In order to avoid these perceived ethical pitfalls, among other reasons, pre-settlement lawsuit financing is often discouraged, and successful plaintiffs’ law firms may choose to avoid such complications. This leaves them, however, without a ready source of funds to pursue growth or to finance additional cases “in the pipeline” when conventional sources of financing, such as lines of credit, have dried up.
For an existing, mature practice, such financing is available through the sale and assignment of earned fees in a post-settlement context. In such circumstances, an attorney may have litigated a case to settlement. Pursuant to his contingency fee contract with the client, he is entitled to a fee of 40% of the award or settlement. However, the settlement is payable in installments, or is subject to court approval, or in the case of a class action, administration of a claims process that may take two or three years. In such circumstances, the attorney’s work is concluded, and the fee already earned. However, the attorney cannot expect to receive the fee for that multi year period.
Thus, in order to finance the next personal injury case or the next class action, the attorney may choose to sell his fee to a lawsuit funding or factoring company, at a discount, in order to obtain the fee right away. The attorney assigns the right to collect the fee at the time the class action is fully administered, and funds are released by a claim administrator directly to the purchaser/finance company. The attorney can then move on to the next case. The financing company bears the cost of having the funds tied up over time.
This post-settlement funding avoids the ethical pitfalls inherent in pre-settlement lawsuit funding. Confidential information regarding the merits of the case is unnecessary. The purchaser, unlike a pre-settlement lender, has neither an interest nor any impact on when a case is settled, or for what amount. Further, there are no specific limitations on the funds obtained by sale and assignment of an existing fee award that may be imposed on pre-settlement lawsuit financing.
Some lenders require that such financing go toward the costs of maintaining the action. This is fine if the law firm is funding each case on an ad hoc basis. If, in contrast, a law firm wishes to use the profits derived from its labors in order to finance the wooing of a new partner, a move to new offices, or even tenant improvements, ad hoc lawsuit financing on a pre-settlement basis would limit the use of such funds.
Unlike traditional bank financing or other lenders, including the use of credit cards or personal loans, fee acceleration in the form of an assignment and payment does not require the payment of monthly interest or principal payments. There are no upfront points or fees. Simply put, there are no payments of any kind until the fee is paid.
The sale of earned legal fees by a law firm after settlement or judgment meets an attorney’s needs for financing while maintaining the utmost in ethical standards. Attorneys do not need to compromise their obligations of client confidentiality, loyalty and control over a lawsuit in order to obtain the funding necessary for growth.
Irena Leigh Norton, Esq. is General Counsel to RD Legal Companies, including RD Legal Funding, LLC. RD Legal provides post-settlement funding solutions to lawyers and plaintiffs, including fee acceleration and lines of credit.