NFL Concussion Case & 9/11 Settlements Could Shape Future Laws on Consumer Legal Funding

A loan or not a loan? That is the question…

The answer could lie in the outcomes of two very public trials, one involving the $1B settlement between the NFL and ex-players who suffered concussion-related injuries, and another involving 9/11 victims and their families.

As The Legal Intelligencer reports, both cases involve Consumer Legal Funders, who provided Plaintiffs with funding in advance of their settlement outcomes. Opponents of the industry – namely class counsel in the NFL case, and NY Attorney General Eric Schneiderman and the Consumer Financial Protection Bureau (CFPB) in the 9/11 case – are trying to peg those funding agreements as lawsuits, which would make them usurious under state law and therefore unenforceable. The funding companies are countering that their transactions do not constitute loans because they are non-recourse (if the Plaintiff loses their case, the funder loses its investment and receives no interest or money back).

In the NFL Concussion Case, Judge Anita Brody of the Eastern District of Pennsylvania declared the funding agreements void, and ordered the claims administrator of the $1B settlement to pay the players directly (and not the funding companies). That decision is currently under appeal. Meanwhile, Consumer Financial Protection Bureau v. RD Legal Funding, is playing out in NY Federal Court, and is raising similar questions about the types of funding agreements companies can enter into with claimants of a pending lawsuit or settlement.

As if this situation wasn’t complex enough, a recent decision – also in New York – in the case of Obermayer Rebmann Maxwell & Hippel v. West, declared that a funding agreement could not be labelled usurious because “a transaction that neither guarantees the lender an absolute right to repayment nor provides it with security for the debt is not a loan.”

Attorneys in the ongoing Consumer Legal Funding cases are taking solace in the Obermayer decision. “It certainly helps,” said Raul Sloezen, who is representing litigation funding companies Cash4Cases and Atlas Legal Funding. “It bolsters the argument that they’re legally valid contracts.”

There are other considerations as well. Eric Schuller, president of the Alliance for Responsible Consumer Legal Funding (ARC), points out that the level of risk the funding companies took in the NFL Concussion and 9/11 cases isn’t necessarily representative of a typical Consumer Legal Funding transaction. “Our clients typically involve a car accident case where we don’t know what that outcome is going to be, so there’s a lot of risk involved in those situations,” Schuller said. “With RD Legal and the NFL settlement and the 9/11 fund, those cases have already been determined. It’s just a matter of when and how much.”

By that logic, a decision in either the NFL or 9/11 case might not necessarily apply in scope to the majority of Consumer Legal Funding transactions.

Additionally, one of the reasons Judge Brody voided the NFL Concussion case funding agreements is the presence of an anti-assignment clause in the settlement agreement. “A third-party funder that failed to perform proper due diligence before deciding to enter such an agreement is prohibited from now reaping the benefit of the contract,” she said.

RD Legal – the funding company whose contracts Judge Brody voided – contends that, although the language bars claimants from selling their claims, it does not prohibit third parties from purchasing anticipated proceeds. “This distinction between barring assignment of the underlying tort claims, and allowing assignment of the settlement proceeds (a contract right) is consistent with [New York’s Uniform Commercial Code], as well as other provisions of New York law that prohibit the assignment of tort claims, but allow for the assignment of the proceeds from a tort claim,” the company said in a filing last year. “It is also consistent with common sense: the players should be free to use the money they receive in this action as they deem appropriate.”

Sloezen argues that the assignability issue is in the same vein as the central question of whether a funding agreement is an investment or a loan. He points out that some clauses specifically allow for recovery even if there are anti-assignment clauses.

So in short, there’s a lot on the table when it comes to how Consumer Legal Funding contracts will be treated by future courts – will they be considered investments or loans? Are anti-assignment clauses enough to void them altogether?

Stay tuned, to find out…

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