Recently we have written about some of the pitfalls associated with litigation funding when it comes to attorney liability (see here). Thereafter, we discussed how a New York appellate court, for the first time, affirmed the discoverability of litigation funding agreements (see here). But even more recently, New York Governor Kathy Hochul signed the Consumer Litigation Funding Act (A804-C/S1104A) into law on December 19, 2025, which seeks to stifle the recent onslaught of third-party litigation funding practices in the state. The new regulatory scheme, which takes effect June 17, 2026, and does not apply to agreements made prior to that date, introduces fee caps, lender-registration requirements, standardized agreements, and transparency measures that may expedite settlement, limit unreasonable demands, and help attorneys avoid potential liability.
This new law could help stem the misuse of litigation funding by lenders. One materially important portion of the legislation caps a funding company’s total recovery at 25% of the gross recovery of the litigation. This should help reduce the problem of litigation funding as an obstruction to settlement negotiations. Lender funds will be restricted, which should facilitate settlements by making it more likely that plaintiffs will accept reasonable settlement offers as opposed to dragging cases on for years.
In addition, all consumer litigation funding companies must register with the state, submit to character and fitness evaluations, and post a bond. This registration requirement creates a public registry of authorized funders and could help drive the most predatory lenders out of New York and dissuade new ones from setting up shop here. The new law also requires that contracts be written in plain, clear language, and it gives plaintiffs a rescission period of 10 days. The law furthermore aims to prohibit misleading advertising to prospective plaintiffs, which protects the public at large.
Another important provision is that repayment must be a predetermined amount based on time intervals from funding through settlement – not a percentage of the recovery – and the funding agreement must include a payment schedule listing the funded amount and charges due at the completion of each 180-day interval, up to the maximum amount owed. As it stands now, these lenders operate largely in the dark, and their identities, if revealed at all, typically emerge only after the case has been resolved.
With respect to potential attorney liability, the new law should help curb undue influence, enabling attorneys to avoid ethical dilemmas. For example, presently, third-party financiers exert various levels of influence over litigation strategy, often pressuring plaintiffs to drag out cases in hopes of a higher payout. The new law explicitly prohibits funding companies from influencing settlement decisions, legal strategy, or the timing of the disposition, making it clearer that settlement authority rests solely with the plaintiff and their counsel.
Further, the law addresses referral fees. As it stands now, litigation funders typically have business relationships with medical providers and law firms, creating potential for conflicts of interest. Under the new law, funding companies will be forbidden from referring clients to specific lawyers or medical providers, which should help lawyers mitigate allegations of conflicts of interest with the client and help them avoid any allegations of divided loyalty between the client and lender.
With every new law comes the possibility of new litigation, and this new law should be no exception. This legislation is a major tool for defense counsel, and it is expected that they will use it. While the legislation does not provide a framework as to what might be discoverable, courts will be tasked with adjudicating the applicability of the new law on a case-by-case basis, including what is material and relevant under the CPLR. It will be interesting to see if the legislation impacts any lawsuits against lawyers accused of improper conduct involving litigation funding. Stay tuned.