“Cash Advance” Pre-Settlement Financing Liens and Assignments – What the Defense Bar Needs to Know

WDC Journal Edition: Winter 2007
By: Mary L. Richards, Senior Staff Attorney - American Family Mutual Insurance Company

Pre-settlement litigation financing (providing cash advances to plaintiffs or their counsel) is a relatively new industry. Here in Wisconsin, it’s a new and unregulated industry. There are no statutes, no case law or ethic opinions addressing the subject. But the pre-settlement litigation financing is becoming more prevalent and this industry is aggressively seeking to gain foothold in our state. Don’t believe me? In addition to these agreements starting to pop up on claims, one of these companies was a sponsor for the recent state bar convention and is a major advertiser in our latest state bar directory.

Pre-settlement financing agreements are not just a topic for the plaintiff’s bar. These agreements also impact the defense bar. They can affect your discovery and your settlement negotiations. Insurance companies and their counsel also have to deal with payment demands by the financing companies. Here’s what you need to know and look out for.

Background.

Pre-settlement financing has been fueled in large part due to the internet and the expansion of television. If you Google the topic, you’ll get over thirty-seven thousand “hits” and identify many different financing companies. This topic has many names (litigation funding, lawsuit funding, litigation financing, etc.) and this financing can function in different ways. Some companies will restrict advances to attorneys to cover filing fees, expert fees, etc. Others will advance living expenses to plaintiffs.

Proponents claim that pre-settlement litigation financing provides court access and bargaining power for low-income plaintiffs who otherwise can’t afford the delay of litigation. Critics (including members of judiciary and the plaintiff and defense bars) cite to consumer exploitation (further injury to the already injured), ethical concerns, and interference with settlement.

Critics also cite champerty and usury against litigation financing. Champerty and usury are, however, antiquated legal doctrines and fail to address modern business practices. Further, another way by which litigation financing companies avoid usury charges is by claiming that their agreements involve investments, not loans, and therefore, the usury laws are inapplicable. Others add that the non-recourse nature of these contracts gives them refuge from such regulation.

Where the topic has been addressed by courts and/or state ethic authorities, treatment of litigation financing agreements varies. Most courts have reluctantly upheld the agreements (usually inviting legislative redress) and state ethics boards reluctantly allowed them, but with reservation and warnings. Only 21 state ethic authorities have addressed this issue. Ohio, however, has held that such agreements are void and unenforceable.[i]

The Lien and Assignment Documents.

The pre-settlement financing process is generally as follows. After contact is made between the plaintiff and the litigation financing company, the plaintiff or plaintiff’s counsel will provide information about the claim or suit to the company. If the application is accepted, a financing agreement will be executed, often at a very high interest rate (one agreement recently seen by this author recited a 3.5% interest rate compounded monthly or 51.1% annually). Some applications will require application fees. Some agreements are absolute in nature, requiring payment regardless of the litigation outcome. Others are contingent or “non-recourse.”

The financing agreement will often be entitled as an “assignment” and “lien” and may consist of more than one document. The agreement will often recite that the plaintiff is assigning a portion of the proceeds of the litigation. This language –“assignment of proceeds” – is presumably used to avoid case law that bans assignment of a tort claim or cause of action.[ii]

The agreements will also cite various “covenants” by the Plaintiff to: provide case status updates; grant no further liens; advise of withdrawal or change of counsel; agreement to choice of law and venue provisions, etc. One financing company has the plaintiff execute an “irrevocable grant of lien, assignment of process and lien payment instructions.” In addition to the repayment obligations and the previously mentioned provisions, the lien/assignment document will contain “directions” to plaintiff’s counsel as to how settlement or judgment proceeds are to be handled.[iii]

How Should Defense Counsel and Insurers Deal With These Things?

Litigation financing companies are usually a problem that belongs to the plaintiff and plaintiff’s counsel. Two particular exceptions, however, can make these agreements issues for defense counsel: discovery and settlement. In completing the financing application, the plaintiff or plaintiff’s counsel may have disclosed otherwise confidential information that has become discoverable. Thus, this author recommends making inquiry of financing agreements, along with other lien information, during discovery.

Additionally, a litigation financing agreement can also impact mediation and settlement negotiations. If a plaintiff has to pay back principal and the high interest, this can create an artificially inflated minimum settlement range for the plaintiff that is divorced from the true value of the claim. Thus, defense counsel who bemoan “the disappearing jury trial” may have found a friend in litigation financing agreements.[iv]

Practically speaking, the presence of plaintiff’s counsel usually serves as a “human shield” to an insurance company’s direct involvement with a financing company. Thorny issues can also arise where a plaintiff fires his counsel or plaintiff’s counsel withdraws. Some plaintiff’s attorneys – particularly in lower-value cases – will withdraw once they discover that their client has executed or is insisting on executing such an agreement. With plaintiff’s counsel out of the picture, financing companies then demand direct payment from the carrier. Such demands may include the following arguments: 1) the financing company claims to be a lienholder and owner of assigned settlement proceeds; 2) New York case law will be cited in support of their equitable lien claim that “once on notice, then liable”[v]; and 3) if the carrier won’t directly pay the financing company, then the carrier must either file a “dec” action or interpleader per the venue provision of the assignment agreement or have external or “fee” counsel hold the funds in trust.

So how to respond? As noted, there is no Wisconsin caselaw. But analysis of this issue picks up where the meager law on chiropractor liens addressed in Reigelman v. Krief, 2004 WI App 85, 271 Wis.2d 798, 679 N.W.2d 857, and Yorgan v. Durkin, 290 Wis.2d 671, 715 NW.2d 160 (2006), left off. Reigelman held that a chiropractor’s lien was enforceable against plaintiff’s counsel because plaintiff’s counsel had signed the lien agreement. Yorgan, however, held that were plaintiff’s counsel had not signed a chiropractor’s lien, the chiropractor’s lien was not enforceable against the attorney.

Yorgan is interesting in that it was a 5-1-2 decision that flirted with the issues raised by litigation financing agreements. The majority (written by Justice Bradley) relied on general contract principles and reasoned that the attorney was not liable to the third-party creditor-chiropractor because the attorney was not a signatory to the agreement, nor would a party seeking to enforce a contact expect a party to be bound by an agreement they never signed.[vi] The majority also refused to enforce the lien against the attorney because it was “not dictated by public policy” and due to the various ethical implications that would be raised for the attorney.[vii]

The majority also rejected the “equitable lien” argument, pointing out that Wisconsin recognizes only a very limited number of statutory liens and that such statutory liens were subject to strict notice requirements. To recognize a lien under the circumstances would have been contrary to the legislature’s intent. The majority further concluded that it was the plaintiff who was unjustly enriched by non-satisfaction of the lien and not the third party against whom the assignee was proceeding.[viii]

The majority also indicated that it was not addressing whether a valid assignment was/could be created in this personal injury action because the issue had not been briefed.[ix] Instead, the majority assumed the chiropractor’s lien was a valid assignment for purposes of its analysis.[x]

The majority refused to allow attorney liability to third-party creditors such as the chiropractor because it would adversely impact parties’ access to the courts and counsel’s willingness to represent such litigants. The court noted that liability would, in essence, make attorneys “de facto collection agents” who would be required to correctly prioritize and pay clients debts” and would burden attorneys with compromised duties to their clients.[xi] The court finally noted, “it is not difficult to imagine a proliferation of agreements like those here, in which clients seek to give an interest in personal injury claim proceeds as security to creditors in addition to health care providers,” and referred to an assignment made to a plaintiff’s landlord in order to avoid eviction.[xii]

Lien notice alone may have been dispositive for at least one justice. The writer of the concurrence, Justice Wilcox, indicated that he would have imposed liability on the attorney if the attorney had actual notice of the assignment but still released funds absent either holding the funds in trust or filing a motion with the court to decide the matter.[xiii]

Where Yorgan becomes even more interesting in relation to litigation financing agreements is in the disagreement found between a majority opinion and the dissent of Justices Roggensack and Butler. The dissent, concluded that the chiropractor had a valid assignment and that such assignments from personal injury proceeds were valid. The majority rejected the dissent’s reasoning on this issue, however, pointing out that the dissent’s authority involved insurance subrogation cases based on contractual subrogation language from the underlying insurance contracts.[xiv]

The dissent also concluded that the chiropractor had an equitable lien that was enforceable against the attorney. In contrast, the majority withheld deciding if the future proceeds of a tort claim can constitute a necessary “res” (a particular property) to which an equitable lien can attach, also noting that it was unclear if Wisconsin case law allowed it.[xv]

While the Yorgan majority was willing to cut plaintiff’s counsel a break as to the plaintiff’s third-party creditor, one can’t predict where our courts will take us with respect to litigation financing agreements. Reigelman and Yorgan may have to a certain degree tacitly recognized or at least opened the door for the recognition of chiropractor liens and assignments as between a chiropractor and a plaintiff and/or plaintiff’s attorney if a signatory. That reasoning is somewhat understandable in light of the recognition given to the claims of other health care providers and insurers. But there is no non-subrogation case law addressing third-party creditors between chiropractor, plaintiff and/or attorney on an insurer providing liability coverage, UM or UIM coverage and/or medical expense coverage. Therefore, in addition to the points raised by the Yorgan majority, it has to be recognized that:

First, “cash advance” litigation financing liens and assignments are different from contractual liens and assignments between a plaintiff and his or her health care providers and insurers.

Second, insurance carriers are in an adversarial relationship with plaintiffs. The ethical dilemmas that face the plaintiff’s bar shouldn’t be foisted upon those adversarial to the plaintiff. Moreover, as a practical matter regarding the handling of settlement money, SCR 20:1.15 “Safekeeping Property,” appears to speak to plaintiff’s counsel and not defense counsel or in-house corporate counsel.[xvi] Nor would these ethical rules even arguably be applicable to non-attorney claims personnel.

Third, what is a carrier to do when the lien/assignment fails to accurate reflect or recite liens that pre-date the lien/assignment of which the carrier has notice (for example, a treating chiropractor)?

Fourth, does a carrier cause or invite other problems by simply declaring that it will put the plaintiff and all lienholders on the settlement draft? It’s not for a tortfeasor’s carrier or counsel to end up trying to sort through, prioritize and negotiate with the plaintiff’s various creditors. However, sending a check out to anyone but the plaintiff invites additional concerns.

Fifth, one has to consider the time and expense of pursuing a declaratory judgment action. This will involve a case-by-case analysis.

Sixth, there are privacy concerns pursuant to Gramm-Leach-Bliley regarding discussion of a plaintiff’s personal injury claim with any one other than a plaintiff or those persons with whom the plaintiff specifically authorizes a carrier to discuss the claim.

Seventh, should you force a litigation financing company to be joined as a necessary party under Wisconsin Statute § 803.03?

Finally, UCC issues as to these contracts may have to be judicially addressed. Reigelman cited Wisconsin Statute § 402.210(5), in support of its conclusion that the chiropractor lien in that case was a valid assignment.[xvii] Yorgan, however, questioned its applicability to such liens and assignments.[xviii]

Therefore, given that pre-settlement financing has us in unchartered waters, this author recommends:

  1. Advise the lienholder that privacy concerns prohibit discussing the plaintiff’s personal injury claim;
  2. It is the plaintiff’s legal obligation to the financing contract provisions.
  3. Neither the alleged tortfeasor or the tortfeasor’s carrier were signatories to the pre-settlement financing agreements and, therefore, the provisions are not binding or enforceable as against non-signatories;
  4. Write to the plaintiff’s counsel (or the plaintiff if there is no attorney) and the litigation financing company that, they should let the carrier know when they get the distribution worked out so that the funds can be released per their mutual instructions.
  5. Based on a risk/benefit analysis, a carrier may wish to file a declaratory judgment action and pay the proceeds into Court for judicial allocation of the funds.

Conclusion.

It’s for policymakers to decide whether legislative regulation of pre-settlement financing is warranted. Pre-settlement financing poses problems for both plaintiff counsel and defense counsel. But in the absence of legislative or appellate court direction, the defense bar and insurance industry need to know how to deal with pre-settlement financing because it impacts claim-processing and litigation.


[i] Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217 (Ohio 2003).

[ii] See Yorgan v. Durkin, 2006 WI 60, ¶3, 290 Wis.2d 671,715 NW.2d 160; Assignability of Proceeds of Claim for Personal Injury or Death, 33 A.L.R.4th 82; 6 Am. Jur. 2d Assignments §66 “Assignment of Proceeds of Recovery”; 6A C.J.S. Assignments § 55 “Personal Injury – Assignment of Proceeds”.

[iii] This “direction of counsel” provision poses several potential settlement and ethical issues for plaintiff’s counsel. See materials cited in endnote 4.

[iv] Ethical problems (i.e. conflicts of interest, confidentiality, etc.) related to litigation financing primarily belong to the plaintiff’s counsel and are beyond the scope of this article. For further information on this topic, see Mariel Rodak, “It’s about Time: A Systems Thinking Analysis of the Litigation Finance Industry and Its Effect on Settlement, 155 U. of Penn. L.Rev. 503 (2006); “Litigation Financing,” by Peter H. Geraghty, (August 2006) online article at http://www.abanet.org/media/youraba/200608; Kenneth L. Jorgensen, Presettlement Funding Agreements: Benefit or Burden, 61 Bench & B. Minn. 14 (2004). Andrew Hananel & David Staubitz, The Ethics of Law Loans in the post-Rancman Era, 17 Geo. J. Legal Ethics 795 (2004); Douglas R. Richmond, Other People’s Money: The Ethics of Litigation Funding, 56 Mercer L.Rev. 649 (2005); “Securing Presettlement Living Expenses for Clients,” Dean Dietrich, Wisconsin Lawyer, vol. 79, No. 5, May 2006.

[v] Rosario-Paolo, Inc. v. D & M Pizza Restaurant, 84 N.Y.2d 379 (N.Y. Ct. App. 1994) and Poughkeepsie Savings Bank v. R & G Sloane Mfg. Co., 84 A.D.2d 212 (N.Y. 1981). Rosario-Paoloinvolved a defendant’s failure to observe contractual duties as to a loss beneficiary provision of a fire policy. Poughkeepsie Savings is a per curiam opinion regarding an assignment of rents under a real property lease that served as collateral for a mortgage. Neither case has anything to do with a personal injury claim.

[vi] Yorgan, 2006 WI 60, ¶15.

[vii] Id. at ¶¶23-30.

[viii] Id. at ¶¶37-40.

[ix] Id. at ¶13.

[x] Id.

[xi] Id. at ¶¶31-32.

[xii] Id. at ¶33.

[xiii] Id. at ¶¶43-52.

[xiv] Id. at ¶13 n.4.

[xv] Id. at ¶41 & n.13.

[xvi] SCR 20:1.15 (a), in part, states that “A lawyer shall hold in trust, separate from the lawyer’s own property, that property of clients and third persons that is in the lawyer’s possess in connection with a representation or when acting in a fiduciary capacity.” (Emphasis added.)


SCR 20:1.15 (d) (1) & (3), in relevant part, provide:

(1) Notice and disbursement. Upon receiving funds or other property in which a client has an interest, or in which the lawyer has received notice that a 3rd party has an interest identified by a lien,court, order, judgment, or contract, the lawyer shall promptly notify the client or 3rd party in writing. Except as stated in this rule or otherwise permitted by law or by agreement with the client, the lawyer shall promptly deliver to the client or 3rd party any funds or other property that the client or 3rd party is entitled to receive.

* * * *

(3) Disputes regarding trust property. When the lawyer and another person or the client and another person claim ownership interest in trust property identified by a lien, court order, judgment, or contract, the lawyer shall hold that property in trust until there is an accounting and severance of their interests. If a dispute arises regarding the division of the property, the lawyer shall hold the disputed portion in trust until the dispute is resolved.
(Emphasis added.)

[xvii]Reigelman v. Krief, 2004 WI App 85, ¶¶25-26, 271 Wis.2d 798, 679 N.W.2d 857.

[xviii] Yorgan, 2006 WI 60,¶14 n.5.

Mary L. Richards is a Senior Staff Attorney with American Family Mutual Ins. Co. She received her undergraduate degree in journalism/public relations from Northern Illinois University and her law degree from the University of Wisconsin-Madison. Richards served two separate stints as law clerk to Wisconsin Court of Appeals Judges Ralph Adam Fine and Charles Schudson. She is past-president of the Association for Women Lawyers. She is a member of Civil Trial Counsel of Wisconsin and the National Association of Insurance Women. Her practice focuses on general insurance defense and coverage litigation.