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An Ohio appellate court has dealt a blow to the litigation-finance industry, ruling that a loan to help finance a personal injury suit charged usurious rates and thus was invalid. On Oct. 31, the Ohio Court of Appeals in Akron ruled that two companies that advance money to personal injury plaintiffs, on the understanding that they will be repaid only if the plaintiffs prevail, are making loans — not “contingent advances” — and thus had broken state usury and lender-registration laws. As a result, the plaintiff in the suit, Roberta Rancman, will not have to repay the loan company anything, including the $7,000 loaned her to finance her personal injury suit. Rancman v. Interim Settlement Funding Corp., No. 20523. A professor who is an expert on the subject, George Steven Swan of the North Carolina A&T State University business school, said that as far as he knows, the ruling is the first time a court has found a litigation finance company in violation of a usury law. This decision comes at a time when the industry to finance litigation — also called “future settlement financing,” “interim financing” or “non-recourse funding” — is under increasing scrutiny. After the Sept. 11 terrorist attacks, plaintiffs’ lawyers complained to federal prosecutors in Chicago that another Ohio company, Providence Inc., may have violated federal law in its soliciting business from families of World Trade Center victims. And in a lawsuit in federal court in North Carolina, Nevada-based Future Settlement Funding Corp. (FSFC) is accused of fraud in its efforts to loan money to potential litigants. FSFC, which is also one of the defendants in Rancman’s suit, appears to be a pioneer in the industry. Swan, who wrote about the subject in the summer 2001 issue of the New England Law Review, wrote that FSFC founder Perry Walton largely “discovered the litigation financing company marketing niche.” And, according to Swan, “Walton avers that usury laws do not apply because his loans constitute contingent obligations.” According to Walton, his industry “levels the playing field and lets the little guy defeat the big insurance companies that drag out litigation until the plaintiff becomes strapped for cash and must settle for less than his claim is worth.” OHIO LITIGATION Roberta Rancman retained Akron, Ohio’s Slater & Zurz to go after her soon-to-be ex-husband’s insurance company after it refused to compensate her for injuries caused by an uninsured driver. When she needed money to make ends meet, the firm reluctantly agreed to help her get financing from FSFC and one of FSFC’s Ohio affiliates, Interim Settlement Funding Corp. (ISFC), said Walter Kaufmann of Slater & Zurz. He added that IFSC’s president, Richard Ashcroft, carefully reviewed the firm’s files and got either Rancman’s or the firm’s signature on so many documents that the deal “looked like a UCC transaction.” Exhibits filed with the appellate court show that in 1999 Rancman signed five documents, among them an assignment, a lien and a security agreement, while an attorney from the firm signed an Attorney Acknowledgment of Lien. ISFC and FSFC advanced a total of $7,000 to Rancman; the agreements called for her to pay at least $16,800 out of any recovery, and as much as $27,600, depending on how long the case dragged on. After Rancman received a $100,000 settlement, Slater & Zurz wrote to FSFC and ISFC in December 1999, giving its opinion that Rancman owed only the $7,000, plus 8 percent in statutorily dictated interest. When the companies balked, Rancman filed suit, seeking a declaration that FSFC and ISFC were engaged in the business of making loans that violated Ohio’s laws prohibiting usurious interest rates and requiring lenders of small amounts to register with the state. The trial court, and ultimately the appellate court, agreed. Writing for a three-judge panel, Court of Appeals Judge William R. Baird said, “The evidence presented at trial demonstrated that the contracts were loans because no real probability existed that non-payment would occur.” He pointed in particular to careful research by IFSC’s Ashcroft, which included consulting a jury verdict database, tallying Rancman’s medical bills and looking for factors predictive of low risk. Kaufmann said Ashcroft testified at trial that during his first year in business, 19 out of 22 claims were paid in full. Baird ruled that because of the companies’ failure to register with the state, Rancman would not have to pay back any of the money loaned to her, let alone the more than 180 percent annual interest called for in the agreements. In reaction, FSFC President Connie Elliano, who is a lawyer and represented the company in this case, wondered how a law firm could facilitate a transaction, however reluctantly, and then turn around and disavow it. She said that Ashcroft had tried to register as a lender but was told by the state that his advances were not loans. Walton said that, contrary to the court’s impression, the company was not a “Crystal Ball Funding Corporation” and could not profitably make advances at 8 percent interest given the risks. Both suggested that the real losers would be desperate Ohio plaintiffs who will no longer have recourse to the company’s services. Though reserving judgment, ISFC’s outside counsel — Robert M. Stefancin of Akron’s Brouse McDowell — suggested that the company may still be able to make advances to Ohio customers, arguing that whether a transaction is a loan or a contingent advance depends on the facts peculiar to that transaction. PROVIDENCE INC. Attorney Thomas A. Demetrio of Chicago’s Corboy & Demetrio complained to federal prosecutors about Providence in September. He believes the company may have violated a federal law designed to shield the families of airline accident victims from attorney solicitation for 45 days. One of Demetrio’s clients, the widow of a man who died on American Airlines Flight 11, received a package from Providence less than two weeks after the plane collided with the World Trade Center. The package contained a $50 bill, a telephone calling card and a recommendation that she contact one of four firms in New York, Cincinnati and Tulsa, Okla. Demetrio said, “This represents the worst in our society at a time when trial attorneys are providing assistance on a pro bono basis to the victims of the Sept. 11 tragedy.” A spokesman for the U.S. Attorney’s Office in Chicago would not confirm or deny that an investigation had been opened. Providence refused to comment on the matter. In North Carolina, FSFC and other defendants have been accused of fraud, interference with contract and other torts in a suit filed last year in the U.S. District Court for the Western District of North Carolina. Weaver, Bennett & Bland P.A. v. Speedy Bucks Inc., No. 1:00cv249-T. According to a March 2001 order allowing the suit to go forward, the Matthews, N.C., law firm Weaver, Bennett & Bland accuses the defendants of negotiating a contract with one of the firm’s clients behind its back after the firm had advised the client that future settlement funding was illegal under state law. The firm alleges that the client turned down a $1 million settlement because her secret contract meant that no recovery would leave her in a better position (because she could keep her advance) than any settlement short of $1.2 million. A jury awarded nothing to the client, leaving the firm without any compensation. Trial in the case is slated for May.

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