The New York Times (NYT) reported this week that hedge funds nationwide have invested billions into mass tort litigation because they can collect 18% or much more in profit. Personal injury litigants often find themselves unable to work due to their injuries and cannot wait for years to collect their award. The practice in New York involves a cash advance that is made to the client who in turn signs away a percentage of his/her recovery. In New York this transaction is described as an assignment, not a loan, to avoid violating state usury laws. Based on how long it takes to collect a recovery, the litigation funding company can recoup double or triple the amount advanced with an effective interest rate at usurious levels. However, the litigation funding company takes the risk that if the client's case is unsuccessful, they do not get paid back anything.
According to the NYT article: "In New York, state lawmakers are trying to crack down on finance firms that offer cash advances to litigants, introducing legislation that would cap interest rates. Critics say that the...loans can leave plaintiffs with only a small fraction of the settlement money they thought they would receive....Analysts estimate that litigation finance is at least a $10 billion industry, and they expect it to keep growing." Plaintiffs' attorneys and hedge funds argue that the litigation funding makes it possible to sue large manufacturer's (especially class actions) that have an unlimited sum of money to aggressively advance any and all defenses with multiple motions and appeals. However, critics of litigation funding point out that the long delays in litigation increase the cost of these loans or advances, which puts pressure on plaintiff's to accept quick settlements at a reduced value.