NOTE:   HB1254 is not a TCJL sponsored or endorsed legislation.  Representative Thompson filed this bill on behalf of the consumer lawsuit lending industry.  We will keep posted.

Under legislation introduced today by Rep. Senfronia Thompson (D-Houston), entities that provide funding for consumer litigation would be subject to regulation by the Texas Department of Licensing and Regulation. HB 1254 defines a “civil justice funding company” as a person that enters into a contract with a consumer to provide non-recourse financing for the consumer’s legal claim in return for a contingent right to receive an amount of the proceeds of a settlement, judgment, award, or verdict obtained on the consumer’s behalf. A “consumer” is any individual who has a pending legal claim and who either resides in Texas or has a legal claim in Texas. The bill specifies that a civil justice funding transaction may not be considered a loan or subject to state laws governing loans (including limits on interest rates). Moreover, a civil justice funding transaction that complies with this law is not subject to any other state law governing loans or investment contracts.

In order to conduct business in the state, a civil justice funding company must register with TDLR, file a bond not to exceed $50,000 (or an irrevocable letter of credit), and biennially renew its registration. The bill prohibits a funding company from: (1) paying or accepting commissions or referral fees to or from a lawyer, law firm, medical provider, chiropractor, or physical therapist (or an employee of any of them); (2) intentionally advertising materially false or misleading information about the company’s services; (3) referring a customer or potential customer to a specific attorney, law firm, medical provider, chiropractor, or physical therapist; (4) failing to promptly supply a copy of the executed contract to the consumer’s attorney; (5) knowingly providing funding to a consumer who has previously assigned or sold a portion of the consumer’s right to proceeds from a legal claim under certain circumstances; (6) making a decision relating to the conduct, settlement, or resolution of the underlying legal claim (this power must remain solely with the consumer and the attorney handling the claim); or (7) knowingly paying or offering to pay, using funds from the civil justice funding transaction, court costs, filing fees, or attorney’s fees during or after the resolution of the claim. If a court finds that a civil justice funding company has committed an intentional violation, the company may recover only the funded amount provided to the consumer without additional charges.

HB 1254 also regulates the form of a civil justice funding contract. A contract must be in writing, contain the initials of the consumer on each page, and be completed when presented to the consumer for signature. A consumer has five business days to rescind the contract without penalty. The contract must further disclose clearly and conspicuously (in at least 12-point bold type) the funded amount to be paid to the consumer, an itemization of one-time charges, the total amount to be assigned by the consumer to the company (including the funded amount and all charges), and a payment schedule that lists all dates and the amount due at the end of each 180-day period from the funding date until the due date of the maximum amount due to the company by the consumer to satisfy the contract. The contract must contain a specific notification of the consumer’s right of rescission, as well as advising the consumer to obtain the advice of an attorney before signing the contract.

The consumer’s attorney must likewise sign a written acknowledgement as part of the contract attesting: (1) to the attorney’s belief that all costs and charges relating to the funding transaction have been disclosed to the consumer; (2) that the attorney is being paid on a contingency basis under a written fee agreement; (3) that all proceeds of the legal claim will be disbursed through the attorney’s trust account or a settlement fund established to receive the proceeds of the claim on the consumer’s behalf; (4) that the attorney is following the consumer’s written instructions regarding the funding transaction; and (5) that the attorney has not received and will not receive a referral fee or other form of consideration from the funding company in connection with the transaction. If the consumer’s attorney does not complete the acknowledgement, the agreement is void.

The civil justice funding company must specify in the contract that the amount to be paid in the event the consumer recovers will be a predetermined amount based on periodic intervals between the funding date and the resolution date, and not an amount determined as a percentage of the recovery from the legal claim. A funding company has a lien on the proceeds of the consumer’s claim inferior only to the attorney’s lien, a Medicare lien, or another statutory lien related to claim.

Communications between the consumer’s attorney and the civil justice funding company pertaining to the funding transaction do not limit, waive, or abrogate the scope or nature of any applicable statutory or common law privilege, including the work-product doctrine and the attorney-client privilege.

Finally, the provisions of HB 1254 do not apply to a funding transaction between the consumer and (1) an immediate family member or (2) an attorney or accountant who provides services to the consumer. It also does not apply to a bank, lender, financing entity, or other special purpose entity that provides financing to a civil justice funding company or to which a civil justice funding company grants a security interest or transfers any rights or interest in a civil justice funding transaction.

HB 1254 would take effect September 1,2013. TDLR shall adopt rules and procedures to implement the bill by January 1, 2014.

Rep. Senfronia Thompson

Rep. Senfronia Thompson

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