You Need to Talk About Litigation Financing With Your Clients

American Currency, American Dollars.

Every solosmall practitioner should talk to their clients about the risks and benefits of litigation finance loans. Litigation finance arrangements were once exclusively found in personal injury cases (where they are commonly called “pre-settlement loans”), but have recently moved into business litigation and family law cases as well. Litigation finance loans (which are also known as pre-settlement advances or legal fee loans) are non-recourse loans given to litigants in exchange for a share of the proceeds of their case. While you may not yet have a client who has accepted some litigation financing, the odds are you will.

Litigation Financing Is Becoming Increasingly Popular

Advertisements for companies that make litigation finance loans have become more and more pervasive, promising that it’s easy to apply “in seconds” and assuring people that they could have up to $100,000 in their bank account within 24 hours. Because of that, litigation financing is quickly becoming a part of the landscape for solosmalls in many practice areas, like it or not. When it comes to discussing this with your clients, you essentially have two options. You can talk about it with new clients at intake, or you can choose a “cross that bridge when you come to it” approach and wait until the client takes the first step in getting a financing agreement. The former approach is much more preferable.

The risks that arise when a client accepts a litigation finance loan are numerous. There are obvious risks, such as a personal injury client “cashing out” of a lawsuit and leaving the lawyer to act as a de facto collection agent for the settlement finance company. There are other risks, such as letting the litigation finance company influence litigation strategy, or requiring that you or the client divulge protected or confidential information in order to get financing.

A Newer Trend: Litigation Finance in Family Law Cases

One of the newest developments in litigation financing is companies extending litigation loans in family law cases. One company’s founder even bills herself as the “Fairy Godmother of Divorce” These types of financing arrangements could provide some fairness in hotly contested divorce cases when one side maintains control of bank accounts and assets during the litigation and therefore has the ability to hire lawyers, while the other side may get locked out of accessing financial assets before the divorce papers are even filed with the court.

Ethical rules prevent lawyers from taking divorce cases on contingency, due to the risk that such fee structures would encourage more litigation of a nastier kind. Litigation financing of divorce cases may make an end-run around this ethical concern and allow for just that sort of litigation. Consider the 2013 English divorce case of Young v. Young, where the sheer amount of litigation financing obtained by one party prompted the judge to pen this into the opinion:

In one sense, the Wife did amazingly well to be able to obtain as much litigation funding as she did, given that she had no security to offer. The amounts spent, however, are truly eye watering.

Ultimately the wife was able to obtain about four million pounds in litigation funding, which translates to about 5.7 million dollars. As to why such an amount was even necessary, the judge wrote:

This case has been quite extraordinary even by the standards of the most bitter of matrimonial breakdowns. It has been conducted in the full glare of the Media. Extremely serious allegations have been bandied around like confetti. Some of these allegations can only be described as “wild”. The case has cost the Wife millions of pounds in litigation fees. It has taken some six and a half years to come to trial. There have been around 65 separate hearings. At an earlier stage, I committed the Husband to prison for six months for contempt of court. I am now going to have to make a large number of findings of fact in relation to matters that are very hotly in issue. I have also decided that I have to be highly critical of the way in which the case has been conducted at various times by both parties. In many respects, this is about as bad an example of how not to litigate as any I have ever encountered.

While the Young case is hopefully an outlier, it should be instructive of the dangers of unfettered litigation financing in something so contentious as a divorce. Adding fuel to an already burning fire will do little more than inflame contentious litigation even further.

Talk to Your Potential Clients About Litigation Financing at Intake

Some practice areas, like personal injury, see their clients get financing offers more often than others. Companies that advertise pre-settlement funding may put an advertisement right in your client’s lap, and it’s up to you as the attorney to educate your client about the potential pitfalls and benefits. Keep in mind, however, that even “having the talk” with your client about litigation finance can bring on ethical issues:

“This Committee can conceive of only limited circumstances under which it would be in a client’s best interests for an attorney to provide clients with information about funding companies that offer non-recourse advance funding or other financial assistance to clients in exchange for an assignment of an interest in the case. Under these limited circumstances an attorney may advise a client that such companies exist only if the attorney also discusses with the client whether the costs of the transaction outweigh the benefits of receiving the funds immediately and the other potential problems that can arise. Only after this discussion may a lawyer provide the names of advance funding companies to clients.” – Florida Bar Opinion 00-3.

In short, litigation financing presents ethical concerns for lawyers even before their client signs an agreement, while litigation financing companies are not governed by any ethical obligations or advertising rules.

What About Alternative Financing Arrangements?

Imagine this nightmare scenario: your client calls you and explains that they will be able to pay off your fees earlier than expected. How? Thanks to their highly successful GoFundMe campaign, wherein they spilled their guts about their case online, giving up confidential information and the litigation strategy you put together in order to get money just to cover their living expenses. Worse, they inflated the issues in their case or outright lied about them in order to get more funding, and all their statements can and most likely will be used against them in their case. Such a nightmare could easily be prevented by discussing the dangers with your client before they turn to fundraising online.

Litigation finance can and will inject itself into your cases with or without you explaining the risks and benefits to your clients. Make sure you address the issues with your clients before it is too late.

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