Probate lending.

Author:Horton, David
Position::Introduction through II. Empirically Assessing Probate Loans B. Results 2. Correlates of Loans, p. 102-136 - Author abstract

ARTICLE CONTENTS INTRODUCTION I. BORROWING AGAINST CLAIMS AND ESTATES A. Litigation Lending B. Probate Lending II. EMPIRICALLY ASSESSING PROBATE LOANS A. Data Description B. Results 1. Overview 2. Correlates of Loans 3. Judicial Intervention III. POLICY IMPLICATIONS A. Usury B. The Truth in Lending Act C. Champerty CONCLUSION INTRODUCTION

On December 28, 2007, Eva Bell died in Alameda County, California. (1) She did not create a trust, which meant that her assets should have passed through the court-supervised probate system to her children and grandchildren. (2) But shortly after the probate matter began, something happened that transformed the succession process. Eva's son assigned $26,100 of his expected payout from the estate to a company, Advance Inheritance, in return for $15,000. (3) In turn, by purchasing heirship rights, Advance Inheritance acquired standing as an "interested person" in Eva's probate case. (4) It capitalized on this privilege by successfully petitioning to become Eva's personal representative (the party responsible for managing her possessions). (5) It then evicted tenants from an apartment that Eva had owned, sold the building, and paid itself thousands of dollars in fees from the estate. (6)

Meanwhile, another firm, Inheritance Funding, entered into several contracts with Eva's other relatives, buying a $57,200 cut of the estate for a total of $39,000.7 The final such deal--in which one of Eva's children sold $7,600 in inheritance rights for $5,000--came just three weeks before the probate ended, and was the equivalent of a loan with an annualized interest rate of almost 1,000%. (8)

Firms like Advance Inheritance and Inheritance Funding lurk on the peripheries of one of the most divisive issues in American civil justice. For the last two decades, there has been a contentious debate over whether third parties should be allowed to purchase, invest in, or control legal claims. (9) The ancient doctrine of champerty once barred strangers from obtaining an interest in pending cases. (10) Likewise, although most rights are assignable--transferrable to others--medieval English judges refused to enforce assignments of complaints. (11) Nevertheless, these rules have eroded over the centuries, blurring the line between causes of action and other forms of property, which can be freely divided, alienated, and pledged as collateral. (12) Recently, venerable enterprises such as Credit Suisse and Allianz have poured money into other parties' lawsuits, and sophisticated litigation-investment boutiques have emerged. (13) These companies typically pay the lawyers' fees "on an interim basis" in exchange for a share of any future verdict or settlement. (14) In dozens of articles in newspapers and law journals, this business model has been praised for opening the courthouse doors to low-income plaintiffs (15) and condemned as a predatory lending practice (16) that subsidizes vexatious litigation. (17)

Yet despite the attention lavished on the litigation-finance industry, inheritance-purchasing companies have flown beneath the radar. No law review article has even mentioned the issue, (18) and only one state statute expressly regulates the practice. (19) To be sure, there are meaningful differences between assigning a pending civil claim and transferring inheritance rights. The former invites strangers into bare-knuckled adversarial proceedings, whereas the latter merely opens the door to the bureaucratic and normally non-contentious world of probate. (20) But as Eva Bell's estate illustrates, both transactions raise concerns about consumer exploitation and the disruptive effect of outsiders on the judicial process. And, in any event, the chasm in our knowledge about probate lending is glaring. Because the death of the baby boom generation will funnel $59 trillion through the succession process in the next half-century--the largest wealth transfer in history (21)--probate lenders will only become more entrenched and powerful.

This Article brings the probate lending industry into sharp relief. It does so by analyzing every estate administration stemming from deaths that occurred during a year in a major California county. This originally collected dataset, which spans 594 cases, capitalizes on a state law that requires probate lenders to lodge their contracts with the court. (22) Thus, it offers insight into a variety of issues that would normally be private, such as the frequency of loans, their terms, their effective interest rates, and whether estates with loans are more likely to degenerate into litigation than their counterparts.

This trove of empirical evidence yields three main conclusions. First, probate loans are more common than one might expect. There are seventy-seven such deals in the files. Although probate lending may be more prevalent in California than elsewhere, (23) there are millions of probate matters throughout the nation each year, which suggests that there is a robust market for inheritance rights. Second, these transactions raise serious fairness concerns. Companies handed out a meager $808,500 in exchange for $1,378,786 in decedents' property. (24) Because these advances occurred, on average, 373 days before the lenders were repaid, the mean markup on the principal was a whopping sixty-nine percent per year. (25) Third, probate lenders are active litigants. They filed petitions or objections in nearly one-third of the matters in which they appeared. Thus, at least in this context, opening the courthouse door to third parties increases the volume of claims.

The Article then discusses the policy implications of these findings. It starts by considering whether probate loans are usurious. Usury statutes, the oldest form of consumer protection, prohibit creditors from charging excessive inter-rates. (26) Yet usury laws only govern advances that are "absolutely repayable." (27) Thus, most courts have exempted litigation loans from usury regulation, reasoning that firms will lose the money they have fronted if the plaintiff neither settles nor prevails at trial. (28) We prove that probate loans involve no such contingency. Indeed, the probate lenders in our dataset recouped the principal ninety-six percent of the time. Even more remarkably, all the probate loans in our dataset that were repaid surpass California's usury limit. Accordingly, these companies are violating the usury laws on a massive scale.

Next, the Article turns its attention to the Truth in Lending Act (TILA). (29) TILA, a federal statute, imposes strict liability upon creditors who violate its intricate disclosure mandates. (30) In the sole case involving probate loans, a federal court dismissed allegations that TILA applied to an assignment of inheritance rights, reasoning that the statute does not cover "non-recourse advance [s]." (31) But our data reveal that probate loans are not truly non-recourse. Indeed, lenders recover both the principal and interest in all but the most extraordinary circumstances. On top of this, we show that their disclosures routinely flout TILA's commands.

Finally, the Article analyzes whether probate loans violate the champerty doctrine. To be sure, unlike litigation loans, which often seek to facilitate claiming, probate loans are not usually made for the purpose of funding a lawsuit. Indeed, most estate administrations glide along without the heirs or beneficiaries filing a pleading or setting foot in court. Thus, at first blush, the presence of a third party among their ranks seems unlikely to affect the probate process. But when we excavate deeper, we find a surprisingly strong connection between loans and conflict. Our linear probability regression confirms that loans increase the odds of a contest far more than any other variable, including intestacies, holographic wills, and testators who disinherit family members. Nevertheless, we also uncover evidence that litigation filed by lenders may sometimes be in the best interests of the estate. We therefore recommend that courts and policymakers police probate loans through mechanisms other than the champerty doctrine.

The Article contains three Parts. Part I surveys the rules that govern the sale of rights that are rooted in the...

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