Over two years have passed since I authored Kahana & Feld’s white paper detailing the problems of third-party litigation funding (TPLF), the then-undeveloped state of New York law regarding the practice, and a strategy for obtaining discovery of TPLF material in civil litigation. In that time, several developments have emerged that warrant review and a re-evaluation of our original blueprint to reflect the evolving legislative and judicial status quo.
The Consumer Litigation Funding Act (CLFA)
On Dec. 19, 2025, Gov. Kathy Hochul made history by signing into law the first New York statute regulating TPLF (A804-C/S1104A). Many in the defense bar hailed this as a “landmark” political victory heralding a “new era” of transparency and consumer protection.
Closer scrutiny of this vaunted statute paints a dimmer picture. Ostensibly, the crown jewel of this legislation is its cap on TPLF “charges” (i.e., interest), which the statute confines to 25% of the total recovery “regardless of the funded amount provided for the relevant claim.” There is no limitation, however, on the number of TPLF agreements a plaintiff may execute, making this provision easily circumnavigable by unscrupulous funding companies. Plaintiffs can still bury themselves in a mountain of interest, they just need to fill out more paperwork.
Also worth noting is the statute’s scope: It governs funding agreements of $500,000 or less. While this assuredly encompasses most agreements in the personal-injury realm, the absence of regulation above this amount creates an attractive value proposition for funders in high-exposure cases. Bear in mind that the statute takes effect on June 17, 2026 without retroactive effect, meaning any funding agreements currently scuttling settlements or eroding plaintiffs’ recoveries will continue to do so unhampered.
Beyond this, the CLFA codifies a handful of restrictions superficially aimed at curbing TPLF influence on litigation. It forbids an attorney from prosecuting a case funded by a company in which he has a financial stake, and outlaws funder “decisions with respect to the conduct of the underlying legal claim or any settlement or resolution thereof.” At first glance, these resemble stern prohibitions intended to safeguard a plaintiff’s right to control his claim and an attorney’s ethical duty to execute his client’s decisions. But the penalties for violating them are lenient: forfeiture of the funder’s right to repayment and a maximum fine of $5,000 per violation. Nor is there a discernible enforcement mechanism. The agreements themselves are not subject to review by the attorney general or another regulatory body, and the funders need only report the number of agreements they have executed, the amounts advanced, and the interest charged. This consumer protection measure thus tasks the consumer with protecting himself, i.e., identifying and reporting violations.
While the CLFA merely fails to rescue plaintiffs from predation, it actively undermines the cause of disclosure. As we have consistently opined, expanding disclosure of TPLF should be the paramount aim of the defense bar because it facilitates settlement and arms litigants with relevant evidence with which to contest plaintiffs’ claims. Not only does the CLFA lack a disclosure mandate—a hallmark of many, if not most, nationwide legislative reforms on this issue—it explicitly narrows the scope of discovery available to defendants by applying the attorney-client privilege to communications between an attorney and funder.
One struggles to find the logic in extending this privilege to the very entity from which the statute purports to protect the plaintiff (and which lacks the essential feature from which privilege stems: a fiduciary duty to the plaintiff). At any rate, the practical effects of this will be to shield conflicts of interest arising from a funder’s involvement from investigation by the relevant authorities and to insulate previously discoverable communications from disclosure. Under this regime, plaintiff attorneys can freely discuss the nature of an accident, physician referrals, anticipated surgeries, and the like with litigation funders without fear of such communications ever gracing a jury’s eyes and ears.
In sum, the CLFA is not the imperfect but well-intentioned reform its defense-side proponents imagine it to be, but a toothless consumer protection measure intended to mollify TPLF critics by handing them a symbolic “step-in-the-right-direction” legislative win. The ill effects of TPLF on civil litigation in New York will continue unabated and, if anything, will fester under the new umbrella of privilege blotting out the sunlight that genuine reform requires.
New Appellate Decisional Law
In November 2025, the Appellate Division, First Department handed down its decision in Lituma v. Liberty Coca-Cola Beverages LLC, 243 A.D.3d 504, 505 (1st Dep’t 2025), finding that TPLF information is “material and necessary” (and thus discoverable) because “it could reveal a financial motive for fabricating the accident.” Central to this conclusion was an affidavit from the defendant’s insurer specifying the “chronology of the events and…the links among plaintiffs, medical providers, and other individuals involved in other suspicious accidents.”
Three months later, the court clarified that TPLF is not discoverable absent a basis to believe such material would reveal “any improper motive.” [See Perdomo v. 361 E. Realty Assoc. LLC, 246 A.D.3d 541 (1st Dep’t Feb. 17, 2026) “GF also offers no basis for its theory that litigation funding documents would shed light on plaintiff’s motivation for bringing the action, and it is otherwise unclear how those documents would be of assistance in revealing any improper motive.”]. Some have read Perdomo to have cabined TPLF discovery to staged accident cases. We disagree. The defendant’s chief argument in Perdomo was that TPLF should be discoverable as a collateral source and as evidence of failure to mitigate damages given that the plaintiff used TPLF to pay for medical care in lieu of Medicaid benefits for which he was eligible. Because TPLF is a lien that must be repaid, it should surprise no one that the court rejected the collateral source argument. Likewise, the court speculated that the plaintiff used TPLF to pay for physicians that did not accept Medicaid, finding that defendant failed to identify an “improper motive” corroborated by TPLF.
Given these holdings, we believe the sensible course is to educate the courts about the explicit and perverse incentives to fabricate medical treatment that TPLF often creates. To this end, we have compiled TPLF agreements promising to pay plaintiffs cash after they have had surgery, which doubtless creates an “improper motive” to go under the knife. The strategy moving forward, therefore, should be to annex such agreements to every discovery motion seeking TPLF information and eventually presenting such evidence to the Appellate Division in support of the point that TPLF influences a plaintiff’s medical decisions and, by extension, the litigation itself. In such circumstances, TPLF would not only be discoverable, but relevant and admissible, as it would bear on the nature and extent of the plaintiff’s damages and the necessity of his medical care. To this end, we have begun compiling publicly-filed TPLF agreements containing such provisions (you can find them along with our sample discovery demands for TPLF material here). The ideal case for appeal would involve, at minimum, a plaintiff who underwent surgery shortly after executing a TPLF agreement (a pattern we have seen often) as circumstantial evidence of the “pay-to-treat” scheme. If revealing a “financial motive to fabricate the accident” supports disclosure of TPLF material, there is no rational basis why a financial motive to fabricate surgery and other medical care should not do so as well.
These are the early battles in what is sure to be a long-fought campaign for TPLF discovery. We remain bullish about the prospects for success. The First Department holdings to date have been measured and have laid the groundwork for future breakthroughs. Moreover, as the issue has not yet reached the Second Department, there is ample room for progress in this venue and potentially the state’s high court. There is also cause for optimism on the legislative front, the CLFA notwithstanding. Since its passage, Governor Hochul has trenchantly advocated tort reforms to lower the cost of auto insurance, including the abolition of New York’s pure comparative fault regime in auto cases, a narrowing of the serious injury threshold, and a limitation on joint and several liability for auto defendants. It is not farfetched to believe that she could eventually set her sights on the practice subsidizing litigiousness in the auto and other sectors.