The Colorado Supreme Court ruled that litigation financing companies are subject to the same regulation as payday loan companies.

The practice of lending money at extremely high interest rates to people and companies filing lawsuits has been criticized for years, including in Colorado.

While proponents of litigation-funding companies say they help level the playing field for those who would not otherwise be able to file personal injury lawsuits, critics say these companies take advantage of injured plaintiffs, give third parties undue influence over legal decisions, and drive up the overall cost of litigation.

The Colorado Supreme Court finally ended a long-running legal battle between the state and two national litigation-funding companies this month when it sided with the state and ruled November 16 that businesses that offer cash advances to plaintiffs should be subject to payday lending rules.

Taking Advantage of Cash-Strapped Plaintiffs?

The decision involved two such companies, Oasis Legal Finance LLC and LawCash, that advance payments — often less than $1,500 — to plaintiffs who are pursuing personal injury lawsuits, including those involving car accidents, slip-and-falls, and medical malpractice. Plaintiffs often need money to get by while their cases pend in court because they cannot work, while medical providers threaten to turn their unpaid accounts over to collections and they are unable to pay other month-to-month living expenses. After all, most people don’t plan for a lawsuit.

But litigation-funding companies don’t offer desperate plaintiffs money from the goodness of their hearts. The U.S. Chamber of Commerce has said it believes these loans actually stimulate more litigation and force consumers to hold out for more money in order to repay the loans, which frequently carry interest rates, fees, and charges as high as 200 percent.

Oasis and LawCash both stopped operating in Colorado in 2010 after the state office that regulates the Colorado Uniform Consumer Credit Code held that disclosure and licensing requirements applied to their businesses. After the companies filed suit to get that decision overturned, the Colorado attorney general counter-sued, accusing Oasis and LawCash of unlicensed lending and charging exorbitant interest rates to plaintiffs.

The companies defended their lending practices by saying that they operate differently from other short-term lenders and their customers don’t have to pay back any money if the amount they recover is less than the cash advanced. But according to Forbes, Colorado’s UCCC defines a loan as the creation of debt by the lender’s payment or agreement to pay money to the consumer, and requires payday lenders who offer credit at rates above 12 percent to be licensed and supervised. Similarly, the Colorado Supreme Court ruled that litigation-funding loans were debt because they created an obligation to pay.

Litigation-Finance Industry Growing

Litigation-funding companies have definitely experienced ups and downs but continue to prosper, and may be considering expansion into new areas, including class-action injury cases and bankruptcy court. Despite the predatory nature of the industry, hedge funds and individual investors alike are drawn to it, perhaps because of the high interest rates charged. Growth may begin to suffer as plaintiffs become more educated regarding the risks of such loans, no matter how desperate they may feel when settlement seems to be a distant proposition, at best.

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