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Sen. Anna Caballero. (Photo: Kevin Sanders for California Globe)

SB 581: Third Party Litigation Funding

Prohibits a litigation financer from engaging in a litigation financing transaction unless registered with the Secretary of State

By Chris Micheli, February 24, 2023 7:01 am

On February 15, Senate Bill 581 by Sen. Anna Caballero (D-Merced) was introduced related to litigation financing by third parties. SB 581 would add Title 1.6C.18 (commencing with Section 1788.310) to Part 4 of Division 3 of the Civil Code.

Title 1.6C.18 would be titled “Third Party Litigation Financing Consumer Protection Act. The bill would define the terms “consumer,” “legal representative,” “litigation financer,” “litigation financing,” “litigation financing transaction,” and “medical provider.”

SB 581 would prohibit a litigation financer to engage in a litigation financing transaction in California unless it is registered with the Secretary of State as a litigation financer in this state.  A litigation financer may be registered in California if it is in good standing with the California Secretary of State and its paperwork with the Secretary of State contains a statement that it is to be designated as a litigation financer.

Each litigation financer would be required to file with the Secretary of State a surety bond of not less than $50,000. The bond would be payable to the state. The bond would continue in effect while the litigation financer is designated by the SOS. The documents filed with the SOS are public records.

A litigation financer would be prohibited from:

  • Paying or offering commissions, referral fees, or other forms of consideration to any legal representative, medical provider, or any of their employees for referring a consumer to a litigation financer.
  • Accepting any commissions, referral fees, rebates, or other forms of consideration from a legal representative, medical provider, or any of their employees.
  • Advertising false or misleading information regarding its products or services.
  • Referring a consumer or potential consumer to a specific legal representative, medical provider, or any of their employees.
  • Failing to promptly supply copies of any complete litigation financing contracts to the consumer and the consumer’s legal representative.
  • Attempting to secure a remedy or obtain a waiver of any remedy, including, but not limited to, compensatory, statutory, or punitive damages, that the consumer might otherwise be or not be entitled to pursue.
  • Offering or providing legal advice to the consumer regarding the litigation financing or the underlying dispute.
  • Assigning, which includes securitizing, a litigation financing contract in whole or part.
  • Reporting a consumer to a credit reporting agency if insufficient funds remain from the net proceeds to repay the litigation financer.
  • Receiving or exercising any right to direct, control, or otherwise influence the conduct of the consumer’s legal claim or action, including, but not limited to, any settlement or resolution.

In addition, a legal representative retained by a consumer, or a medical provider for a consumer, or any of their employees would be prohibited from having a financial interest in litigation financing and would be prohibited from receiving a referral fee or other consideration from any litigation financer, its employees, owners, or its affiliates.

The terms of the litigation financing agreement must be set forth in a written contract that is completely filled in and there cannot be any incomplete sections when the contract is offered or presented to the consumer, legal representative, or medical provider. Also, a litigation financing contract would be required to contain specified disclosures in 14–point, bold font and be placed clearly and conspicuously immediately above the consumer’s signature line in the litigation financing contract.

The following disclosures would be required in a litigation financing contract:

  • Consumer’s Right to Cancellation with specified language included.
  • Fees charged statement.
  • Litigation financer has no rights to make decisions about the lawsuit.
  • What happens when there is no recovery of any money.
  • Read the contract fully before signing it.

In addition, any the legal representative would be required to acknowledge in the contract that they or their employer or employees have neither received nor paid a referral fee or any other consideration from or to the litigation financer, nor will in the future do so.

A litigation financer may charge the consumer an annual fee not to exceed 36 percent of the original amount of money provided to the consumer for the litigation financing transaction. There are rules related to the annual fee, as well as compounding of fees. A fee cannot exceed 42 months from the date of the contract with the consumer. There are also limitations on providing financing to certain consumers in specified instances.

A consumer or their legal representative is required to provide to all parties to the litigation, including their insurer, if, prior to litigation, any litigation financing contract or agreement under which anyone, other than a legal representative permitted to charge a contingent fee representing a party, has received or has a right to receive compensation or proceeds from the consumer that are contingent on and sourced from any proceeds of the civil action, by settlement, judgment, or otherwise.

Every litigation financer is required to annually file with the SOS a report that must contain the following information:

  • For each person that, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 5 percent or more of the voting securities of the litigation financer specified data.
  • For each litigation financing transaction entered in this state or involving a claim to be litigated in this state, the litigation financer is required to identify specified data.

Thereafter, the Secretary of State is required to annually submit a report to the Legislature regarding the information received. However, this report as filed cannot be made available to the public and would be confidential by law and privileged, and would not be subject to disclosure under the California Public Records Act.

This new law would apply to any action filed or certified as a class action. A litigation financer would be jointly liable for costs assessed pursuant to this law or any monetary sanction imposed, on the consumer whose claim or action the litigation financer is funding pursuant to a litigation financing transaction.

Finally, the practice of litigation financing would be regulated by the Secretary of State, who would be required to adopt regulations consistent with this new law. And, any violation of this law would make the litigation financing contract unenforceable by the litigation financer, the consumer, or any successor-in-interest to the litigation financing contract.

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