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The biggest weapon that opponents of plaintiff financing, often incorrectly called a “lawsuit loan”, have in their arsenal is the vague resemblance between plaintiff financing and loans. They use this weapon to push legislation that increasingly regulates financing that has the capacity to empower plaintiffs. The half-dozen states that regulate plaintiff financing under the name of protecting plaintiffs have failed to realize that they are ironically hurting plaintiffs by reducing the resources they have to maximize their settlement offers. Most states have recognized that the process of financing plaintiffs’ lawsuits is an investment, not a loan; usury caps, or regulation of interest rates, do not apply to investments, and thus, should not apply to plaintiff financing. If it did, the industry would not exist.

There’s a growing push from powerful lobbying groups to classify plaintiff financing as a loan. This movement, driven by certain interests, threatens to limit the financial help available to plaintiffs in long legal battles. A clear example of this is Arizona’s SB1403 bill, which passed its first hearing in February 2015. This bill categorizes plaintiff financing as a loan, reducing its ability to support plaintiffs who are facing drawn-out lawsuits.

On the other hand, Indiana’s SB373 bill took a more favorable approach. It classifies plaintiff financing as a non-loan transaction, benefiting both the industry and consumers by providing plaintiffs with better financial resources during their lawsuits. The different approaches in Arizona and Indiana highlight the critical importance of how plaintiff financing is defined and regulated.

Why Words Matter: Loans vs. Investments

How we describe plaintiff financing can shape how people perceive it. When we call it an “investment,” it represents an opportunity for plaintiffs to receive financial support during their cases. However, when we refer to it as a “loan,” it can appear predatory, as if it’s something from which plaintiffs need protection.

This difference in framing was evident in the Arizona SB1403 hearings. The bill’s title, “lawsuit lending,” already framed plaintiff financing negatively, associating it with frivolous lawsuits and clogged courts—when in reality, these limitations stifle free market competition and plaintiffs’ access to justice.

In contrast, Indiana’s Civil Law Committee, chaired by Senator Joe Zakas, recognized that plaintiff financing is not a traditional loan. Zakas and Senator Greg Taylor correctly pointed out that while some argue for rate caps, such caps usually apply to loans with penalties for default—not the kind of non-recourse agreements made in plaintiff financing.

Challenging the “Loan” Argument: Why Plaintiff Financing Is Different

Those who support labeling plaintiff financing as a loan often rely on flawed reasoning. In one hearing, an Indiana representative argued, “It looks like a loan to me, so I’m gonna call it a loan.” But simply because something appears similar doesn’t mean it is the same. Legal scholar Victoria Shannon, a professor at Washington and Lee University, outlines five reasons why plaintiff financing should not be classified as a loan:

1. No Absolute Obligation: Unlike a loan, plaintiffs who receive financing have no obligation to repay if they lose their case. The financing is structured as a purchase of an asset—a stake in the plaintiff’s potential recovery.
2. Non-Recourse: If the plaintiff loses, the financing company cannot pursue their other assets. This is a key distinction from products like payday loans, where lenders can automatically withdraw money from a borrower’s bank account.
3. Higher Risk: Legal funders take on significant risk. They may get paid back in six months, ten years, or never. The risk is much greater than in traditional loans, which justifies the higher rates associated with plaintiff financing.
4. Multilateral Transactions: Plaintiff financing involves more than just the funder and the plaintiff. The outcome depends on judges, juries, and other factors. This is much more complex than a typical loan, where only the borrower’s actions determine repayment.
5. Asymmetry of Information: In many cases, the greatest financial need comes early in the lawsuit, when neither the plaintiff nor the funder knows all the details of the case. This uncertainty increases the risk for funders, making the financing process far more complicated than a traditional loan.

So What’s the Real Agenda?

The push to classify plaintiff financing as a loan is ultimately misleading. It’s not about debt—it’s about providing plaintiffs the financial support they need during long legal battles, much like how venture capital helps startups get off the ground.

There are three key takeaways from this issue:

1. Financing Should Not Lead to Debt: Plaintiff financing does not create debt. Unlike payday loans, plaintiffs are never stuck in a debt spiral because they don’t owe more than their recovery, even if they win.
2. Plaintiff Financing Helps Prevent Financial Hardship: Many plaintiffs who take financing are struggling to pay their bills due to an injury or accident. This financing helps them cover essentials like rent, utilities, and medical expenses.
3. Plaintiff Financing Can Maximize Settlements: A plaintiff might be tempted to settle early for a low amount, just to cover their bills. With financing, they can hold out for a fair settlement, potentially making more money in the long run.

The Real Goal Behind Regulation

The debate around bills like Arizona’s SB1403 is framed incorrectly. Lobbyists argue that plaintiff financing is predatory, but in reality, it offers essential financial help to people in need. Mislabeling it as a loan restricts access to this help, ultimately benefiting insurance companies that often underpay injury claims.

Classifying plaintiff financing as a loan doesn’t protect consumers—it hurts them. It allows large companies to drag out lawsuits until plaintiffs can’t afford to continue and are forced to accept low settlements. The real agenda here is to protect the interests of those companies, not the consumers.

It’s time for lawmakers to rethink how they regulate plaintiff financing. By understanding it as an investment rather than a loan, they can ensure that plaintiffs have the financial resources they need to pursue justice.

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Resources:

Learn more about Arizona’s SB1403 on the Arizona Legislature’s website 

For insights on Indiana’s legal financing bill, visit the Indiana General Assembly’s site 

Explore Victoria Shannon’s detailed research on plaintiff financing on SSRN.