SAN FRANCISCO (Legal Newsline) - The U.S. District Court for the Northern District of California has proposed a rule that would require parties in civil cases to disclose if they are receiving third-party funding.
This proposed rule follows a national trend of third party funding becoming more popular. In this industry, the funder agrees to supply money in exchange for a share of any eventual settlement or verdict.
California court might start requiring the disclosure of third party funders. | Shutterstock
The funder is not repaid if there is no recovery - an agreement that funders say prevent it from being regulated like ordinary loan companies that have interest fees capped by state laws.
The Northern District of California already has Civil Local Rule 3-15 which requires all parties to disclose “entities other than the parties themselves.” District Judge Richard Seeborg, chairman of the court’s rules committee, is proposing to add the words “including litigation funders.”
Companies such as Bentham IMF and Longford Capital Management have been providing this litigation funding, especially in California, but judges and other parties in the cases don’t have visibility into these contracts.
In 2014 there was a federal proposal that all litigants who had litigation funding must disclose who was supplying the funds. It didn’t pass but did spark conversation nationwide.
“Knowing who is potentially influencing the course of litigation and potentially the settlement is something other parties and judges could find useful in litigating a case,” Ronni Fuchs, a partner with Pepper Hamilton, told Legal Newsline.
“Both the court and the other parties would want to know if there is someone behind the scenes causing a change in the balance of negotiations.
Fuchs does not believe requiring the disclosure of third party lenders will discourage the practice in the future.
“I do not think disclosure is going to put the genie back in the bottle,” Fuchs said. “If it's a good investment, people will make the investment. If its a good business model, disclosure isn’t going to stop it.”
The point of this amendment isn’t to stop the practice but merely level the playing ground in litigation.
Some concern has been voiced that disclosure will give the other party an advantage. If the other party knows an individual cannot fund the litigation themselves, the other party might drag the case out, making it even more expensive for the individual.
Currently, no similar rules exist so judges are making decisions at their own discretion. Fuchs believe amendments, like the one Northern District of California is proposing, might become more popular in other courts.
“It's hard to read tea leaves,” Fuchs said. “But I would imagine judges generally like to know if there is another party not before the court that is influencing litigation pending in front of them."