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Investing in pending personal injury suits continues to grow in the state as well as nationwide. The lawsuit-factoring industry got a boost in New Jersey in January when a state supreme court advisory committee permitted lawyers to refer clients to a factor to get an advance against the anticipated settlement or award. There is even a course offered in Las Vegas on how to start and operate a factor to invest in pending suits. But now that more and more plaintiffs’ lawyers are signing on to such deals, agreeing to pay off the factor’s lien upon recovery, a question looms: Are these funding companies lenders and therefore subject to the state’s criminal usury law that forbids interest rates above 30 percent on loans to individuals? The question is important because most if not all of these factors are charging more than 30 percent � and some are charging close to 200 percent. Most lawyers familiar with the growing business say the issue has not yet been addressed in New Jersey. The factors say they are not subject to the criminal usury statute — N.J.S.A. 2C:21-19 — because they do not lend. Rather, they purchase an interest in the proceeds of a future settlement or award. They rely on legal opinions telling them that their financial product cannot be considered a loan because it is a nonrecourse transaction. In other words, if there is no recovery, there is no obligation to pay anything back. These legal opinions also point out that a loan has a fixed payment date, unlike the new “purchasing agreements” or “investment agreements.” “I make an investment in that person’s case,” says Joseph DiNardo, president of Buffalo-based Plaintiff Support Services. He says the company has $8 million invested in pending litigation involving at least 400 clients, including some in New Jersey. “The law is that you can do it because it’s on a nonrecourse basis,” says DiNardo, a lawyer who stopped practicing law to become a factor, when asked about the usury statutes. Plaintiff Support Services charges 34 percent on an annual basis and is among the lowest in the industry. At the other end of the spectrum is Advance Legal Funding of Biloxi, Miss., which charges 15 percent a month, or close to 200 percent on an annualized basis when compounded. Allyn Sweet of Bowie, Md., a broker for Advance Legal who services New Jersey, says Advance Legal has recently gone to a rate of 100 percent for the first six months, and 200 percent if payment is not made for more than six months. “In other words, if you borrow $1,000 and the case doesn’t settle for over six months, you pay back $1,000 plus $2,000,” Sweet says Sweet says “that’s pretty expensive,” and therefore she has been trying to steer business to factors with lower rates. A man describing himself as the owner of Advance Legal says when asked about the firm’s rates, “We don’t charge 15 or 20 percent a month like some do … . We negotiate our fees, and we have flat fees.” He declines to say what those fees were. But an Advance Legal “investment agreement” obtained by the Law Journal for a proposed $2,000 advance six months ago obligated the plaintiff to pay $2,000 ” … together with interest at the rate of 15 percent per month.” The owner, who says he is a nonpracticing lawyer, declines to identify himself, saying only that his daughter, son and sister were also in the family-operated firm. A colleague in the industry, though, identifies Advance Legal’s owner as Gerald Emil. A spokeswoman for the State Bar of Mississippi in Jackson says Emil is a Biloxi lawyer suspended from the practice of law. A person at Emil’s home confirms that Emil is the head of Advance Legal. The man who answered the phone at Advance Legal says, “We have three or four cases a month in New Jersey, which I’d say is one of the hotbeds in the area of torts.” He estimates that the practice has ballooned to a multibillion-dollar business nationwide and that his firm alone has funded cases in every state. “Banks won’t touch it,” he says, agreeing with his competitors that factors are “providing the necessities of life” for poor plaintiffs whose only asset of much value is their claim and who need immediate cash for rent, groceries, tuition, bail or their children’s education. He and Darryl Levine, the CEO of USClaims of Wilmington, Del., point to the Las Vegas lawsuit-funding school as one reason for the fast growth of the industry. USClaims is underwriting tort cases in five states, including New Jersey, with a rate of 2.5 percent a month, or 34.85 percent annually. LEARNING IN LAS VEGAS Those Las Vegas classes are run by Perry Walton, whose company, Future Settlement Funding Co., makes advances nationwide in what Walton calls “lower value cases” worth no more than $10,000. Another company in which he is a part owner but says he does not run, Resolution Settlement Corp., underwrites potentially big cases, valued at up to $500,000, he says. Walton, a one-time rock musician and mobile home park developer from North Carolina, acknowledges that he was convicted three years ago in Nevada of extortionist collection of a debt while running a finance company called Wild West Funding. Prosecutors charged him with threatening a client who failed to pay him back. Walton says that while he made the threat, the case was “political,” though he declines to elaborate, and he was the only person ever charged under that statute. “I introduced the concept on a national basis … . I’ve talked to 400 people around the country,” he says of the growing presettlement funding business. “Pretty much everybody who got their start in the industry got it from me.” He says he ran many classes in 1998 and 1999 but gives few courses today. Two people in the industry say the course costs $12,000 to $14,000. Walton says his operation has evolved more “from being a retailer to a wholesaler,” explaining that his company invests in tort cases written by other factors on a participation basis. A LOAN BY ANY OTHER NAME Asked about state usury laws across the country, Walton says his counsel advises him, “this is not a loan, this is a contingent repayment, an investment in a case contingent upon an outcome which may not happen.” Levine, the CEO of USClaims, agrees that the product is not a loan because “there is no obligation to pay us back … . If there’s no proceeds, we get nothing.” Steven Goldstein of New York’s Goldstein & McGowan, who has used USClaims, says that the issue has not been decided in New York or in New Jersey, where he also practices as a solo in Springfield. He terms “outrageous” rates of 10 percent to 15 percent a month. He predicts that “in New Jersey there will be a case where somebody, a client or a lawyer, is not going to pay the factor back” on the grounds that the interest is illegal. Then the issue will be settled. John Cannel, executive director of the state’s Law Revision Commission, which has proposed dismantling the state’s usury laws on the civil side, says the question of whether the new products are loans “is right on the line.” But he says he believes they will ultimately be labeled loans. “My feeling is that it is a secured loan … even though modern law says that if a thing is not sellable, then it shouldn’t be used as security.” He and others point to the language used. Not only does Advance Legal use the terms “interest” and “rates,” but Plaintiff Support Services runs ads with a headline saying, “Where do you go when your client asks you for a loan?” DiNardo calls the headline only a “catch phrase” and is not intended to mean that a loan is involved. On its Web site, USClaims describes the method of deciding on a fee this way: “The longer it takes for USClaims to receive payment, the larger the amount due.” Lawyers are prohibited from lending their clients money pending the end of the case. Harvey Grossman, a West Orange, N.J., lawyer who runs a factor called The Lions Group, says the funding of cases is here to stay. He cites last January’s Opinion 691, in which the Supreme Court Advisory Committee on Professional Ethics concluded that it was ethical for lawyers to advise clients about factors if they need cash. Opinion 691 is silent on the issue of rates. In 1992, the committee issued Opinion 670 on the factors that sprang up to buy Joint Underwriting Association settlements at discount. But where the committee said lawyers should be satisfied that the discount is reasonable, Opinion 691 instructed lawyers not to be involved in any financial advice, saying the client must make his or her own business decision. The committee did say, though, that lawyers should recommend the client see a financial consultant if he or she is unsophisticated. Grossman says his fees vary, but acknowledges writing business at a rate of 28 percent upfront, meaning that the per annum rate can be dramatically higher if the case settles before a year. He says the rates will fall as competition increases. “Just like the factors buying the JUA settlements, they started out at 60 cents on the dollar but wound up at 90 to 95 cents as the marketplace drove the rates down.”

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