By V. Christopher Potenza, Esq. and Nicholas J. Heintzman, Esq.
The United States, for the most part, stands alone in the world of civil litigation by not following the “English Rule” that the party who loses in court pays the other party’s legal costs. The “American Rule” is that the prevailing party in most litigation across the United States is unable to recover attorneys’ fees or significant litigation costs, although some specific types of claims have statutory provisions for attorneys’ fees, or parties may otherwise provide for attorneys’ fees through contract. Rather than attorneys’ fees, the prevailing party is usually able to recover statutory “costs” or “fees” from their opponent, and while such awards vary between individual states and federal courts, they are typically nominal.
Since an award for attorneys’ fees to the prevailing party is uncommon in the United States, “adverse cost insurance,” which covers the losing party’s litigation expenses owed to the prevailing party, is also uncommon. Litigation funding to personal injury plaintiffs, typically referred to as “no resource” loans, is becoming a booming industry that raises both ethical concerns and case values, despite the costs of the loans not being directly recoverable. Although the loans have high interest rates, plaintiffs do not have to repay these loans if they do not recover in their lawsuits. As such, underwriting and the size of a loan are usually driven by the seriousness of a plaintiff’s injury and the merits of the claim. If a plaintiff has already recovered via a “no recourse” loan, there is little incentive to accept a settlement offer that is not substantially greater than the amount already received by the plaintiff. This often puts a plaintiff at odds with plaintiff’s own counsel and the loan financier, who have competing recovery interests with the plaintiff. As such, knowledge of a litigation loan is important in evaluating the risks and costs associated with a claim.
Courts across the United States vary in their approach to the discoverability of litigation loan information, but for the most part hold that litigation financing information is not discoverable. Federal courts which have addressed the discoverability of litigation loans typically hold that information concerning the loans is non-discoverable, usually on relevancy and work product grounds. See Fulton v. Foley, No. 17-CV-8696 (N.D. Ill. 2019). However, Federal courts recognize that there is no “bright-line prohibition” on the discoverability of litigation funding, and Federal courts might permit discovery where there is a factual showing of “something untoward” occurring in the case. See V5 Techs. v. Switch, Ltd., 334 F.R.D. 306 (D. Nev. 2019). In New York, while there is no appellate level decision addressing the discoverability of litigation loans, a few lower-level courts have precluded the disclosure of loan funding on relevancy grounds. See Quan v. Peghe Deli Inc., 2019 N.Y. Slip Op. 32422 (N.Y. Sup. Ct. 2019); Cabrera v. 1279 Morris LLC, 2013 WL 5418611, at *1 (N.Y. Supt. Ct. 2013).
In practice, however, savvy plaintiff’s attorneys will disclose the existence of a “no recourse” loan since it will likely impact settlement negotiations and plaintiff’s “bottom-line,” yet will fight against any attempts to disclose the loan application or any documents submitted that contain any statements or impressions on the merits of the claim. Where a plaintiff refuses to disclose even the existence of a loan, a significant work-around however is to check for UCC filings as many states, including New York, require the litigation lending company to file notice of a UCC lien. The publicly available information however is usually limited to the date of the loan, and name of creditor and debtor, without further disclosure of the amount or other underwriting submissions.
While the law is still developing in this area, the Harmonie Group’s Litigation Loan Compendium provides a useful state-wide resource on this topic. Even though many states have enacted consumer protection statutes regulating nonrecourse litigation loans, most are silent on the issue of disclosure to adverse parties in litigation. There are a few outliers that should be noted. Wisconsin for instance has mandated the disclosure of all legal funding agreements, including litigation loans. Alaska is an exception to the “American Rule” and is a “loser pays” state, thus disclosure of the loan is more likely to be deemed relevant.
Without much law to support compelling a plaintiff to disclose the existence of a “no recourse” or litigation financing loan, and understanding the legitimate concerns plaintiff’s counsel may have in protecting from disclosure statements of the plaintiff or impressions from counsel in a loan application, it is imperative that counsel understand that basic disclosure of the loan and its terms is critical to good-faith settlement negotiations where all parties have a better understanding of their own risks, and the risks of their adversaries.
Hurwitz & Fine, P.C. provides fast and effective responses to claims of transportation negligence. Our team of trained attorneys and panel of investigative experts are available 24/7 to respond rapidly to serious accidents across New York State. Contact our 24-Hour Emergency Response Team via our 24-Hour Line at 716-849-8948 or e-mail us at [email protected].
V. Christopher Potenza is a Shareholder at Hurwitz & Fine, P.C., focusing his practice on the defense of complex personal injury claims, including commercial transportation, products liability and medical malpractice.