texas School of Law

Ronen Avraham

Tel Aviv University - Buchmann Faculty of Law; University of Texas at Austin - School of Law

Anthony J. Sebok

Yeshiva University - Benjamin N. Cardozo School of Law

Date Written: July 27, 2021

Abstract

Litigant finance is a growing and increasingly controversial industry in which financial firms advance a plaintiff money in exchange for ownership rights in the proceeds of the legal claim on a nonrecourse basis: A plaintiff must repay the advance only if compensation is ultimately received for the legal claim. The nonrecourse nature of this funding exempts it from most states’ consumer credit laws, enabling funders to charge higher interest and fees than would otherwise be permitted. When this funding involves ordinary consumers, critics of the industry contend that the uncapped interest rates exploit vulnerable litigants, while its defenders argue that the availability of these cash advances improves the welfare of consumers, especially those who have no other credit options.

This funding made headlines during the recent NFL concussion litigation, with more than one thousand players reported to have received such cash advances and with class counsel raising concerns of “predatory lending.” Because the industry has not been forthcoming with facts, the larger policy debate thus far has largely relied on anecdotes and speculation. In addition, the debate has ignored the important differences between pre- and post-settlement litigant funding.

This Article is the first to present systematic, large-scale data on post-settlement litigant funding—the type of funding most NFL players reportedly received. We were given unrestricted access to the complete archive of sixteen years of funding applications and funding contracts from one of the largest consumer litigant funding companies in the United States. These data, which are robust and representative, enable us to make transparent the terms and true price to consumers of this formerly mysterious funding. We find that the Funder offers not only clearer contract terms but also better financial terms to post-settlement clients relative to pre-settlement clients. Yet these better terms do not come close to reflecting the virtually nonexistent litigation risk to the Funder. We therefore recommend that post-settlement litigant funding be subject to the same regulations as conventional consumer credit and that a standardized, simple disclosure be required.

Keywords: litigation finance, mass torts, class actions, torts, consumer protection, usury

JEL Classification: K10, K13, K23, K39, K41

Suggested Citation

Baker, Lynn A. and Avraham, Ronen and Sebok, Anthony J., The Mysterious Market for Post-Settlement Litigant Finance (July 27, 2021). 96 N.Y.U. L. Rev. Online 181 (2021), U of Texas Law, Law and Econ Research Paper Forthcoming #E602 , U of Texas Law, Public Law Research Paper Paper #719, Cardozo Legal Studies Research Paper Forthcoming, Available at SSRN: https://ssrn.com/abstract=3894486 or http://dx.doi.org/10.2139/ssrn.3894486

Lynn A. Baker (Contact Author)

University of Texas School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1325 (Phone)

Ronen Avraham

Tel Aviv University - Buchmann Faculty of Law ( email )

Ramat Aviv
Tel Aviv, 69978
Israel

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
(512) 232-1357 (Phone)

HOME PAGE: http://www.utexas.edu/law/faculty/profile.php?id=ra22397

Anthony J. Sebok

Yeshiva University - Benjamin N. Cardozo School of Law ( email )

55 Fifth Ave.
New York, NY 10003
United States

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