Lawsuit Reform Alliance Decries Former AG Candidates Move to Lawsuit Lending

ALBANY, NY (10/07/2011)(readMedia)-- Sean Coffey, a lawyer who last year ran unsuccessfully for New York's Attorney General in the Democratic Primary, has co-founded a firm that will fund lawsuits. This is further proof that relationship between financing firms and lawyers must end.

The Lawsuit Reform Alliance of New York (LRANY) has taken a strong stand against this practice, often called "Non-recourse civil litigation financing", or more commonly, lawsuit lending.

Such financing companies essentially engage in payday lending for litigation. They seek out consumers who have filed lawsuits and offer to pay them up-front money in exchange for a percentage of whatever award they may later receive in their lawsuit – a percentage which increases over time. Litigation companies prey on vulnerable consumers – people who are often injured and unable to work, with no financial support, and desperate for cash. These companies force the consumer to agree to unfair terms that ultimately result in the consumers giving up a big piece, if not all, of any award they may receive for their injuries.

"Investing in lawsuits is called champerty and it is illegal in most other industrialized nations. The rates charged in these lawsuit loans are outrageous, and victims who win their lawsuit can end up with nothing after they repay the loan," said Tom Stebbins, Executive Director of the Lawsuit Reform Alliance of New York. "In the worst cases, victims actually end up owing money to the lawsuit lenders. This is lawsuit 'loan sharking', plain and simple."

Because of the high rates charged by lawsuit lenders, plaintiffs are forced to seek higher awards to offset the additional cost.

"Imagine you are an injured person, and you sue for $100,000 for medical costs and other damages. Now imagine that if you win the lawsuit, you will owe the lawsuit lender $40,000. Would you settle for $100,000? Of course not, because now you need $140,000. Since plaintiffs are less likely to settle for a reasonable amount, this drags out litigation and drives up costs, for all New Yorkers," said Stebbins.

Lawsuit lenders insist that because borrowers are not required to repay if they lose their case, their products are not loans, but rather, investments. In this way, they currently sidestep New York's consumer protection laws. There are no regulations that govern the rate of interest that lawsuit lenders may charge, which can exceed 100% annually. In New York, an annual rate higher than 16% is considered usury.

In addition to exploiting vulnerable consumers, this practice encourages lawsuit abuse. A trial lawyer may be unwilling to file a frivolous or speculative lawsuit because the chance of winning is too low to justify the time invested. But, when a lawsuit lender is added to the mix, the dynamic changes. Large lawsuit lending companies effectively mitigate the risk of individual cases by charging high interest rates and spreading that risk across a broad portfolio. Because the borrower owes nothing if they lose, there is little reason not to use such a loan to file a frivolous lawsuit.

This practice impacts every single New York taxpayer. Towns and municipalities, as deep pocketed defendants, are often the target of costly lawsuits. New York City alone has already paid over half a billion dollars in tort claims in 2011. As both the frequency and cost of these lawsuits increase, cities and towns are forced to adjust their budgets.

"There are two ways they can do that," said Stebbins. "Either raise taxes or cut services. The bottom line - lawsuit reform is mandate relief."

A 2009 study by the Pacific Research Institute estimated that lawsuits cost each New Yorker over $800 per year.

"The fact that a former candidate for the position as our state's chief lawyer is engaged in this practice should be a wake-up call to all New Yorkers. The legislature should take action and prohibit lawsuit loansharking to protect consumers, businesses and taxpayers," said Stebbins.

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The Lawsuit Reform Alliance of New York (LRANY) is a broad based coalition of hardworking New York business leaders, health care professionals, local government leaders and consumers who are committed to changing New York's burdensome and expensive legal system to help create more jobs and energize our State's economy.