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The controversial lawsuit financing industry has survived its first known appellate-level challenge in Florida. But the state’s 2nd District Court of Appeal criticized the business as “one-sided” and called on the Legislature to consider regulating the industry. Litigation financing companies, many of them run by lawyers, provide money to personal injury plaintiffs. When the plaintiff wins a verdict or settlement, the company collects the principal plus an often hefty fee. If the plaintiff loses, the company generally gets nothing back. “The court has no authority to regulate these agreements,” the 2nd DCA panel said in its unanimous opinion last week in Victoria Fausone v. U.S. Claims Inc., written by Judge Chris Altenbernd. “However, if The Florida Bar is going to allow lawyers to promote and provide such agreements to their clients, it would seem that the Legislature might wish to examine this industry to determine whether Florida’s citizens are in need of any statutory protection.” The 2nd DCA opinion upheld the validity of Victoria Fausone’s financing deal with Pennsylvania-based U.S. Claims, under which the company collected $50,000. Fausone, who had tried to void the contract, also was ordered to pay the company’s legal costs. Daniel P. Rock, the attorney for U.S. Claims, said he was pleased that the Lakeland, Fla.-based 2nd DCA panel “did not judicially attempt to impair a contract where the Legislature has not seen fit to regulate.” Fausone, a Pasco County, Fla., resident who represented herself in the appeal, could not be located for comment. Companies that provide such litigation financing say they are providing money for people who need to pay medical bills and living costs while their lawsuits proceed through the courts. But critics, including some plaintiffs lawyers, consider the practice a form of predatory lending, because these financing deals carry charges as high as 200 percent of the amount advanced. The Florida anti-usury statute prohibits loan companies from charging more than 18 percent annually. The 2nd DCA panel offered its own critique of such financing arrangements. “The purchase agreement in this case is one-sided and designed to prevent a Florida citizen from having access to a local court or another local dispute resolution forum,” the panel wrote. “Such agreements create confusion concerning the party who actually owns and controls the lawsuit, and creates risks that the attorney-client privilege will be waived unintentionally.” REFUSED TO PAY Fausone originally filed a negligence suit after she was hit by a dump truck while riding her bike in May 2000. In October of that year, Fausone obtained litigation financing from two companies, Advance Settlement Funding Inc. of Silver Springs, Fla., and Advance Legal Funding of Biloxi, Miss. In 2001, Fausone contacted U.S. Claims for additional litigation financing. The company gave her $18,000, some of which was used to consolidate her previous loans at better rates. Between August 2001 and November 2002, Fausone went back to U.S. Claims, seeking more money. She eventually obtained a total of $30,000 from the company. In 2003, Fausone settled her personal injury case for more than $200,000. But in a letter to U.S. Claims, her attorney said Fausone had directed him not to pay the $50,397 she owed the company. Rock said Fausone was trying to renegotiate the loan. “She just really thought, ‘I’ve got the money, I can control the shots and I want to negotiate a settlement for less money,” said Rock, whose practice is based in New Port Richey, Fla. “And it didn’t work out the way she designed it.” As allowed in the financing contract, U.S. Claims began arbitration proceedings in 2004 in Philadelphia. But Fausone challenged that contract in Pasco Circuit Court. She argued that the contract terms were unconscionable, the financing charges were usurious and that she should not be compelled to enter arbitration. The trial court never ruled on the declaratory judgment. The arbitration in Pennsylvania resulted in U.S. Claims being awarded $72,000. Fausone did not participate in the arbitration proceedings, despite being offered the chance to take part by telephone. Fausone then filed a motion in Pasco County Circuit Court to vacate the arbitration award. U.S. Claims countered with a motion to uphold the award. The trial court never ruled on Fausone’s motion to have the contract declared a regular loan, which would have made it subject to state limits on loan rates. In April 2004, the Pasco Circuit Court conducted a hearing on whether to confirm or vacate the award. But Fausone decided not to proceed with her motion to vacate, resulting in an order confirming it by Judge W. Lowell Bray. Fausone appealed Bray’s decision to the 2nd DCA in May 2004. On review, the 2nd DCA found Fausone had withdrawn her motion to vacate the arbitration award so there was no legal issue for the panel to consider. “[Fausone] has not demonstrated that the purchase agreements could be invalidated by a Florida court,” the court said. “There appear to be no laws regulating such agreements in Florida. They are not treated like consumer loans. Accordingly, we must affirm the judgment on appeal.” Judges James W. Whatley and E.J. Salcines concurred in the opinion. BAR ALLOWED FUNDING DEALS In a March 2002 ethics opinion, the Bar’s board of governors said litigation financing is not unethical, but it frowned on the practice. “The Florida Bar discourages the use of nonrecourse advancing funding companies,” the 2002 ethics opinion declared. “The terms of the funding agreements offered to clients may not serve the client’s best interests in many instances.” Still, the Bar allowed lawyers to dispense information about litigation financing companies to their clients, share information with the financing companies, and disburse settlement funds. That approval, however, came with a number of restrictions, including rules against attorneys recommending a case to a litigation loan company or initiating contact with a company. At that time, the Bar declined to address whether litigation loans are legal under state law, saying such a decision was outside the scope of a Bar opinion. In an informal opinion several years ago, the Florida Office of Financial Regulation deemed litigation financing a loan and subject to state usury laws. In its ruling last week, the 2nd DCA panel noted that a person in Fausone’s situation might need extra financial help. “A person who suffers a severe personal injury will often need money to care for herself and her family during the pendency of litigation,” the panel said. “Lawsuits take time and come with few guarantees. Grocery stores and home mortgage lenders do not wait for payment merely because a person is unable to work due to an automobile accident or other injury. Thus, it cannot be denied that people like Ms. Fausone may need a credit source during litigation.” Still, the 2nd DCA panel called on the Legislature to study possible regulation of the practice. The court said “a person who is the victim of an accident should not be further victimized by loan companies charging interest rates that are higher than the risks associated with the transaction.” In its 2002 ethics opinion, the Bar’s ethics committee expressed similar concerns about litigation financing arrangements. “The committee can conceive of only limited circumstances under which it would be in a client’s best interests for an attorney to provide clients with information about funding companies that offer non-recourse advance funding or other financial assistance to clients in exchange for an assignment of an interest in the case.” ‘BORDERING ON THE UNETHICAL’ The litigation financing industry recently has organized itself into the American Legal Finance Association to educate state officials around the country about industry practices and weed out abusive operators and excessive financing charges. The association did not provide comment for this article before deadline on Monday. The association reached a deal this year with New York State Attorney General Eliot Spitzer to self-regulate its practice, provide “greater transparency” and promote full disclosure to borrowers. In Florida, state Sen. Walter “Skip” Campbell, D-Tamarac, a plaintiff lawyer and member of the Senate Judiciary Committee, said in an interview that he was not aware of any lawmaker pushing legislation to regulate litigation financing. But Campbell also said he’s no big fan of the industry. “I personally always thought it was bordering on the unethical,” he said. On the other hand, Campbell expressed concern about the possibility of the Legislature encroaching on the authority of the Florida Supreme Court and the Bar to establish court rules and regulate attorney practices. “If the court system is saying this is a legislative issue, I’m very much concerned that the Legislature might start taking on some of these other issues that are clearly court regulation [or] lawyer regulation such as attorney fees,” he said. Sen. Daniel Webster, R-Winter Garden, the chair of the Judiciary Committee, could not be reached for comment.

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