In Lituma v. Liberty Coca-Cola Beverages LLC, New York’s Appellate Division, First Department affirmed the trial court’s decision to vacate note of issue and order further discovery into plaintiffs’ third-party litigation funding in a personal injury action where defendants asserted a counterclaim and affirmative defense sounding in fraud and presented evidence suggesting that plaintiffs’ claims arose from systemic fraudulent conduct. This marks the first time the Appellate Division has affirmed a trial court decision ordering a plaintiff in a personal injury action to produce discovery into third-party litigation funding.
Third-party litigation funding refers to financial arrangements in which a lender provides financial support to a plaintiff to fund litigation, operating as a non-recourse investment with repayment contingent on recovery. Access to such funding agreements may yield information bearing on plaintiffs’ credibility, settlement posture and claimed damages. In cases of alleged fraud, such discovery may uncover evidence tending to show fabrication of the asserted claims or participation in an organized scheme to manufacture them. Though how courts will apply Lituma remains unclear, defendants should attempt to invoke the decision when pursuing litigation funding agreements in appropriate cases.
Litigation Funding and “Fraud Rings”
Over the past two decades, the litigation funding industry has expanded nationwide and particularly in New York, with specialized companies building ongoing relationships with law firms and clients across diverse practice areas. Proponents argue funding enables claims that plaintiffs could not otherwise afford, supports litigation against well resourced corporate defendants and shifts risk to funders who absorb costs if the case fails. Funding can also cover plaintiffs’ medical bills, business continuity or other matters while litigation is pending. Critics counter that funding may fuel meritless claims, impose high interest rates that burden plaintiffs with debt and pressure plaintiffs to reject reasonable settlement offers. The anonymity of funders also raises transparency and judicial economy concerns, and may leave parties uncertain whether plaintiffs retain exclusive control of their cases.
In recent years, New York has seen revelations of alleged “fraud rings” — organized schemes involving lawyers, doctors and plaintiffs staging accidents, performing unnecessary surgeries and falsifying billing to inflate damages in personal injury claims. These rings exploit New York’s insurance and no fault systems, turning minor incidents into major payouts. Participation in these “fraud rings” has been the subject of a spate of lawsuits, criminal proceedings, and, in some cases, convictions.
In the alleged schemes, litigation funding was used to provide capital to plaintiffs who staged accidents, with repayment contingent not on plaintiffs’ own success but instead on their attorneys’ ability to secure recoveries. By severing financial obligation from plaintiffs’ performance, this structure arguably created an incentive to participate in fraudulent claims. In many instances, plaintiffs were alleged to have undergone unnecessary medical treatment to bolster their claims, with costs typically advanced through liens or by law firms, further highlighting the seriousness of the alleged fraud and the strength of the financial incentives built into the arrangements.
For instance, a Racketeer Influenced and Corrupt Organizations Act (RICO) case pending in the Eastern District of New York, Union Mutual Fire Insurance Company v. Subin Associates, LLP, alleges the litigation financing company Pegasus Legal Capital, LLC, a plaintiffs’ personal injury law firm, and related defendants, orchestrated a fraudulent scheme involving staged accidents and corrupt medical referrals.[1] Discovery in that matter revealed metadata indicating a litigation funding agreement had been created before the incident it purported to finance, underscoring the alleged premeditated nature of the scheme.
First Department Approval of Financing Discovery
In the underlying action, defendants in Lituma moved to amend their answer to add an affirmative defense and counterclaim alleging plaintiffs intentionally staged their rear-end motor vehicle collision, relying solely on the defendant driver’s affidavit. Defendants then served discovery demands seeking litigation funding agreements, to which plaintiffs objected. The Bronx court granted leave to assert the defense and counterclaim, and defendants subsequently moved for an order vacating note of issue and directing additional discovery based on new investigatory materials suggesting plaintiffs were part of a “fraud ring” involving other claimants in similar, allegedly staged, motor vehicle accidents.
In affirming the trial court order that there was “good cause” to vacate note of issue and directing disclosure of litigation funding material, the First Department held that litigation funding information was material and necessary, as it could reveal a financial motive for fabricating the incident. This ruling establishes a legal precedent in permitting such discovery.
Prior Decision Alignment
The Lituma decision aligns with prior New York state court decisions permitting discovery of third-party litigation funding where the defendant establishes that such information is material and necessary to a counterclaim or defense. For instance, the New York County Supreme Court allowed discovery regarding a litigation financing agreement when the plaintiff’s motivation for filing the defamation action was an element of defendants’ anti-SLAPP counterclaim.[2]
These decisions emphasize that defendants must demonstrate materiality and relevance, the standard for discovery of any other material in New York. For instance, the Kings County Supreme Court granted litigation funding discovery after defendants framed the information as material and necessary, after plaintiff’s counsel disclosed that his client had obtained a loan to pursue the litigation.[3] Consistently, the First Department and New York trial courts have denied litigation funding discovery where the defendant had not articulated how financing information would support or undermine any claim or defense.[4]
Beyond “Fraud Rings”
Although the Lituma defendants introduced evidence linking litigation funding to alleged “fraud rings” in seeking court approval, the decision suggests that such discovery may be permissible whenever it is material to the issues or where the record indicates plaintiffs staged the incident or otherwise distorted the underlying facts. In this manner, the Lituma decision reaffirms the principle that discovery is permitted where the material sought is relevant to a claim or defense.
The Lituma defendants alleged that plaintiffs staged and intentionally caused the motor vehicle collision before obtaining evidence suggesting possible involvement in a broader “fraud ring.” This sequence underscores that the relevance of litigation financing does not necessarily depend on proof of participation in a wider enterprise, but may instead rest on its independent bearing on the claims and defenses at issue.
Accordingly, litigation financing discovery should not be confined to cases involving evidence of participation in alleged “fraud rings,” as funding may be tied to staged accidents or fraudulent claims regardless of any broader connection. Moreover, obtaining the litigation financing agreements may be the first step in uncovering participation in a fraudulent enterprise.
Conclusion
At present, it remains unsettled whether courts will constrain Lituma to cases involving alleged “fraud rings” or instead interpret it as reaffirming the propriety of such discovery in any matter where it is material and necessary. The broader implications of Lituma outside the First Department have yet to be determined.
To position litigation financing discovery for court approval, and for broader strategic purposes, defendants should consider counterclaims and/or affirmative defenses sounding in fraud whenever there is evidence plaintiffs staged the incident or misrepresented the facts supporting their claims. Beyond participation in a fraudulent scheme, indicators of misrepresentation may include conflicting accounts of the accident or inconsistencies with objective or neutral evidence. In those circumstances, litigation‑financing discovery would bear directly on those counterclaims and defenses and arguably be discoverable pursuant to Lituma. Another tactical avenue for defense counsel is to subpoena the litigation funding company itself, to pursue production of information, records and metadata, which in the Union Mutual Fire Insurance Company v. Subin Associates, LLP matter allegedly revealed the creation of the funding agreement before the accident even took place.
Our Mass Torts and Industry-Wide Litigation Practice Group and Medical and Life Sciences Industry Team attorneys are following this issue and other important issues throughout New York and the nation. Should you have questions on this or related matters, please contact attorney Abbie L. Eliasberg Fuchs at (212) 313-5408 and afuchs@harrisbeachmurtha.com, attorney Alex Anolik at (212) 912-3502 and aanolik@harrisbeachmurtha.com, attorney Kelly Jones Howell at (212) 912-3652 and khowell@harrisbeachmurtha.com; attorney Julia Wanamaker at (212) 352-5439 and jwanamaker@harrisbeachmurtha.com, or the Harris Beach Murtha attorney with whom you most frequently work.
This alert is not a substitute for advice of counsel on specific legal issues.
Harris Beach Murtha’s lawyers and consultants practice from offices throughout Connecticut in Bantam, Hartford, New Haven and Stamford; New York state in Albany, Binghamton, Buffalo, Ithaca, New York City, Niagara Falls, Rochester, Saratoga Springs, Syracuse, Long Island and White Plains, as well as in Boston, Massachusetts, and Newark, New Jersey.
[1] Union Mutual Fire Insurance Company v. Subin Associates, LLP, Case No. 25-cv-02652-OEM-CLP (E.D.N.Y. May 12, 2025).
[2] Smartmatic USA Corp. v. Fox Corp., No. 151136/2021, 2023 N.Y. Slip Op. 30886(U), at *2-3 (Sup. Ct. N.Y. Cty. Mar. 24, 2023).
[3] Manrique v. Delgado, D.M.D., 23879/2015E, 2019 WL 13043577, at *1-2 (Sup. Ct. Bronx Cty. Jan. 2, 2019).
[4] Worldview Ent. Holdings, Inc. v. Woodrow, 204 A.D.3d 629, 630 (1st Dep’t 2022); Coronado v. Veolia N. Am. & Subsidiaries, 450319/2019, 2021 WL 1374261, at *1 (Sup. Ct. N.Y. Cty. Apr. 5, 2021) (“[T]he litigation funding in question is not the subject of plaintiff’s claim for damages, and is not a collateral source.”); Cabrera v. 1279 Morris LLC, No. 307449/2010, 2013 WL 5418611, at *1 (Sup. Ct. Bronx Cty. Sept. 23, 2013) (denying litigation financing request as not material and necessary); Rodriguez v. Rosen & Gordon, LLC, 156846/2020, 2022 WL 635416, at *4 (Sup. Ct. N.Y. Cty. Mar. 4, 2022) (same); Quan v. Peghe Deli Inc., 7763/2017, 2019 WL 3974786, at *2-3 (Sup. Ct. Queens Cty. June 13, 2019) (same); Garcia v. City of N.Y., 161140/2017, 2022 WL 4790488, at *2 (Sup. Ct. N.Y. Cty. Oct. 3, 2022) (same); Urbanik v. Riese, No. 712350/2017 (Sup. Ct. Queens Cty. Aug. 11, 2020) (same).
