Lawsuit Financing Ethics

date: 10/25/2011

Many plaintiff firms seek such financing on an ad hoc basis. In these circumstances, a funding company provides the attorney with a cash advance against a favorable outcome of the case. Based upon the strength of the case, and in certain circumstances, an evaluation of the strength of your firm’s portfolio of cases, a lawsuit funding company will provide an advance (generally, somewhere in the range of 10-15%) on the expected amount of the award, should the attorney prevail in the case. Generally, such an advance is “non-recourse.”

Like a contingency fee itself, the legal funding advance does not need to be repaid unless a successful result – whether settlement or eventual award – is achieved. These funds allow a law firm to finance costs such as experts. Pre-settlement lawsuit financing, however, has come under fire from critics who believe such financing agreements – whether provided to lawyers or their clients – violate long-standing ethical prohibitions.

For example, critics charge that such financing drains money from plaintiffs. Interest rates in pre-settlement lawsuit loans generally exceed 15% a year, and most states allow lawyers that borrow to bill clients for the interest payments. The costs can exceed the benefits of winning. In addition, lawyers are not required to tell clients that they have borrowed money, so the client may be unaware that there is financial pressure to resolve a case for a figure that will repay a lawsuit advance. 
Other critics cite the potential violation of ethical obligations that is inherent in providing information to a lender regarding the merits of an ongoing lawsuit. Every attorney, whatever his or her state of practice, is charged with an undivided duty of loyalty to his or her client. Some critics charge that this duty of loyalty, as well as duties of confidentiality, may be impaired when information regarding the merits and potential results of a lawsuit are provided to a lender in order to facilitate pre-settlement lawsuit financing. Some lenders require notice of settlement offers, for example.

Other critics point to the medieval doctrine of champerty – which precludes “officious intermeddling” and profiteering from the sale of legal claims to third parties. Such doctrines are intended to deter speculation and litigation and supposedly serve the interest of protecting defendants from frivolous lawsuits. Some critics charge that financing constitutes an improper “workaround” of doctrines precluding the assignment of personal injury claims. Such charges are the subject of a number of articles both in mainstream media, such as the New York Times, and legal journals.

Post-settlement funding is often a more viable option, which we will discuss in the final segment of this article.

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