Believe it or not — banks, hedge funds and private investors are now funding lawsuits. They are pumping staggering amounts of money into medical malpractice claims, class actions against companies, and even divorce fights! According to a front page New York Times article by Binyamin Appelbaum, total investments in lawsuits at any given time now exceed $1 billion!
As Mr. Appelbaum puts it, "Lawsuit lending is a child of the sub-prime revolution, the mainstream embrace of high risk lending at high interest rates…" According to his article in The New York Times, Massachusetts in 1997 became the first state to allow lawsuit lending. In 2000, the American Bar Association eliminated rules prohibiting the practice.
Some of those financing other people’s lawsuits are private "investors", but even banks and financial institutions are getting into the act. Another article in yesterday’s New York Times emphasizes that lawsuit lending is currently subject to very few government regulations.
It seems to me that "lawsuit lending" needs far greater scrutiny by bar associations and governmental authorities. There will be situations in which this practice might be appropriate, but there will be many more when it is not.
This much is very clear: lawsuit lending creates an even greater need for asset protection planning. We already live in a highly litigious society. Now, it seems some plaintiffs will be able to get third parties to fund their litigation. This will not only facilitate the filing of more lawsuits, but it will also give plaintiffs resources to attempt to collect on judgments.