Rules lax on litigation lending

Waters acknowledges Oasis disclosed the terms clearly and in large print, but he regrets his decision.

“At the time, I was in a desperate spot,” he said. “These people catch you at your most vulnerable moment.”

While many Georgia lawyers agree companies like Oasis fill a need, they also say many companies prey on the vulnerable with high costs for borrowing.

And despite the controversial nature of this relatively new industry, these loan-like transactions do not fall under the scrutiny of any state agency and are not addressed by Georgia law, according to the Attorney General’s office.

“I wouldn’t say it’s a gray area, it’s a no area,” said Sid Barrett, a senior assistant state attorney general. “It’s subject to the ordinary laws of contract and treated as a private matter.”

The state bar is devising a regulatory plan to present to the state Legislature next year.

Georgia usury laws, which cap interest at 60 percent for most loans, do not apply because the transactions require plaintiffs to pay only if their lawsuits are successful and, therefore, are not considered loans, Barrett said.

The industry defines the transactions as an investment in a client’s lawsuit, said Gary Chodes, chief executive officer of Oasis.

“We’re sometimes the victim of the plaintiff’s lack of satisfaction [with the settlement], but they do know what they got into and the vast majority of people are honorable and pay us back,” Chodes said.

Desperation is expensive

Payment schedules from some companies show plaintiffs can end up owing almost 300 percent a year more than the amount they received.

The extraordinary cost is why Gino Brogdon, a former Fulton County Superior Court judge and now a trial lawyer, discourages clients from dealing with the companies.

“It’s kind of like having a pet rattlesnake — if you don’t feed it, it will bite you,” Brogdon said. “Unless there is no other option and the clients are going to be homeless and the children are eating mud pies, I don’t recommend this.”

But, while Brogdon and other Georgia lawyers, including Decatur injury attorney Stephen D. Apolinsky, advise their clients not to take money from these companies, they acknowledge plaintiffs who are injured and cannot work often need money for rent, groceries and other bills while awaiting the outcome of their lawsuits.

“I find that it’s a necessary evil,” Apolinsky said. “The reality is, sometimes it’s the only way for these people to keep on their heat and pay their bills.”

A plaintiff receives a payment from the litigation funder and agrees to repay the principal and fee from the proceeds of his lawsuit, whether that is a settlement or court victory. The legal process can take months or even years and the fee the plaintiff has to pay increases dramatically as time passes.

Without the legal funding industry, plaintiffs under extreme financial pressure would have to settle cases hastily for less money than they would receive given more time, said Chodes, the Oasis CEO.

Some Oasis customers do not qualify for credit cards or other forms of credit, Chodes said. A home equity loan at prime plus 1 percent might appear to be a better deal than the high percentage deals offered by his company and others, but a home equity loan requires a monthly payment and if you miss that payment, you could loose your house, he said.

“It might be a terrible idea, but to position this as a last resort idea, is not true,” Chodes said. “That’s a bit harsh.”

Further, he said, plaintiffs have the benefit of legal council because they always have representation for their lawsuit and their lawyer often negotiates repayment.

People familiar with litigation lending estimate five to 10 national or regional companies operate consistently in Georgia with a fluctuating number of smaller local companies. Oasis describes itself as the largest litigation funder in the country.

From 2007 through 2010, 15,530 Georgia residents applied for Oasis funding and the company accepted 5,326, according to company data. To select clients, Oasis considers the strength of a case, whether the plaintiff has insurance, the severity of the injury, the description of the accident and whether the plaintiff has an attorney.

The company charges high fees because the risk is high, Chodes said.

He estimates Oasis loses 15 percent to 25 percent of the money it advances. Oasis loses money when plaintiffs lose their cases, but also when a case settles for less than expected, the plaintiff dies or declares bankruptcy.

But Craig T. Jones, an Atlanta trial attorney, said the risks are overstated by the companies. Lawsuit lenders know lawyers do not invest time and resources in cases unless they believe their clients have a reasonable chance of success, Jones said.

A 2009 presentation to the Society of Actuaries by the London-based investment firm Peachtree Asset Management supports Jones.

The presentation showed that losses are “extremely low” because the companies use defense-oriented lawyers to review cases, they assess each lawsuit’s potential worth conservatively and they lend no more than 20 percent of a case’s estimated value.

“I think the amount of money these people get is disproportionate to the risk they take,” Jones said. “These things are abusive.”

Nationwide, plaintiffs receive $150 billion in tort payments a year, according to the presentation by Peachtree Asset Management, a parent company of Peachtree Financial Solutions, which has main offices in Norcross and Florida. Peachtree Financial invests in assets such as structured legal settlements, annuities, lottery winnings, sports contracts and life insurance policies.

About $200 million a year in advances is provided to plaintiffs, mainly by “mom & pop shops started by lawyers,” the report said.

Cosumer protection

Only five states have explicit consumer protection laws regarding litigation finance, Chodes, of Oasis, said.

The industry generally supports some regulation and has backed many states’ efforts to enact laws to prevent extreme cases, he said. Oasis supports a licensing process; a five-business-day right of rescission; rules requiring disclosure of terms, uniform fee structures and payment of loan proceeds to plaintiffs, not their lawyers, plus limitations on interaction between the company and the plaintiff after the transaction.

But, along with safeguards, some such laws may provide a legal justification for the industry’s existence.

In Ohio, the litigation funding industry pushed the state Legislature to pass regulations in 2008 after the state Supreme Court effectively ended the practice by ruling the contracts with plaintiffs were not recognized by state law, said Ryan Fisher, a Cleveland attorney.

Other states have taken a more aggressive stance against litigation funders.

Last July, the Colorado attorney general informed Oasis and another legal funder that the companies must abide by the state’s lending laws. Oasis sued the attorney general’s office, which responded with a counter suit. Both suits are pending.

Treating the industry as lenders will not work in Georgia, said Nic Greco, president of Essential Legal Funding LLC, a Peachtree City litigation funder.

“Nobody wants to see predatory lending or an end-around usury laws, but at the end of the day all that will do is drive the costs up, and if you treat this more like lending, this kind of lending will go away,” he said.

The State Bar of Georgia plans to develop a legislative proposal this year to address the most offensive aspects of litigation funding while not eliminating plaintiffs’ access to money, said S. Lester Tate III, a Cartersville attorney and president of the bar.

“We live in a society in which, if you have a right, you also have a responsibility,” Tate said. “These people who are loaning money have the right to do that, but they’re not living up to their responsibility.”

The bar will consider, among other solutions, capping the amount companies can charge consumers, although Tate warned Georgia’s political climate makes that approach unlikely to succeed, and allowing trial court judges to control transactions for larger amounts, he said.

House Majority Whip Edward Lindsey, R-Buckhead, a trial attorney, said the Legislature will wait for guidance from the bar.

“It needs to be regulated like any other lender to make sure these consumers are not taken advantage of,” Lindsey said. “These people are often in the most desperate of situations.”