For many years now, third-party litigation financing has become an increasingly relevant consideration for parties to litigation nationwide. Many states have implemented varying levels of restrictions and regulations, and North Carolina has recently prohibited it entirely in civil cases.[1] In May of 2026, Tennessee enacted new regulations, amending its Litigation Financing Consumer Protection Act (“Act”). For financing contracts entered into on or after May 19, 2026, the Act now requires disclosure of the contract itself and imposes new rules regarding funder control, fees, registration, and responsibility for certain costs and sanctions.[2] The following provisions are likely to standardize how litigation financing will be handled in lawsuits across Tennessee, including yours.
1. The financing agreement is disclosed as a matter of course.
At least in theory, no longer will parties wrangle over whether the terms of a third-party litigation financing arrangement are discoverable. Under the Act, a party using covered litigation funding must generally disclose the financing agreement itself to both the court and the other parties within 14 days after filing its initial pleading.[3] A protective order may be put in place to limit further dissemination, but the agreement is disclosed automatically. Depending on its terms, the agreement may reveal the amount funded, the third party’s return, the priority for recovered proceeds, reporting obligations, amendment or termination rights, and whether the funding is connected to a broader portfolio of matters. Subsequent amendment of the agreement during the life of the case will likely trigger new disclosure obligations.
2. The third-party funder cannot control litigation strategy.
The Act prohibits third-party funders from directing any decisions about the course of the litigation, and this includes not only settlement decisions but also choice of expert witnesses and even choice of counsel.[4] These decisions are exclusively reserved for parties and their lawyers. The terms of the financing agreement can become particularly important here, as certain contractual rights retained by the third-party funder can indicate a prohibited level of control beyond mere monitoring.
3. Costs and sanctions can be borne by the third-party funder.
Just as the profits can be shared, so can the losses. If the court imposes costs or monetary sanctions against a party or their attorney, a third-party funder is jointly and severally liable for such costs or monetary sanctions.[5] Furthermore, the Act now provides a broad indemnification requirement, mandating that a third-party funder indemnify the party or their attorney for adverse costs, attorney fees, damages, or sanctions, provided that the award or order is not the consequence of intentional misconduct by the party or attorney.[6] The potential downside is therefore quite high for the third-party funder, and if you are dealing with litigation financing on the other side, you should be cognizant of any signs indicating that these provisions are influencing litigation conduct in one way or another.
4. Targeted litigation-funding discovery matters now more than ever.
The mandatory disclosure rule is limited to the financing agreement itself, and disclosure of the financing agreement does not make every communication with the third-party funder automatically discoverable. Relevance, proportionality, privilege, and work-product protections still apply.
However, the agreement can serve as a starting point for generating leverage in discovery when considering the following:
- The dates and amounts of funding and contractual amendments, as compared with key litigation events;
- Whether contractual rights rise to the level of actual decision-making authority;
- Communications or contractual provisions regarding changes in counsel or experts or conditions on additional funding;
- Factual representations made to obtain funding where they bear on damages, ownership of claims, standing, or other disputed facts relevant to the case; and
- Registration, bonding, and other records bearing on statutory compliance.[7]
Engaging in targeted discovery is crucial for determining all stakeholders in the litigation, as well as their impact on the case, and ensuring compliance with the Act. Unveiling noncompliance can give you an offensive edge and unlock certain remedies and sanctions. Violations can render the financing agreement unenforceable and can constitute an unfair or deceptive practice enforceable by the Attorney General through the Tennessee Consumer Protection Act.[8] The Act does not, however, prescribe a particular case-level sanction for violation of the 14-day disclosure requirement, leaving that determination for courts to deduce from the Act and address through traditional procedural rules and sanctions mechanisms like Rule 37.
5. The terms of the financing agreement can affect settlement economics.
Finally, although the third-party funder is prohibited from directing litigation and settlement decisions, third-party funding can still have an impact on settlement incentives and timing. Outside funding can reduce the pressure to settle by giving a claimant resources to endure and absorb high litigation costs like expert retention, complex discovery, and trial-related expenses. The terms of the agreement can shed light prospectively on how parties can be expected to behave and posture themselves at certain milestones through the course of the litigation.
Moving forward, bearing these five considerations in mind when third-party litigation financing is, or could be, involved will help you take full advantage of the recent amendments to Tennessee’s Litigation Financing Consumer Protection Act.
[1] 2026 N.C. Sess. Laws 14, § 1; N.C. Gen. Stat. § 66-523.
[2] Tenn. Pub. Acts ch. 1005 (2026) (HB 2108 / SB 2101).
[3] Tenn. Code Ann. § 47-16-106(d) (as amended by 2026 Tenn. Pub. Acts ch. 1005, § 5).
[4] Tenn. Code Ann. § 47-16-105(b)(1) (as amended by 2026 Tenn. Pub. Acts ch. 1005, § 3). Language to this effect must be written into the body of every litigation financing agreement. Tenn. Code Ann. § 47-16-106(c) (as amended by 2026 Tenn. Pub. Acts ch. 1005, § 5).
[5] Tenn. Code Ann. § 47-16-107(b) (as amended by 2026 Tenn. Pub. Acts ch. 1005, § 6).
[6] Tenn. Code Ann. § 47-16-107(c) (as amended by 2026 Tenn. Pub. Acts ch. 1005, § 6).
[7] Third-party funders must register and maintain a $50,000 surety bond, made payable to the State of Tennessee for use by the Attorney General for enforcement purposes. Tenn. Code Ann. § 47-16-103(b) (as amended by 2026 Tenn. Pub. Acts ch. 1005, § 2).
[8] Tenn. Code Ann. § 47-16-107(a) and -108.
