{"id":50020,"date":"2016-09-30T11:27:00","date_gmt":"2016-09-30T16:27:00","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/supreme\/legal-commentary\/a-new-york-decision-that-may-imperil-plaintiffs-ability-to-finance-their-lawsuits.html"},"modified":"2016-09-30T11:27:00","modified_gmt":"2016-09-30T16:27:00","slug":"a-new-york-decision-that-may-imperil-plaintiffs-ability-to-finance-their-lawsuits","status":"publish","type":"supreme","link":"https:\/\/supreme.findlaw.com\/legal-commentary\/a-new-york-decision-that-may-imperil-plaintiffs-ability-to-finance-their-lawsuits.html","title":{"rendered":"A New York Decision That May Imperil Plaintiffs’ Ability to Finance Their Lawsuits"},"content":{"rendered":"\n
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A New York Decision That May Imperil Plaintiffs’ Ability to Finance Their Lawsuits:
Why It Should Be Repudiated, Or Limited to Its Facts<\/span><\/h1><\/td>\n <\/tr>\n

By ANTHONY J. SEBOK <\/h2>
<\/a>\n\nanthony.sebok@brooklaw.edu<\/a>
\n\n—-\n\n
Monday, Apr. 18, 2005<\/div><\/td>\n\n <\/tr>\n <\/table>\n

A New York state court ruling reported in the New York Law Journal on April 1 seems, at first glance, to challenge the legal status of outside litigation financing in New York. Such financing allows plaintiffs to fund their expenses – from medical care, to expert testimony, and the like – without wholly relying on their contingency lawyers’ coffers to do so. <\/p>

The decision, Echeverria v. Lindner<\/i><\/a>,<\/i> casually suggested that New York courts should view investments in lawsuits as loans, which would therefore be regulated by New York’s usury statutes. (The usury statutes prohibit the charging of excessive interest.)<\/p> \n\n\n

In this column, I will explore why Echeverria<\/i> is a troubling decision. I will argue that it ought to either be repudiated by other New York judges, or be limited to its very special facts.<\/p>

The Basic Facts of Echeverria, and the Issue on Which the Judge Focused<\/b><\/p>

On September 1, 2000, Juan Vicente Echeverria was working as a day laborer on a construction site in Long Island when he fell off of an elevated platform . His injuries were so serious that he eventually required back surgery. <\/p>

Echeverria sued under New York’s Labor Law \u00a7 240<\/a>. That law holds contractors and property owners strictly liable if a safety measure designed to protect a worker from an “elevation-related hazard” turns out to be inadequate, fails, and causes an injury. <\/p>

On June 4, 2003, Echeverria was able to obtain a default judgment against two defendants, and on August 2, 2004 Echeverria was able to obtain default judgments against three more defendants. On October 27, 2004, just before trial, Echeverria settled with the remaining defendants. <\/p>

The damages issue was left to the judge. Judge Ira B. Warshawsky decided, after some misgivings, to award Echeverria $2.1 million in damages. Echeverria had suffered considerable medical expenses, loss of earnings, and pain and suffering as a result of his fall. In addition, the judge noted, Echeverria also had had to pay a company named Lawcash $14,806. <\/p>

What was this for? On November 25, 2003, Lawcash handed Echeverria a check for $25,000. In its contract with Echeverria, Lawcash described the $25,000 as an investment in Echeverria’s suit. <\/p>

\n\nUnder the contract’s terms, if Echeverria was successful in his litigation, Lawcash would get all or some of its money back (depending on how much Echeverria himself was able to obtain), as well as a significant additional payment. If Echeverria lost his suit or recovered nothing, Lawcash would receive nothing, losing its $25,000 “investment.”<\/p>

Judge Warshawsky noted that Lawcash received almost $39,000 in return for its “investment” of $25,000, for a “profit” of almost $14,000 in less than a year. He was clearly bothered by what he saw as a more than 50% rate of interest. And he wondered if the contract that opened up the possibility of an interest rate this high was illegal.<\/p>

This was an odd issue for the judge to focus on, because Lawcash was not a party to the proceeding, and had already been paid. <\/p>

Had Echeverria sued Lawcash to try to void the agreement, it would have been logical for this issue to be raised. But it was not logical in the proceeding to determine how much the defendants would pay Echeverria to compensate him for his losses.<\/p>

So why did the judge raise the issue of the legality of the Lawcash contract? Maybe he was trying to send a message about the whole outside litigation financing business. <\/p>

Was This Rate of Interest Illegal? <\/b>Some Possible Bases for Thinking So<\/b><\/p>

<\/b><\/b><\/p>

First, Judge Warshawsky explored the possibility that the contract between Echeverria and Lawcash was invalid because it was champertous. <\/p>

I have examined the strange history of the rule against champerty in the United States in a number of earlier columns – including this one<\/a>. The rule basically tries to limit the “stirring up” of litigation by officious intermeddlers (or lawyers) by prohibiting individuals from purchasing another person’s lawsuit.<\/p>

But it turns out that New York has a very limited rule against champerty – one that does not view an investment in a suit that has already been filed as problematic. After all, absent very unusual circumstances, an investment by a third party after a plaintiff has sued cannot be the cause of the lawsuit. Such investments might enable a suit go forward but they don’t usually “stir it up”; thus, in New York’s view, they aren’t champertous.<\/p>

What about the idea that the agreement interfered with Echeverria’s ability to make independent decisions about whether and when to settle? An Ohio court had so held, with regard to all agreements regarding outside litigation financing, in 2003 in Rancman v. Interim Settlement Funding Corp. – <\/i>a decision that I criticized in an earlier column<\/a>. <\/p>

But Judge Warshawsky did not echo the Ohio court’s reasoning. Indeed, he noted that litigation financing might actual actually help plaintiffs in retaining their independence, by giving them the leeway to resist the temptation to settle too cheaply. And that dynamic certainly may have been true in the case of Echeverria himself – an illegal alien working in a blue-collar job, who very probably had little savings.<\/p>

Was the Agreement a Contract for a Usurious Loan?<\/b><\/b><\/p>

Judge Warshawsky next took up the question of whether the Lawcash agreement was void because it was a usurious loan.<\/p>

New York, like most other states, has criminal and civil laws against usury. New York’s law generally prohibits loans charging interest higher than 16%. <\/p>

Judge Warshawsky held that the agreement between Lawcash and Echeverria was a loan agreement. And he noted that it explicitly provided for a return of at 3.85% per month if Echeverria succeeded in his suit. Thus, he concluded that it was usurious. Judge Warshawsky held that Lawcash should have received no more than $4,000 in addition to the return of its initial $25,000 investment. <\/p>

But why did Judge Warshawsky view this as a loan agreement in the first place – rather than an investment agreement (which would then fall outside the usury law)? <\/p>

The judge deemed Echeverria’s claim a “sure thing” because he was suing under a statute that imposes strict liability. (Strict liability is not dependent on a showing of negligence; it follows directly from a showing of causation and harm.)<\/p>

Why Judge Warshawsky Was Wrong to See The Lawcash Agreement as a Loan<\/b><\/b><\/p>

There are a number of reasons to be skeptical of Judge Warshawsky’s argument.<\/p>

First, the idea of any lawsuit being a sure thing is a little silly. Until a judgment has been collected many things can go wrong.<\/p>

Second, this lawsuit was far from a “sure thing” in 2003, when Lawcash invested in the case. At that point, two defendants out of a set of seven or eight had defaulted (that is, failed to appear in court). Thus, no one could know if they had any assets, or if they did, how difficult it would be to reach them. Moreover, Echeverria’s illegal alien status might reasonably have seen as complicating his ability to win and collect a judgment. What if he were to be deported before the case could proceed? <\/p>

Third, strict liability is not absolute liability. The plaintiff has to still prove that the accident was caused<\/u> by the absence or failure of a required safety measure that failed to give the proper<\/u> <\/i>protection. <\/p>

So the plaintiff was to prove more than merely that he suffered an “elevation-related” injury while in the employ of the defendant or on its property. This proof could have gone wrong – or been rebutted by defendants – in any number of ways. <\/p>

If scaffolding cases were truly open and shut, why would defendants ever go to trial with them? Yet they do. And Judge Warshawsky, as a trial judge, must know that. <\/p>

The Problematic Implications of Judge Warshawsky’s Ruling<\/b><\/b><\/p>

In the end, Judge Warshawsky’s ruling is not only ill-reasoned, it is so vague as to be useless. That is why I believe other courts should shy away from following it. <\/p>

Judge Warshawsky cannot really be saying that all civil cases based on strict liability are “sure things.” They plainly are not. So he must be saying, instead, that judges should decide, case by case, whether a given case was a sure thing – and if it was, strike down any agreement with an entity such as Lawcash. <\/p>

This is recipe for disaster. Judges’ assessment of cases will be inevitably affected by twenty-twenty hindsight, when the question is really what the case looked like when Lawcash entered into its agreement with the plaintiff. And the end result will be that the firms that provide litigation support will charge more for their services, out of fear that they will not know whether any given agreement will be deemed usurious or not. <\/p>

Some firms may limit their activities or leave the market. Plaintiffs will inevitably be hurt; some may not be able to get their litigation financed at all. <\/p>

Imagine if this had happened to Echeverria. He <\/p>

got his back operation only a few months after<\/u> Lawcash invested in his suit. What if Lawcash had not invested? Would he still have received decent medical care, and gotten a $2 million judgment? <\/p>

Judge Warshawsky never offered facts to suggest that Echeverria was made worse off as a result of the deal he struck with Lawcash. If anything, the facts suggests Lawcash’s money was important in Echeverria’s litigation success.<\/p>

The <\/b>Wrong Way<\/b> to Reform Litigation Financing<\/b><\/b><\/p>

It may be the case that the litigation financing industry needs to be regulated in ways that insure that firms like Lawcash do not take advantage of a poor and vulnerable laborer like Echeverria. But rulings like this are the wrong approach. <\/p>

The theoretical concerns that the judge might have about litigation support have not yet been supported by evidence. Furthermore, the solution offered by the judge–to apply a cap of 16% return to those cases that are determined after the fact to be “sure things”–would make it more difficult than ever for litigants to get help.<\/p>\n\n\n\n\n\n<\/span>\n\n\n\n\n\n

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\n\n\n\n\n\n<\/a>\n\nAnthony J. Sebok, a FindLaw columnist, is a Professor at Brooklyn Law School. His other columns on tort issues may be found in the archive of his columns on this site. \n\n

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