Legal Funding 101 by RD Legal Funding

Joseph Genovesi, President of RD Legal Funding
Joseph Genovesi, President of RD Legal Funding gives a brief synopsis of the legal funding industry. In this white paper, the reader will gain a basic understanding of a few methods that can be used for legal financing.

 

DO I NEED LEGAL FUNDING?

As most plaintiffs and attorneys know, litigation can be a drawn-out process that can take up an enormous amount of time and resources. Cases are emotionally and monetarily costly, and the subjective natures of some of these cases – for example, emotional reparations in a personal injury or wrongful death case – can lead to an extended or delayed trial period.

These delays are detrimental to all plaintiff-side parties involved with the case. Plaintiffs can be subject to lost wages, medical and legal expenses, and of course, lost time and energy. The attorneys involved with these cases are similarly put out – they are often working on a contingency fee basis, meaning that they only receive payment upon favorable outcome. As a result, it may be months or years until attorneys receive payment for their work, if they receive it at all.

Fortunately for both plaintiffs and attorneys, there is a way to access funds before an award is distributed. This means that expenses can be paid off, lost and missing wages can be accommodated, and, more importantly, life can resume an air of normalcy. Litigation Financing, also referred to as Legal Funding or Legal Lending, provides a solution to case and settlement delays.

timeline of a personal injury lawsuit

This graph from GJEL Lawyers (GJEL.com) shows that receiving a settlement award can take up to two years or more.

BUT WHAT IS LEGAL FUNDING?

Legal funding is a process through which litigants and attorneys can secure capital to finance litigation, or other legal costs, through a financier.
the world of funding

The World of Funding

If you haven’t heard of legal funding, that’s probably because the industry is so new. Litigation financing originated in the United Kingdom in the late 1980s and soon migrated to New Zealand, Australia, South Africa, and eventually the United States. The practice was virtually unknown in the United States until 1997, when sub-prime lending became more popular. In the past decade, legal lending has gained popularity in Germany, France, and Hong Kong, to name only a handful of places.

Legal lending treats litigation as collateral, allowing attorneys and plaintiffs to borrow or advance money against lawsuits and case inventories. This type of financing allows plaintiffs’ attorneys to pursue cases that they otherwise might not have been able to afford, and cover case costs such as experts, witnesses, and discovery. Lending also protects attorneys from the ethical implications of simultaneously trying and financing a case. In the United States, most states find no issues with legal financing, as long as attorneys fully disclose the funding process, and the associated risks, to the client (i).

As previously mentioned, legal funding, which is legal in all 50 states, can be used by either attorneys or by plaintiffs. Plaintiff funding is normally used to help pay for daily expenses and legal fees. Attorneys, however, often seek legal funding to either fund individual cases, or to fund their business as a whole. Attorneys who work on a contingency fee basis are especially drawn to legal lending as a means of accessing capital to fight against well-moneyed defendants, and improve and smooth out an often erratic cash flow. The legal lending industry has opened up a plethora of opportunities for contingency fee attorneys and smaller plaintiff law firms.

Attorneys and law firms can be funded by traditional methods, such as personal loans or fee sharing, or by alternative methods, such as post-settlement funding or case cost financing. Both traditional and alternative methods have their pros and their cons, but because alternative financing can be industry specific – attorney fee acceleration is an industry specific type of alternative financing – it often provides benefits that traditional financing cannot.

The following pages will provide a brief overview of funding, beginning with an explanation of traditional funding methods, and concluding with alternative funding. Please note that the following pages do not describe all methods of legal funding, and that the methods presented are only described in part. Both the legal industry and the funding industry are complex, and this paper is intended to provide only a basic explanation of a few types of funding.

LEGAL FUNDING 101

TRADITIONAL FUNDING

The following methods of financing litigation are all examples of traditional funding. None of the below methods are industry specific, meaning none of these methods are OMGspecifically meant to serve attorneys or those who work in the legal industry. These types of lending are subject to regulations, and failure to repay loans or delays in payments can be reflected in a credit report.

TYPES OF TRADITIONAL FUNDING


PERSONAL LOAN or PERSONAL LINE OF CREDIT

Personal loans and personal lines of credit are two of the most common types of financing. The main difference between these two types is that the lendee receives a personal loan in a single bulk sum, whereas funds from a personal line of credit can be withdrawn over time. With this type of funding, the borrower applies to take out a predetermined sum of money, and agrees to pay back that sum incrementally over time, with interest. They must pay back that full sum on schedule in order to preserve their credit score. Failure to pay the full amount owed on time can subject the lendee to default rates, which can eventually result in an accumulation of debt.

BANK LINE OF CREDIT

franklin-rollsA bank line of credit provides a source of funds that can be made accessible to the borrower at any time. Interest is only paid on funds that are withdrawn. Typically, this credit is secured by collateral.  However, as attorneys would be applying for a business LOC rather than a personal LOC, only a secured option would be available. This can cause difficulty, as an attorney’s main asset is their case inventory, which banks almost never recognize as collateral.

Compared to other types of funding that will be discussed below, Bank Lines of Credit typically charge less interest on return. However, as mentioned above, Bank LOCs are more difficult to obtain for attorneys, who often lack the collateral to secure a line.

PARTNERS’ CASH

Partners in a law firm will often contribute their own personal funds to finance the firm. A potential downside of using partners’ cash to finance a firm and its legal proceedings is lost opportunity cost. Any funds directly used to fund the firm cannot be invested for various other opportunities. Even if you see a return on the capital you invested, it will not see any additional growth due to interest. In fact the capital may lose value due to inflation. Though this method of funding does involve a significant personal risk, it decreases the risk of owing return percentages or of paying late fees.

CREDIT CARD

credit-cardBusinesses use credit cards much as an individual would use a credit card. This can pose a high risk for an institution such as a law firm awaiting a settlement payout. If a bill is not paid on time, the institution can face an interest rate of up to 30% and a series of late fees. Paying these interest rates and fees are likely, as most credit cards have low credit limits that will not cover a law firm’s needs. Moreover, some attorneys have been known to finance cases with multiple credit cards which can lead to high payments and high interest rates. This can lead to a spiral of debt for the attorney.

FEE SHARING

Attorneys can share fees with each other, as long as they are not bound by certain ABA restrictions. According to an ABA ethics opinion (ii), “Where there is a single billing to a client in such situations, a lawyer subject to the Model Rules may divide a legal fee with a lawyer or law firm in the other jurisdiction, even if the other lawyer or law firm might eventually distribute some portion of the fee to a non-lawyer, provided that there is no interference with the lawyer’s independent professional judgment.”

Fee sharing is beneficial because when you are sharing costs, your personal expenses are reduced. Also, creating a referral fee arrangement, which is a form of fee sharing where one attorney collects a fee for referring a client to another attorney, is a great way to generate new leads. Plus, if you are for some reason unable to litigate a case, you can still earn income for referring a client to another firm.

ALTERNATIVE FUNDINGdollar-pills

Litigation financing is a method of lending where the litigation itself is treated as collateral. This means that either the inventory of a single specific case, an entire case load, or an entire law firm is considered when creating a funding agreement. Once these inventories have been accounted for, plaintiffs or attorneys can receive capital to use against existing lawsuits or case inventories.

Alternative litigation funding allows an attorney to pursue a case or take an advance on a fee (or, in some cases, a plaintiff to take an advance on a suit or award payment) with a lower chance of accumulating debt. With alternative litigation funding, an attorney can receive cash up front. Usually, the requirements for receiving alternative funding are less stringent than those of traditional lending. In some cases, an attorney will not have to worry about paying back an advance until after a case has been settled.

Pre-settlement funding has higher rates than post-settlement funding. Pre-settlement funding is non-recourse, meaning that if the attorney or plaintiff does not win his or her case, the lendee is not obligated to repay the lending company. This is beneficial for the lendee, but riskier for the lender. Because of this, pre-settlement lenders offer advances in smaller sums, at higher interest rates.

While post-settlement funding can only be used against an individual case, it has much lower interest rates. Post-settlement funding is also non-recourse and less risky for the lender than pre-settlement. Since the case has already reached a settlement agreement between all parties, there is much less chance of non-payment, and thus the lender is able to offer greater advances at more advantageous rates.

TYPES OF ALTERNATIVE FUNDING


PRE-SETTLEMENT FUNDING

In pre-settlement funding, the lender accepts the risk of non-payment. In return for the lender offsetting this risk, the lendee will pay higher interest rates. Pre-settlement funding can help plaintiffs and attorneys cover the expenses of litigation. For example, pre-settlement funding can help an attorney pay for experts and other discovery costs, or help a plaintiff offset living expenses.  Pre-settlement funding can be obtained at any point during a trial up until a decision is made. The vast majority of plaintiffs use pre-settlement funding, rather than post-settlement funding.

hanging-twentiesATTORNEY LINES OF CREDIT

Securing a line of credit through a third party funder is often a better solution for attorneys than securing a bank line of credit. As previously mentioned, banks do not recognize an attorney’s case load as collateral, making it difficult for attorneys or law firms to secure bank lines of credit. However, alternative funding companies do value the case load as an asset, and will use it as collateral.

Lines of credit can be given from a bank, or from a private institution. When given from a bank, LOC is viewed as a type of traditional lending; when given from a private institution, LOC is viewed as a form of alternative lending. In essence, a line of credit supplies a source of funds that is accessible to the borrower at any time. Interest is only paid on funds that are withdrawn. This credit can be secured by collateral, as with a personal loan; or, it can be an unsecured line of credit. Also similar to personal loans, lines of credit can be difficult to qualify for.

CASE COST FINANCING

Case Cost Financing is essentially a line of credit (LOC) with a technological service that can track the LOC on a case by case basis. This method is best used on a short-term basis. Costs can qualify as a case expense, and can then be recouped from the cases themselves. Case cost financing is popularly used in contingency fee cases (iii).

When properly executed, the interest from case cost financing passes onto the plaintiff. Because of the associated low cost, Cast Cost Financing may be a good potential option for contingency fee attorneys.

As with everything, case cost financing comes with a caveat. It is incredibly difficult to qualify for, and often comes with a modified fee agreement that must be presented to the plaintiffs. Furthermore, it is difficult to find a qualified provider with the appropriate technology to track the LOC.

ACCELERATED STRUCTURED SETTLEMENTmoney-tree

Some settlement awards may be given as structured settlements, meaning that after a settlement is awarded, a settlement fund is created, and the award is paid out incrementally over a predetermined time period. If the settlement recipient requires immediate access to some of the money in this account, it is possible to accelerate either the full payment, or in certain situations, a portion of the payment, from the structured settlement. While this can give the recipient immediate access to cash, it can potentially push the recipient into a higher tax bracket, temporarily. Moreover, this option is very expensive, and all advances are steeply discounted. Most experts would advise against an accelerated structured settlement.

VOUCHER FUNDING

Many states appoint attorneys to represent plaintiffs or defendants who otherwise would not have access to professional counsel. Voucher funding is a system by which these attorneys can receive accelerated fees. Voucher funding operates on the same premise as attorney fee acceleration, in which the funding company purchases the fee amount and advances the sum to the attorney (for more information, see ATTORNEY FEE ACCELERATION). The state is responsible for paying the funding company.

A voucher essentially serves as a promissory note to pay an attorney who has completed a case and is awaiting payment. Voucher funding accelerates that attorney’s accounts receivable, and the obligor, usually the municipality in which the attorney practices, pays back the funder.

In normal circumstances, vouchers are paid off on a short-term basis. However, voucher funding has become more popular during the recession, as certain municipalities have fallen into poor financial standings. In many cases, voucher delays have been extended, increasing the demand for voucher funding.

APPEALS FUNDING

Appeals funding and judgment/ verdict funding are only applicable to cases that have already been decided and are being challenged, or have been challenged, in the court of appeals. Appeals funding has risks similar to those found in pre-settlement funding, because the appeal could be lost by the plaintiff’s side. Rates are usually in between those found in pre-settlement funding and post-settlement funding.

ATTORNEY FEE ACCELERATION

Attorney fee acceleration is a type of post-settlement funding that can only occur after the outcome of a case has already been determined and agreed upon by all parties. An attorney or plaintiff may want to look into post-settlement funding if a settlement has been offered, but delays will prevent the award from being paid out for a significant amount of time. Post-settlement funding generally has lower interest rates than pre-settlement funding, and is very low-risk for the lendee, because all remaining major risks are accepted by the lender.

white-piggy-bankThere are two main risks that the lender accepts in post-settlement funding. The first is obligor risk, or, in other words, the lendee accepts the risk that the obligor (for example, the defendant, or their insurance company) will not be able to pay the settlement amount. This could happen for a number of reasons, including the obligor filing for bankruptcy, or simply refusing to pay the agreed upon amount.

The second risk that the lender accepts in post-settlement funding is the risk of a long payment delay. For example, once a settlement is agreed upon, delays can prevent the award from being paid out for months, or even years. It is common to see delays built into class action cases due to legal processing, Medicare or Medicaid liens, or in any compromise hearing where a minor is involved. Lenders typically offer non-recourse advances, meaning that if an advance was given on a settlement that, for one of the above reasons, did not pay out, the lendee would not owe the lending company.

Attorney fee acceleration is a strictly post-settlement funding option. An attorney might consider applying for his or her fee to be accelerated if there is a delay in settlement distribution for any reason. Fee acceleration is a great way to help an attorney receive fees that would otherwise be left unpaid for an unknown amount of time. This type of funding is best if an attorney needs an immediate cash flow, and waiting for a delayed settlement could damage the practice.

IS FEE ACCELERATION RIGHT FOR ME?

 

Fee Acceleration is incredibly beneficial to attorneys who are stuck with payout delays and are in immediate need of capital. The plan can be very flexible, as an attorney can take out cash advances in portions. Moreover, as long as the collateral is present (in that settlement), the lendee can request multiple advances. As opposed to a Line of Credit, Fee acceleration does not require a monthly interest payment, nor does it require secured collateral.  Similarly, Fee Acceleration is easier to qualify for than Line of Credit.  Fee Acceleration has better rates than pre-settlement funding due to the different risk profile. Unlike many other types of both traditional and alternative funding methods, Fee Acceleration does not require a credit history in order to qualify.

Entering a fee acceleration agreement removes obligor risk from the attorney. The lender assumes the risk of an obligor being unable to pay the settlement award. For the lendee, the risks are very low. The application for fee acceleration is based almost entirely on the case in question, as opposed to the attorney’s or law firm’s assets.

Fee Acceleration will not fit the funding needs of everyone, but for some, it may be the best option. All of the following types of cases are eligible for Fee Acceleration, and this is only a partial list! (iv)

Medical Malpractice

Personal Injury

Wage & Hour Disputes

Securities Class Actions

Mass Torts

Infant Injuries

Negligence

Wrongful Death

Product Liability

Multi-District Litigation

Class Actions

Wrongful Termination

Employment Discrimination

Antitrust

Court Appointed Fees

Pharmaceutical Litigation

Indigent Defense Funding

Maritime (Jones Act)

Dog Bites

Breach of Contract

Sexual Harassment

Premises Negligence (Slip & Fall)

Whistleblower (Qui Tam)

Civil Rights

Toxic Torts

Below are two Fee Acceleration case studies to show the different ways this option can benefit your firm.

FEE ACCELERATION CASE STUDIES

CASE STUDY #1

Client A is a sole practitioner specializing in personal injury and medical malpractice litigation. He has been slowly ramping up the practice, and currently has several promising cases being litigated. Almost all of Client A’s case load is worked on a contingency basis, so any losses in his litigation can be a big setback.

Unfortunately, Client A is in a situation where one of his PI cases resulted in an unexpected defense verdict. Now, there are costs associated with this case that must be paid, including expert witnesses and depositions that were used in the course of the trial, with no attorney fee forthcoming.

Client A, as is the case with most smaller solo firms, does not have a lot of assets, nor a large enough case load, to qualify very easily for bank loans, bank LOC or litigation company LOC. There is another PI case that has reached a settlement, and Client A is expecting a $200,000 attorney fee to come soon. However, Medicare has already indicated that they are filing a lien against the settlement, tying up the attorney fee with no clear indication as to how long it will take to be sorted out. Client A has the potential to wait 6 months or longer before it is resolved and payment can be made on his fee.

Client A uses Fee Acceleration to apply for a $75,000 advance against the $200,000 fee. Qualification is easier than loans and LOC, since funding is only against this specific case and not the personal or business finances of Client A. Advancement of $75,000 against the fee is secured, and Client A now has funds at his disposal to pay the costs associated with his lost case as well as various miscellaneous business and personal expenses. Client A has use of cash flow now, limiting the time risk of attorney fee payment, and will not have to pay back anything until the settlement finally pays, whenever that may be.

CASE STUDY #2

Client B is a partner in a mid-sized plaintiff’s litigation firm, consisting of 2 other partners and 10-15 other lawyers/staff. The firm handles a wide range of plaintiff’s cases, including injury, discrimination and harassment. Client B has a particular emphasis on class action litigation. Recently, the firm was involved in a major MDL against a pharmaceutical company concerning the injuries caused by one of their drugs. A global settlement was reached in the litigation, and the special master has awarded Client B a $3 million fee as part of the common benefit fund.

Final approval of the settlement is not expected for 6 months or longer. Client B is currently ramping up lawsuits in another class action concerning a popular medical device. Momentum has been building and many potential plaintiffs are coming forward looking for attorneys to handle their cases. Client B would like to have funds available for advertising and marketing his firm’s services in this latest class action case. Fee Acceleration is used for a $1 million advance against the $3 million fee owed. That money is now available at Client B’s disposal to add more plaintiffs to his case load in this progressing medical device litigation.

IN CONCLUSION

 

If you’re awaiting a settlement payout that has a delay; if your business needs a boost to draw in more clients and potential cases; if you want to diversify your interests but are a bit below budget; if you are a plaintiff and high legal and medical fees are putting a damper on day to day living, then legal funding may be right for you.

LEARN MORE

RD Legal Funding has the resources to provide you with excellent litigation financing to help you recover case expenses, expand your caseload, and receive delayed payments.

For more information, call 1-800-565-5177 toll free for a consultation, or view our website at www.legalfunding.com.

Keep up to date with legal news and information on the legal funding industry by following RD Legal Funding on Twitter, Facebook, Google+, and LinkedIn.

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(i) http://www.instituteforlegalreform.com/sites/default/files/thirdpartylitigationfinancing.pdf

(ii) http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/formal_opinion_464.authcheckdam.pdf

(iii) http://www.youtube.com/watch?v=O1cDq5jh_5k&list=PL4765D936B86B5C03

(iv) http://www.legalfunding.com/eligible-cases/


Written by Joseph Genovesi, President of RD Legal Funding

One comment

  1. I am a solo practitioner, and in the past have passed on cases because I did not have adequate resources to properly litigate them.
    I have downloaded your white paper for ready reference, and will pass it on to several colleagues.

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