The Best And Worst States For Litigation Finance (Part II)
And the most attractive states for investing in litigation are....
A couple of weeks ago, I introduced the idea of the best and worst states for litigation finance. This article follows that one. Please note that all of what follows is merely my opinion and informed by the opinions of practicing litigation finance professionals. There are good and bad investments in any state, and you should always do your own due diligence when investing.
Different states have different legal requirements that apply to investing in litigation finance. For those new to the field or looking to invest in states they are not intimately familiar with, case management software is a necessity. One example of such software is a product suite from Mighty, which is probably the best-known case management software in the field, and its product deals specifically with differences in state-by-state legal requirements.
Most Attractive States for Investing in Litigation
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Different litigation funders often prefer cases in different states based on their own personal geography, the industry niche they are in, or their experience. With that said, some commonalities do hold. From the perspective of many litigation funders, the most attractive states for investing in litigation are: Florida, Texas, New York, and Ohio.
Each of these states are regarded as attractive for specific reasons related to past court decisions and legislative action. Two of the top issues in litigation finance are the enforceability and regulation of litigation finance.
Roni Elias of litigation finance firm TownCenter Partners cites Florida as a state in which his firm places particular emphasis, in part due to the size of the state, but also because of settled case law. A Florida case has specifically held that litigation finance agreements are enforceable: Kraft v. Mason, 668 So. 2d 679 (Fla. 4th DCA 1996). The court held that the contract was not prohibited by the doctrine of champerty. It did not address the question whether usury laws applied to the agreement, but it did enforce the contract as written, regardless of usury law, and other Florida cases hold that non-recourse lending is not subject to usury laws.
Texas imposes no direct regulation of litigation finance, and its case law has specifically held that litigation finance agreements are enforceable and that usury laws do not apply to them. Anglo-Dutch Petroleum Int’l, Inc. v. Haskell, 193 S.W.3d 87, 103-04 (Tex. App. 2006).
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New York courts have specifically held that litigation finance agreements are enforceable. Echeverria v. Estate of Lindner, 7 Misc. 3d 1019(A), 801 N.Y.S.2d 233 (Sup. Ct. 2005). In addition, a consent decree between the New York Attorney General and the American Litigation Funding Association (ALFA) permits litigation funding agreements that include certain minimum disclosures and provide for a five-day “cooling off” period after execution that would permit consumers to rescind the agreement.
Ohio directly regulates litigation financing transactions through Ohio Rev. Code Ann. § 1349.55. It imposes fairly minimal requirements: about the contents of the agreement itself; about the attorney’s duty to make sure that any recovery is placed in his or her trust account for payment to the funder and client; and that the lawyer cannot be required to have any duties contrary to the Ohio rules of professional conduct. It does not impose any regulations on the amount of fees, the accrual of interest, or the time period upon which fees can be charged.
Least Attractive States for Investing in Litigation
Paralleling the most attractive states for litigation finance, there are also a number of states that are unattractive, according to industry sources. States cited as the least attractive states for investing in litigation include Alabama, Colorado, Kentucky, and Pennsylvania.
Alabama courts have held that litigation financing agreements are a form of “gambling” or speculating in litigation and are therefore void as against public policy. Wilson v. Harris, 688 So. 2d 265 (Ala. Civ. App. 1996).
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Colorado courts have held that litigation financing is a loan, notwithstanding the contingency of the duty of repayment. Thus, litigation financing agreements are subject to the state’s usury laws. Oasis Legal Fin. Grp., LLC v. Coffman, 361 P.3d 400 (2015). In addition, because the decision in Oasis Legal effectively disregarded express contract provisions, there is reason to think that Colorado courts will interpret litigation finance contracts very loosely and will not respect the strict terms of the agreement.
Kentucky has a statute that, by its express terms, would make litigation financing contracts void. Ky. Rev. Stat. Ann. § 372.060. A recent federal case has held that this statute and case law applying common-law principles would invalidate litigation finance contracts. Boling v. Prospect Funding Holdings, LLC, No. 1:14-CV-00081-GNS-HBB, 2017 U.S. Dist. LEXIS 48098, at *5-6 (W.D. Ky. Mar. 30, 2017). In addition, the Bolling court stated, in dicta, that a litigation finance agreement would violate Kentucky’s usury laws as well.
Pennsylvania recognizes the doctrine of champerty, and it may be asserted as a defense against the enforcement of a contract when three elements are established: “1) the party involved must be one who has no legitimate interest in the suit; 2) the party must expend its own money in prosecuting the suit; and 3) the party must be entitled by the bargain to share in the proceeds of the suit.” Fleetwood Area Sch. Dist. v. Berks Cnty. Bd. of Assessment, 821 A.2d 1268, 1273 (Pa. Commw. Ct. 2003). The doctrine has recently been applied to invalidate litigation financing agreements. WFIC, LLC v. LaBarre, 2016 PA Super 209, 148 A.3d 812.
There are a number of states that directly regulate litigation financing agreements, and some of them impose strict limits on the fees that funders can charge. Tennessee and Indiana are two examples. While funders may wish to avoid making contracts in these states, I would say that they pose fewer problems than the states that have explicitly held that litigation finance contracts are unlawful or that have case law demonstrating aggressive hostility to litigation financing.
Earlier: The Best And Worst States For Litigation Finance (Part I)
Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively through Morning Investments Consulting and writes for Litigation Finance Journal. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at M.McDonald@MorningInvestmentsCT.com.
