Except for the time I served as a jury foreman, I have never seen the justice system in action, up close and personal. But, I did last week as I saw the bi-product of the Colorado Supreme Court debate on an issue close to my heart: legal funding. Legal funding helps families and gives them a choice to replace lost income now—when they need it—not years after an accident. Providers buy a small amount of a plaintiff’s future settlement so that they can get a shot at a fair settlement. You and I both know that insurance companies give lowball offers to victims because it inflates their bottom line. Legal funding is often the only thing that keeps the insurance industry from walking all over the average Joe. That’s why the actions of activist judges in Colorado are so disappointing.
Selling personal property is as American as apple pie, and it’s the most common financial transaction in the world. The right to sell personal property is taken as a basic right, and adds to economic security. But, the Colorado Supreme Court just took that right away from the state’s residents—telling them they can’t sell part of their settlement, they have to take out loans if they want to try to fight for a fair settlement. The one moment of clarity that the Court had is that there is room for “reasonable disagreement”.
The State of Colorado has unique and vague laws when it comes to defining credit. Legal precedent set in state and federal courts across the country have supported the concept that interests in the proceeds of lawsuits can be bought and sold. In bankruptcy court, a federal venue, often estates have no value except for an open claim being litigated. Those rights are often bought and transferred in the dissolution of an estate. States like Colorado, and Colorado specifically, treat products that involve the transfer of a payment stream for cash a sale. Think future annuity streams, lottery winnings, life insurance benefits.
Loans are typically defined as debt instruments that are backed by a personal obligation to repay. That sets someone up for default, default penalties and collection. This simply doesn’t happen with legal funding. The legal funding provider gets paid only from the purchased future proceeds purchased. Loans also have periodic payments (often monthly). Loans create a debt. Legal funding does not have those aspects.
Colorado is conspicuously vague in its definition of debt and loan, and the Colorado Court makes a pretty circular argument: Debt is created from a loan. A loan creates debt.
The one moment of clarity that the Court had is its statement that on this issue, there is room for “reasonable disagreement”. In briefing out the Colorado court, legal funding providers were joined by a bevy of legal scholars and the Colorado trial lawyer’s association to point to case precedent around the country pointing to treatment of lawsuits as assets that can be sold, an established practice that is supported by Colorado Supreme Court case law dating back over a century to 1903, and on point decisions from the supreme courts of neighboring states. On the other side of the argument, the State was joined by the U.S. Chamber of Commerce, several insurance institutes and an association of insurance defense lawyers. Strange bed fellows.
In the end, the Colorado case ignored and did not address the counter arguments. It reached for supporting (but not substantive ) evidence to support its view, and avoided the uncomfortable conflicting precedents.
I’m told Colorado beats its own path apart from the rest of the country. Just look to the radical position they took with marijuana which has incited staunch opposition from bordering states that have sued Colorado over worries about cross-border trafficking. I have an unpleasant taste in my mouth from that unique Colorado justice system, and it’s not apple pie. Tastes like...disappointment.
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The trade association for litigation finance providers (aka lawsuit finance), the Alliance For Responsible Legal Funding (ARC), has its view published at www.prnewswire.com/...