NCPA - National Center for Policy Analysis

Some Companies Lend Plaintiffs Money For Lawsuits

May 21, 2001

The Florida bar is about to become the first large state professional group to ban a new and controversial industry: companies that lend money to plaintiffs in lawsuits in return for a share of any future winnings. The bar's ethics committee is scheduled to vote on a rule to prevent lawyers from drawing up the papers necessary to secure such loans.

Plaintiffs' attorneys advance clients money for lawsuit-related expenses, but ethics rules forbid them from making loans to cover legal expenses.

  • The loans by lenders, called "advance settlement funds," are made without collateral and employ interest rates ranging from 50 percent to nearly 200 percent annually.
  • The companies say the high risk -- because there is no guarantee plaintiffs will win their suits or repay the loans if they do -- justifies the high rates.
  • The practice is illegal in Maine, but other states permit lawyers to refer clients to advance settlement companies, about four dozen of which have sprung up over the past five years.
  • Plaintiffs' lawyers argue the loans help poor plaintiffs -- who often lose income and run up debts while waiting months or even years for cases to be resolved -- turn down cheap settlements typically offered by insurers and large companies.

Critics argue the high-interest loans take unfair advantage of poor plaintiffs and undercut the legal system by allowing frivolous lawsuits to be pursued. They contend the loans can pose conflicts for plaintiffs' lawyers, who can face pressure from clients to obtain unreasonably high settlements so they can pay the interest on the loans.

The Florida ethics rule would keep lawyers from "appearing to endorse" the pre-settlement loans. The bar has also asked the state's banking regulators to determine whether the loans violate rules against excessive interest rates.

Source: Richard Willing, "Lawsuit-based Loans Under Attack in Florida," USA Today, May 21, 2001.


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