New York's New Era Of Litigation Financing: Transparency, Consumer Protection, And Emerging Discovery Battles

Introduction
New York has enacted a sweeping reform of third‑party litigation financing, coupling comprehensive statutory regulation of consumer legal funding with a notable appellate decision expanding discovery into funding arrangements in suspected fraud cases. Together, these developments mark a decisive turn toward transparency, accountability, and court‑supervised scrutiny of funding in New York litigation.

The Landmark Statute: A804C/S1104 Signed into Law
On December 22, 2025, Governor Kathy Hochul signed A804C/S1104 (the Consumer Litigation Funding Act) into law, establishing New York's first comprehensive framework governing consumer legal funding transactions. Under the statute, consumer legal funding is defined as a nonrecourse transaction in which a company purchases a contingent right to receive proceeds from a consumer's legal claim, with the consumer owing nothing in the absence of recovery.

The legislation was sponsored by Assembly member William B. Magnarelli and state Senator Jeremy Cooney, with strong support from industry stakeholders who framed the measure as bringing long‑needed transparency and consumer safeguards. The Consumer Litigation Funding Act takes effect 180 days after becoming law, signaling a mid‑2026 operational start for registration, oversight, and disclosure requirements.

Core Consumer Protections and Market Conduct Rules
The statute codifies a suite of mandatory disclosures and conduct standards designed to prevent opaque pricing and undue influence over litigation strategy. Contracts must plainly disclose all terms, charges, and cumulative repayment amounts, with the consumer initialing those core items to ensure informed consent. Consumers are afforded a 10‑business‑day right to cancel without penalty, giving them time to review terms or seek independent advice.

Attorney involvement and independence are expressly addressed. Attorneys must acknowledge reviewing mandatory disclosures and are prohibited from accepting referral fees or maintaining any financial interest in funding companies, thereby targeting conflicts that could distort client advice or case strategy. The law also bars funders from influencing settlement decisions or legal strategy and prohibits misleading advertising and referrals to specific lawyers or medical providers—practices that have drawn scrutiny from courts and policymakers.

In a significant structural move, New York now requires funders to register with the state and file annual reports, with associated bonding and disclosure requirements. This regime creates a supervisory baseline that regulators and courts can use to monitor compliance and market practices.

Appellate Development: Discovery Into Funding in Fraud‑Tainted Cases
In a parallel development, the Supreme Court of New York's Appellate Division, First Judicial Department, inSteven Lituma et al. v. Liberty Coca-Cola Beverages LLC et al., Case No. 2025-00995, affirmed a trial court's order vacating the note of issue and permitting expanded discovery—including discovery into litigation funding—where defendants proffered evidence linking plaintiffs to a network of suspicious accidents and providers. The court held that when unusual or unanticipated circumstances surface late, and substantial prejudice would result, vacatur and further discovery are appropriate.

Critically, the panel approved discovery into the funding of plaintiffs' litigation as "material and necessary" to the defense, explaining that funding information could reveal a financial motive for fabricating an accident. In doing so, the court applied New York's broad standard for disclosure—"all matter material and necessary"—and underscored trial‑level discretion to reach funding where questions of fraud or motive are credibly raised.

The decision also clarified that procedural objections to a fraud‑based affirmative defense were not properly before the court where not preserved on appeal, reinforcing that once such a defense is pleaded, discovery commensurate with that defense—including funding discovery—may follow.

Outlook: Transparency With Guardrails
New York's approach favors transparency and consumer protection, seeking to curb abusive practices that erode recoveries or compromise attorney independence. As agencies implement registration and reporting, and as courts apply the statute alongside existing discovery standards, expect a more visible, rule‑bound funding ecosystem—and increased attention on how funding interfaces with litigation conduct, settlement dynamics, and fraud screening.

In short, New York has moved litigation financing from the shadows to a supervised, disclosure‑heavy regime, while empowering courts to probe funding when it bears on motive or misconduct. Stakeholders should prepare for regulatory compliance and more nuanced discovery practice as these changes take hold.

This article was published in the January 7, 2026, posting ofCLM Magazine.

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