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New York Times
http://www.nytimes.com/2003/05/19/national/19FEES.html
May 19, 2003
Lenders to Those Who Sue Are Challenged on Rates in Ohio Case
By Adam Liptak
Roberta Rancman was having trouble making ends meet after a car accident with a drunken
driver sent her to the hospital five years ago. So she borrowed $7,000 for living expenses from
two companies that lend money to people whose only asset is a personal injury lawsuit.
The companies charged Ms. Rancman rates that would make a loan shark blush. On the other
hand, they agreed that she would have to repay them only if she won or settled her injury suit.
In 2001, an Ohio appeals court declared the contracts that Ms. Rancman had signed void because
the interest was so high. It noted that the lowest possible rate on the larger of the two loans, for
$6,000, was at least 280 percent. The Ohio Supreme Court will soon decide the companies'
appeal.
The case is the first significant legal challenge to the practices of a flourishing new industry.
More than 100 companies nationwide have emerged in the last few years to lend money to
people with personal injury lawsuits pending, at rates of 2 percent to 15 percent a month.
At any given time, executives of the loan companies said, the industry has more than $50 million
in outstanding loans.
Many legal experts defend the industry. They say these lenders level the playing field between
individual plaintiffs and corporate defendants, allowing plaintiffs to outlast their adversaries'
delaying tactics and obtain bigger settlements or jury awards.
Other experts say the companies exploit vulnerable people and encourage or prolong litigation in
violation of centuries-old but eroding judicial prohibitions against investing in others' lawsuits.
Ms. Rancman eventually received a $100,000 settlement from an insurance company in her
injury suit. But she had second thoughts about repaying the two companies and sued to cancel
the contracts she had signed with them. She declined to comment on her suit. Her lawyer did not
return a call seeking comment.
Robert M. Stefancin, a lawyer for the Interim Settlement Funding Corporation, one of the
companies that lent money to Ms. Rancman, declined to say whether the fee was justified.
"I don't know, and I can't answer that question," Mr. Stefancin said.
But he said the courts should not interfere with the company's contract. He noted that because
Ms. Rancman's injury case was complicated and uncertain, the company had taken a substantial
risk that its money would never be repaid. That risk, he said, means the transaction should not be
considered a loan for purposes of the usury laws, which prohibit excessive interest, but only
when the borrower's obligation to repay is absolute.
Susan Lorde Martin, who teaches business law at Hofstra University, said many objections to
such loans were unfounded. Borrowers are seldom exploited, Ms. Martin said, because they are
typically represented by lawyers as a consequence of their injury suits. And such loans do not
encourage frivolous litigation, because lenders screen out claims that are unlikely to result in
recoveries.
"Who doesn't want these firms?" Ms. Martin asked. "Corporate defendants. Without these firms,
corporate defendants have these poor consumers just where they want them."
Thirteen finance companies filed a friend-of-the-court brief in the Ohio Supreme Court
defending the industry's practices, if not the interest rates at issue in the case, as "individualized
tort reform" that "helps plaintiffs resolve their cases solely on the merits, not on the respective
financial conditions of the parties."
Some lenders acknowledge that the fees charged in some cases are excessive and that not every
firm is perfectly ethical.
"There are some charlatans," said Michael Blum, the chief executive of LawFinance Group, a
San Francisco firm active in the related field of investing in court judgments subject to appeal.
"Charging exorbitant rates — 15, 20 percent a month — isn't fair and isn't justified."
The loans are for living and medical expenses, which lawyers are generally prohibited from
advancing to their clients. They must be repaid only if the borrower wins or settles the lawsuit,
and only if money remains after legal fees and expenses.
Most plaintiffs do not need such loans to finance their lawsuits, because lawyers are allowed to
charge contingency fees, being paid only if the case is won. As an economic matter, such a fee
structure is similar to the loans made to Ms. Rancman. Both are seen as investments in lawsuits.
The prohibition on allowing lawyers to advance living expenses, coupled with an erosion of the
prohibition on investing in others' lawsuits, or champerty, has helped create the industry.
There are some satisfied customers. Jerome Brown, 51, is an automobile mechanic and carpenter
in St. Petersburg, Fla., who has not been able to work since suffering back injuries in a car
accident in 1999. Mr. Brown sued not long after, but the lawsuit progressed slowly.
By the time he turned to a New York company called LawCash in 2001, his family was in dire
need of money, he said.
"We were running such a bad streak of luck," Mr. Brown said. "We were running behind in the
mortgage, the car payments, the lights, the water, the phone. A couple of times our lights were
out. They were literally going to take the house."
He borrowed $15,000 at about 2.75 percent a month. He said it meant that he did not have to
choose between an insufficient settlement and paying his bills. He repaid the loan last month and
voices no regrets.
"The interest rate is high," Mr. Brown said. "But what do I care if I can save my house?"
LawCash says it has provided more than $10 million to more than 1,300 people since it was
established in late 2000. The average loan is $7,800, and fees are 2 to 4 percent monthly. It has
been paid back in about a third of the cases, making $4.3 million on a $3.5 million investment. It
says its clients have lost only three cases, involving loans totaling $12,500. The rest of the cases
are pending.
Sherry L. Foley, the chief executive of American Asset Finance, a New Jersey firm, said rates
had been falling.
"Competition serves to regulate the industry," Ms. Foley said. "Not long ago, 15 percent a month
was standard. On the East Coast now, you're looking at 3 percent to 6 percent."
She said those rates were justified.
"In some of these cases, you're going to get zero, and you have to allow for that," she said.
"Maybe you're making an 18 to 20 percent return after overhead, the cost of money and the cases
you lose. It's not the windfall it seems to be."