NEW YORK (Legal Newsline) - New York City's bar association has decided that it is unethical for lawyers to enter into agreements with companies that finance lawsuits in exchange for a percentage of the recovery.
The practice of third-party litigation funding has faced criticism and drawn the attention of regulators around the country who are worried that the eventual payoffs exceed allowable interest rates, though plaintiffs lawyers say it increases access to justice for clients who can't afford it.
The New York City Bar Association released its formal opinion on July 30, interpreting an existing rule on lawyers sharing fees with non-lawyers.
"The opinion concludes that some ways of funding lawyers, financing lawyers, run afoul of the fee-splitting," Bruce Green, a professor at Fordham Law School who chairs the NYC Bar's Committee on Professional Ethics, told Legal Newsline. "(It is) not dealing with clients."
Green added that it is "not a fair assumption" that the bar association is particularly concerned about the practice, which he described as fine within the rules.
But the opinion did note: "Rightly or wrongly, the rule presupposes that when non-lawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer."
Critics of the practice, which has boomed in recent years both at the consumer-lending level and in arrangements between law firms and funders, do believe that influence can become part of the process.
Michigan-based lawyer Mary Terzino, a critic of third-party litigation funding, said the opinion helps clarify the bar association's long-standing restriction on fee-splitting. Terzino is a consultant for the U.S. Chamber Institute for Legal Reform, which owns Legal Newsline.
She called it "a very positive development" and one that she hopes others will follow.
Several state bars - Nevada, Maine, Utah, and Virginia - have issued directions that any such funding has to be a loan that attorneys must pay. The industry has resisted the idea that their arrangements are traditional loans, since the funders receive nothing if the plaintiff does not receive a settlement or award.
A 2015 decision by the Colorado Supreme Court agreed with the state Attorney General’s Office that the agreements are, in fact, loans, leading to a settlement of more than $2 million.
The South Carolina Department of Consumer Affairs had reached a similar decision in 2014, while Oklahoma, Tennessee, Arkansas and Indiana have all passed laws regulating the industry.
The State of New York and the Consumer Financial Protection Bureau have filed suit against RD Legal Funding over its agreements with 9/11 first responders and former NFL players.
The judge overseeing the NFL litigation in Philadelphia has voided those agreements.
The opinion by the NYC bar is not binding and only relates to transactions between the funder and the lawyer, not plaintiffs.
The ethics committee's opinion does not concern the "traditional recourse loan" that requires the lawyer to repay at a fixed amount of interest regardless of the case.
"However, the fee-sharing rule forbids two alternative arrangements," the committee stated.
"First, where an entity’s funding is not secured other than by the lawyer’s fee...so that it is implicit that the lawyer will pay the funder only if the lawyer receives legal fees."
Secondly, the arrangement cannot be one in which the repayment is based on the amount of legal fees, including a rate on a sliding scale based on the total legal fees.
Green said this opinion "builds on decades of interpretation" but that it had not been addressed in recent years.
It is now estimated around 30 percent of legal firms use third-party funds for cases either involving individuals or mass actions and class actions. It was 13 percent four years ago, according a study by the Columbia Law School.
Court cases, including in Georgia, have been filed by plaintiffs claiming the interest charged was extortionate, sometimes approaching or surpassing 100 percent. The Georgia case hinges on whether the money is an investment or a loan, and if the latter is then covered by usury laws.
"It is taking advantage of people who are desperate, are hurt and have not sufficient funds to get by," Ira Rheingold, executive director of the National Association of Consumers Advocates, told Legal Newsline in an interview earlier this year.
"It needs regulation, with limits on interest rates and fees, and that people have some idea of how much they are going to get," he said.
A New York bill introduced by Sen. Robert Ortt (R-Lockport), with a companion filed in the Assembly, tightens contract rights, allows cancellation, describes the payments as loans and caps the interest rate at 25 percent.
But the industry is fighting back against these assaults, with the trade group the Alliance for Responsible Consumer legal Funding claiming that if passed, it will kill the industry in New York entirely.
In a blog post published earlier this year, Eric Schuller, president of the trade group, said the organization supports a rival bill.
"The Senate’s bill will do one thing: eliminate the industry from the State of New York, and harm all of the consumers who rely on it," Schuller said.