New York Governor Kathy Hochul recently signed the Consumer Litigation Funding Act (the Act) into law, significantly expanding state regulation of consumer litigation funding. The Act requires plain language contracts that disclose key financial terms of funding arrangements and mandatory state registration for all litigation-funding companies It shuts down financial arrangements that risk distorting litigation by prohibiting referral fees, attorney financial interests in funding companies and the use of funding to pay litigation costs, while imposing strict limits on funder involvement in litigation decisions. It also requires a time based, capped repayment structure rather than repayment tied to a percentage of the litigation outcome.
This significant legislative development comes in the wake of the First Department’s November 2025 ruling in Lituma v. Liberty Coca-Cola Beverages LLC, which, for the first time, affirmed the discoverability of litigation funding agreements under appropriate circumstances (see New York Appellate Court Approves Discovery into Litigation Funding).(1) Together, these legislative reforms and emerging judicial approval of disclosure reflect a broader effort to curb the funding practices that critics contend enable coordinated “fraud rings” and inflated damages claims.
Background Regarding Third-Party Litigation and “Fraud Rings”
Third-party litigation generally involves a lender advancing a non-recourse payment to a plaintiff with repayment contingent on recovery in underlying litigation. Proponents argue it expands access to justice by shifting the financial risk to funders and enabling claims plaintiffs could not otherwise afford. Critics, however, counter that litigation funding incentivizes weak or inflated claims, imposes excessive interest rates that burden plaintiffs with debt, and can interfere with settlement dynamics by encouraging plaintiffs to reject reasonable offers in favor of maximizing funder returns. Historically, funders operated with limited scrutiny because they were not parties to the lawsuits and disclosure of funding agreements was not consistently required, creating an opaque environment in which courts and defense lawyers are typically unaware of a funding influence in any given case.
In New York, the growth of the litigation funding industry has coincided with the exposure of organized “fraud rings” involving lawyers, medical providers and plaintiffs who were alleged to have staged accidents, performed unnecessary medical procedures and falsified billing records to inflate personal-injury damages. Litigation funding often supplied upfront capital in these schemes, with repayment tied not to plaintiffs’ financial circumstances, but to attorneys’ ability to secure recovery.
Consumer Litigation Funding Act
In December 2025, the New York Legislature delivered the Consumer Litigation Funding Act (A804-C/S1104-A) to Gov. Hochul, seeking to increase disclosure and regulation of consumer litigation funding agreements. The Act sets the below notable requirements:
- Contract Protections for Consumers – Contracts must be written in clear, plain language, and include specified disclosures, such as the funded amount, payment schedule and maximum total repayment amount. Consumers must be given a 10-business-day right to cancel and return the funds. Prepayment penalties and related fees are prohibited.
- Recovery Cap – A funder’s recovery is capped at 25% of the consumer’s gross recovery in the underlying litigation. Repayment amounts must be predetermined based on time intervals from the funding date through resolution, and cannot be calculated as a percentage of the litigation outcome. Repayment is limited to the proceeds of the legal claim, and only to the extent such proceeds exist.
- Restrictions on Litigation Influence – Funders are barred from influencing case strategy, including settlement decisions, and may not interfere with the attorney’s professional judgment. They are prohibited from paying or offering to pay court costs, filing fees or attorney’s fees using funds from the consumer litigation funding transaction. Attorneys and law firms retained by the consumer may not hold a financial interest in the funding company.
- Elimination of Referrals – Litigation funding companies, attorneys, law firms, medical providers, chiropractors and physical therapists are prohibited from paying or accepting referral fees, commissions or other forms of consideration.
- Increased Transparency – Funders must register with the state and submit to character and fitness evaluations. They must file contract forms with the New York Department of State and annually report the number of transactions, total amounts funded and the percentage charged to each consumer where repayment was made. The state will make this information public 90 days after submission. Communications between attorneys and funders, however, are deemed privileged.
- Penalties for Violations – A company that violates the Act in connection with a specific transaction forfeits its right to recover in that case and may face civil penalties of up to $5,000 per violation.
The regulatory framework takes effect on June 17, 2026. The law, however, shall not apply to any consumer litigation funding previously effectuated prior to that date.
Potential Impact
The Act addresses many of the structural vulnerabilities identified by critics of litigation funding agreements as concerning. By requiring plain-language contracts, detailed disclosures of financial terms and a consumer’s right to cancel, the Act increases transparency at the outset of the funding relationship and reduces opportunities for hidden or exploitative terms. Eliminating percentage-based returns tied to case outcome and open-ended, compounding growth of the amount owed, and capping the funder’s recovery at a percentage of recovery in the underlying litigation, reduces the incentive to reject reasonable settlement offers. Its prohibition on funders influencing litigation strategy targets a core issue in prior funding arrangements, where external financiers could encourage plaintiffs and attorneys to pursue inflated claims to maximize investment returns. Likewise, barring referral payments to attorneys and medical providers disrupts the financial networks that may have allowed “fraud rings” to thrive. Taken together with mandatory state registration and reporting, and the threat of penalty for violations, these measures collectively create a more regulated and traceable funding environment, narrowing avenues for undisclosed third-party participation and making it more difficult for fraudulent actors to use litigation funding to launder or amplify illegitimate personal injury claims.
It is important to recognize the Act is limited to funding of litigation filed on behalf of natural persons, and does not regulate commercial or corporate litigation funding. In addition, enforcement priorities will depend on administrative leadership rather than judges overseeing cases where litigants may have obtained funding agreements.
Implications for Litigation
The Act’s introduction of transparency and regulatory controls will likely reduce opportunities for abuse in the funding of personal injury claims, yet whether funding agreements are subject to disclosure is left unaddressed. The Act does not independently require disclosure of the funding agreements during discovery: although communications between attorneys and funding companies are expressly protected, the Act is silent on the discoverability of the underlying contracts. It likewise remains unclear whether contract forms filed with the Department of State will become publicly accessible through FOIL requests or other mechanisms.
Given these gaps, courts will likely continue to evaluate disclosure requests under the “material and necessary” standard set forth in CPLR 3101, as reflected in the recent First Department decision, Lituma v. Liberty Coca-Cola Beverages LLC. Overall, while the Act strengthens oversight and eliminates incentives for abuse, its silence on discoverability indicates that questions about how funding will interact with fraud detection and case management will continue to be shaped through judicial review and strategic defense advocacy.
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) In Lituma v. Liberty Coca-Cola Beverages LLC, Index No. 33275/20, Case No. 2025-00995 (1st Dep’t 2025), 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.
