ARIZONA HOUSE OF REPRESENTATIVES

Fifty-sixth Legislature

Second Regular Session

 

HB 2638: litigation; financing; consumer protection; enforcement

Sponsor: Representative Grantham, LD 14

Committee on Judiciary

Overview

Establishes a new chapter in A.R.S. title 12 relating to litigation financing.

History

According to the American Bar Association, litigation finance is the practice of an unrelated third party providing capital to a plaintiff to fund litigation in return for a portion of any monetary recovery.

The Arizona Consumer Fraud Act, which is codified at A.R.S. title 44, chapter 10, article 7, relates generally to elimination and remedying of unlawful practices in merchant-consumer transactions. Under A.R.S. § 44-1522, the act, use or employment by any person of any deception, deceptive or unfair act or practice, fraud, false pretense, false promise, misrepresentation, or concealment, suppression or omission of any material fact with intent that others rely on such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise whether or not any person has in fact been misled, deceived or damages thereby, is declared to be an unlawful practice. The Arizona Attorney General is authorized to take certain actions to investigate and enforce violations of this provision (A.R.S. §§ 44-1524 through 44-1534).

Provisions

Preserving Consumer Control and Recoveries

1.   ☐ Prop 105 (45 votes) ☐ Prop 108 (40 votes) ☐ Emergency (40 votes) ☐ Fiscal NoteProhibits a litigation financier from directing or making any decisions with respect to the course of any action that is subject to a litigation financing agreement (Agreement) or any settlement or other disposition of the action, including decisions concerning the appointment or changing of counsel, the choice of or use of expert witnesses and litigation strategy, and requires that the named party and counsel of record retain all rights to control and decision-making with regard to the action. (Sec. 1)

2.   Proscribes a litigation financier from, directly or indirectly, receiving a larger share of the proceeds of an action than the named parties to the action that is subject to an Agreement. (Sec. 1)

3.   Requires the court in a class action lawsuit to consider the existence of litigation financing and any related conflicts of interest when determining whether a class representative or class counsel would adequately and fairly represent the interests of the class. (Sec. 1)

4.   Instructs the court in a multidistrict lawsuit to consider the existence of litigation financing and any related conflicts of interest when approving or appointing counsel to leadership positions, meaning any lead counsel, colead counsel, common benefit counsel, steering committee membership, executive committee membership and other similar positions or roles. (Sec. 1)

Prohibited Conduct

5.   Prohibits a litigation financier from doing any of the following:

a)   paying or offering to pay a commission, referral fee or other consideration to any person, including legal counsel, a law firm or a licensed health care provider, for referring a person to the litigation financier;

b)   assigning, including securitizing, an Agreement in whole or in part; or

c) being assigned rights to an action that is subject to an Agreement to which that litigation financier is a party. (Sec. 1)

Required Disclosures

6.   Requires legal counsel who enters into an Agreement to deliver a copy to all persons legal counsel is representing in the subject action within 30 days after the earlier of:

a)   being retained as legal counsel; or

b)   entering into the litigation financing agreement. (Sec. 1)

7.   Unless otherwise stipulated or ordered by a court, requires a party to an action or the party's counsel of record to, without awaiting a discovery request and within 30 days after commencement of the action, deliver a copy of the Agreement to all of the following persons:

a)   all parties to the action or to the parties' counsels of record;

b)   the court, agency or tribunal in which the action is pending;

c) any known person with a preexisting contractual obligation to indemnify or defend a party to the action, including an insurer providing indemnification or paying a party's defense costs;

d)   for class actions, any member of the class on request; and

e)   for multidistrict litigation consolidated in Arizona, all legal counsel approved or appointed to a leadership position. (Sec. 1)

8.   Unless otherwise stipulated or ordered by a court, instructs a party to an action or the party's counsel of record to, without awaiting a discovery request and within 30 days after commencement of the action, disclose in writing the existence and nature of any legal, financial or other relationship between legal counsel for the party to the action that is subject to an Agreement and the litigation financier to the persons listed in paragraphs a), b) and c) under provision 7 above. (Sec. 1)

9.   In addition to the disclosures required above and unless otherwise stipulated or ordered by a court, requires a party to an action or the party's legal counsel of record, without awaiting a discovery request and within 30 days after commencement of the action, to disclosure in writing to the persons listed in paragraphs a), b) and c) under provision 7 above, the U.S. Department of State and the U.S. Attorney General the name, address and citizenship or county of incorporation or registration of any foreign person, foreign principal or sovereign wealth fund, other than the named parties or legal counsel of record:

a)   that has a right to receive any payment that is contingent in any respect on the outcome of the action by settlement, judgment or otherwise, or on the outcome of any matter within a portfolio that includes the action and involves the same or affiliated legal counsel;

b)   from which money that is used to satisfy any term of the litigation financing agreement has been or will be directly or indirectly sources, in whole or in party;

c) that has received or is entitled to receive proprietary information or information affecting national security interests obtained as a result of the action. (Sec. 1)

10.  Specifies that the above disclosure requirements are continuing obligations that are triggered on any party or their counsel of record upon entering into a new Agreement or amending an existing Agreement, and that they apply to class actions and multidistrict litigation. (Sec. 1)

11.  Provides that the existence of an Agreement and its participants or parties are permissible subjects for discovery in any action that is subject to an Agreement. (Sec. 1)

Consumer Protection from Adverse Determinations

12.  In any Agreement, requires a litigation financier to indemnify the funded consumers against any adverse costs, attorney fees, damages or sanctions that may be ordered or awarded in any action for which the litigation financier is providing litigation financing, except that indemnification is not required for any adverse costs, attorney fees, damages or sanctions that result from the consumer's intentionally wrongful conduct. (Sec. 1)

Enforcement for Violations

13.  Deems an Agreement that is entered into in violation of this new chapter to be void and adjudges a litigation financier who violates any of the requirements above relating to preserving consumer control and recoveries, prohibited conduct or required disclosures to have committed an unlawful practice under A.R.S. § 44-1522. (Sec. 1)

14.  Requires the court to determine sanctions for any party that fails to make the disclosures required above, and mandates that an evasive or incomplete disclosure be treated as a failure to make the required disclosure. (Sec. 1)

Miscellaneous

15.  Defines the following terms:

a)   action;

b)   consumer or funded consumer;

c) foreign person;

d)   foreign principal;

e)   licensed health care provider;

f) litigation financier;

g)   litigation financing agreement or litigation financing;

h)   national security interests;

i) proprietary information; and

j) sovereign wealth fund.

16.  States that this act applies to any civil action, administrative proceeding, claim or cause of action that is pending or commenced on or after its effective date. (Sec. 2)

17.  Contains a delayed effective date of January 1, 2025. (Sec. 3)

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