Third-party litigation financing is getting closer scrutiny in New York, where lawmakers are pushing to regulate an industry in which companies have been accused of charging unreasonably high fees and interest rates.

But supporters of third-party litigation funding and representatives from the industry argue that fronting consumers funds from their potential settlements can help cash-strapped litigants make ends meet while they wait for their settlements to get paid out and that reports that some borrowers have been stuck with interest rates as high as 124 percent do not reflect the industry as a whole.

As it stands now, New York state does not regulate the litigation funding industry, and unhappy consumers have turned to the courts for relief. The companies can only collect repayments if litigants receive awards or settlements, and thus they are not beholden to lending and financing caps.  

Litigation funding has been available for consumers for about two decades, though the sector hasn't “exploded” in use like litigation funding for corporations, said Anthony Sebok, a professor at the Benjamin N. Cardozo School of Law and a visiting professor at Cornell Law School.

Sebok co-authored a comprehensive study on the litigation funding industry in which he and Ronen Avraham of Tel Aviv University and the University of Texas School of Law looked at more than 38,000 cases that were funded by a single third-party company and that proceeded to settlement and payment and found that a majority of cases in which litigants sought third-party funding involved car accidents, while 18 percent involved premises liability or general negligence.

But the industry itself has recently moved further into the limelight, and not entirely for positive reasons. One high-profile example was the revelation that PayPal founder Peter Thiel paid for Hulk Hogan's “sex tape” lawsuit against the news site Gawker, which ultimately filed for bankruptcy and ceased publication.

This year, The New York Times reported that funding companies were making moves to cash in on the #MeToo movement by providing payments to plaintiffs in the cascade of new sexual harassment cases hitting the courts.

The New York Post has published stories about the industry detailing several of the cases in which consumers sought litigation funding, including a 2015 suit filed in state court in the Bronx in which plaintiff Bishme Ayers said that the Brooklyn-based LawCash advanced him $350 to bring claims that he was abused by corrections officers on Rikers Island, and that he had to repay $2,600 to LawCash from his $10,000 settlement.

Last year, the Consumer Financial Protection Bureau joined up with the New York Attorney General's Office to file suit in the U.S. District Court for the Southern District of New York to sue the New Jersey-based RD Legal Financing, alleging that the company gave “loans at usurious interest rates” to NFL players with brain injuries and to police officers, firefighters and other first responders to the Sept. 11, 2001, terrorist attacks.

For its part, RD Legal Funding, represented by attorneys from Boies Schiller Flexner and Calcagni & Kanefsky, argued the cash advances are “assignments” and has fired back with claims that the structure of the CFPB is unconstitutional and that the agency is overstepping its authority.

Meantime, in Albany, the New York State Assembly is considering bills that would impose regulations on litigation funders such as capping interest rates and requiring the companies to explain their fee structures to consumers.

State Sen. Robert Ortt, a Niagara County Republican, has proposed a bill that would cap interest rates at 25 percent as well as require the companies to register with the New York Department of State and to educate consumers about the terms of their contracts with the companies.   

“I think as they have caught on, more and more people have been paying attention to what is going on here,” said Andrew Dugan, a spokesman for Ortt.

In the other chamber, Assemblyman Erik Dilan, a Brooklyn Democrat, is sponsoring a competing bill that would also cap interest rates from being used to pay attorney fees.

Ortt's bill would exempt contracts offering more than $500,000, while the Assembly's version of the bill does not have an exemption.

According to testimony on the proposed bills presented to a state Senate committee on May 16, the American Legal Finance Association, a trade association of legal funders, supports Dilan's bill and state regulation of the industry, but argues that Ortt's legislation would “effectively eliminate” legal funding as an option in New York.

“Consumer legal funding helps consumers who have a pending legal claim access funds to help them make ends meet while they wait for a fair settlement in a case,” said ALFA executive director Kelly Gilroy, according to her prepared remarks. “This money is used for life needs like buying groceries and paying rent and does not fund the litigation.”

Critics of the industry include business groups such as the Lawsuit Reform Alliance of New York, which argues that, without regulation, the companies are free to prey on vulnerable New Yorkers; and The Business Council of New York State, which argues that litigation funders are gumming up court dockets and making New York less friendly to business.

“Once plaintiff attorneys are paid and after lawsuit loans get repaid with their exorbitant interest rate, there is often little left of the settlement or judgment for a plaintiff to make them whole,” said Lev Ginsburg, director of government affairs for The Business Council, during the May 16 hearing before the state Senate committee. “The lawyers and the lenders are the only winners in this new reality.”  

Sebok, who supports litigation funding, said in an interview that, while abuses by litigation funders have attracted headlines, the entire industry shouldn't be judged on the deeds of a few bad actors.   

“It's my impression that the cost or the deals that the consumers are getting in New York don't look as bad as the stories you've read about in the newspaper,” Sebok said.