During its 2019 regular session, the West Virginia Legislature once again reviewed the West Virginia Consumer Credit and Protection Act and determined additional changes were necessary. The Act, one of the primary statutes governing consumer loans, leases, credit sales, and other transactions in the state, has served as a basis for lawsuits by consumers against banks and other financial institutions since its 1974 enactment.

This time, the Legislature amended the Act to create a new article, Article 6N. Effective June 5, 2019, it regulates and imposes restrictions on “litigation financiers” and “litigation financing contracts.”

The Multi-Billion Dollar Global Industry

Litigation funding started in the mid-1990s in the United Kingdom and Australia. It moved into the United States in the mid-2000s. According to the U.S. Chamber’s Institute for Legal Reform, third-party litigation funding “is a global industry with approximately $100 billion available to funders and firms.”

Litigation funding involves third-party funding of legal cases. Companies provide financing for litigants—usually plaintiffs—allowing them to prosecute their lawsuits. In exchange, the litigation funding company gets a percentage of any judgment or settlement the litigant obtains. According to the American Bar Association’s ABA Journal, advocates of litigation funding argue it “levels the litigation playing field, benefits companies and firms by allowing them to free up capital for core business purposes, and reduces the risks for firms and their clients to settle for less than what their cases are worth.”

On the other hand, critics argue it “encourages the filing of frivolous suits, and gives plaintiffs’ attorneys an unfair advantage in settlement talks.” They also argue litigation funding inserts an outside party into the litigation who might try to exert control. Indeed, according to the U.S. Chamber’s Institute for Legal Reform, an executive at one of the world’s largest litigation funding companies admitted they “make it harder and more expensive to settle cases.”

The Act’s Regulation of the Industry

Against this backdrop, the West Virginia Legislature felt it necessary to regulate the practice of litigation funding.

The new article is limited to “consumer” litigation funding, and “consumer” is defined as “any natural person who resides, is present, or is domiciled in this state.” Accordingly, this new article does not appear to apply if the litigation funding is provided to an entity, such as a corporation.

The new article regulates “litigation financiers,” defined as any person, entity, or partnership engaged in “litigation financing.” Litigation financing is defined as a nonrecourse transaction in which financing is provided to a consumer in return for a consumer’s assigning to the litigation financier a contingent right to receive an amount of the potential proceeds of the consumer’s judgment, award, settlement, or verdict obtained with respect to the consumer’s legal claim.

It should be noted that the Legislature included an express exception from the definition of litigation financing for legal costs advanced by the consumer’s attorney.

Article 6N regulates both litigation financiers and litigation financing contracts. Requirements for financiers include the following:

1. Financiers are required to become registered as active and in good standing with the West Virginia Secretary of State;
2. They must post a surety bond with the Secretary of State and approved by the Office of the West Virginia Attorney General in an amount not less than $50,000;
3. They are prohibited from paying to or receiving from the consumer’s attorney any commission, referral fee, rebate, or other compensation;
4. They are prohibited from assigning a litigation financing contract (with certain exceptions); and
5. They are prohibited from reporting the consumer to a consumer reporting agency if insufficient funds remain from the net proceeds of the litigation to repay the financier.

Requirements for contracts include the following:

1. The transaction must be set forth in a written contract “that is completely filled in with no incomplete sections when the contact is offered or presented to the consumer”;
2. The contract must include certain disclosures set forth in the new article in at least 14-point, bold font placed clearly and conspicuously within the contract;
3. Regarding certain disclosures required in the contract, the new article sets forth the language that must be included in the contract and where it must appear in relation to the consumer’s signature line;
4. The contract must contain a right of rescission;
5. The contract must not charge an annual fee of more than 18 percent of the original amount of the money provided to the consumer with an additional limitation if the consumer enters into more than one contract per year;
6. The contract must not compound fees more often than semiannually;
7. The contract must contain a written acknowledgment by the consumer’s attorney (if the consumer is represented) of certain facts, including that the attorney is not receiving a fee or compensation for referring the consumer to the financier; and
8. The contract is prohibited from containing a mandatory arbitration clause.

If the requirements are not followed, the consequences can be steep. Any violation shall render the contract unenforceable by the financier, any successor-in-interest, or the consumer. Further, if the consumer and financier litigate the enforceability the contract, the defendant may be responsible for paying the plaintiff’s attorney’s fees.

The Immediate Effect of the New Article

The enactment of the new article did not go unnoticed. Litigation Finance Journal characterized it as “impos[ing] strict regulation on consumer legal funders, which will essentially prevent the funding industry from operating in the state.” The Alliance for Responsible Consumer Legal Funding, a litigation funding trade group, characterized the new article as “capp[ing] interest rates so low that funders have mostly stopped doing business in [West Virginia].”

As stated, the new article may prevent plaintiffs from receiving funding that would allow them to file or continue a lawsuit. It is too early to determine whether Article 6N will have any appreciable effect on the number of lawsuits filed against banks or other financial institutions under the Act. However, if a litigation financier provides funding for a plaintiff to sue a bank, at least that fact will not be hidden. The new article requires the consumer to disclose the existence of a funding transaction and produce a copy of the contract without waiting for the defendant to request it.