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It’s no secret that litigation is expensive. When an individual squares off against a big company in a personal injury or product liability case, they pit their own finances against the bottomless resources of a corporate bank account. The price of the attorney and court costs won’t change. This puts a heavy burden on the plaintiff, who often cannot afford to carry their own case.

Enter litigation financing. Sometimes known as “non-recourse financing,” this type of loan lets plaintiffs continue fighting their court battles without having to drain their personal savings. It sounds great, and such financing has saved thousands of plaintiffs. But is it a good deal?

What is Litigation Financing?

At its most basic, litigation financing is a loan against the outcome of the case. The lender advances a sum of money against the potential settlement and attaches some or all of the settlement with interest. If the plaintiff loses, the financer gets nothing and cannot recover the loan, hence “non-recourse.” On the other hand, if the plaintiff wins, the finance company recovers the full amount of the loan, plus whatever interest they agreed on, which can be as much as 100% or more of the original loan.

How It Works

Litigation financing has been around since the 1990s. It began with the recognition that civil suits can drag on for years, and plaintiffs may be unable to work or operate their businesses while the suit is ongoing. Unfortunately, this can lead to cash-strapped plaintiffs accepting less-than-optimal settlements just because they can’t afford to keep fighting.

Litigation financing steps in to give plaintiffs the money they need to survive while their case proceeds. Plaintiffs use financing for personal expenses, rent, payroll, mortgage payments, and other expenses. Having an immediate source of cash can be the difference between taking a settlement and continuing a case.

Plaintiff funding begins as an assignment of rights. The lender is assigned the rights to the lawsuit’s proceeds when completed. No collateral or guarantee is offered; the lender is only repaid if the lawsuit is successful. If the plaintiff loses, the lender cannot recover anything. There is no commitment to repay the loan, and the lender cannot sue the debtor to recover the loss.

Because of the risk of total loss, lenders charge high interest on lawsuit loans. The structure of non-recourse lending takes the loans out of state usury laws, so interest can be very high, up to 100% of the original loan. A $4 million loan may require an $8 million payback from the settlement.

Who Qualifies for Lawsuit Lending

To protect themselves against this potential loss, litigation financers vet their potential candidates carefully. To qualify for litigation financing, a plaintiff needs:

  • An attorney
  • A contingency agreement
  • A viable claim
  • A defendant able to pay the settlement

In other words, litigation financers will not pay for plaintiffs’ legal fees and won’t pay for speculative claims or dubious court battles. These loans are available for plaintiffs in complicated cases against insurance companies, healthcare providers, large corporations, and similar defendants.

The attorney must agree to be part of the funding process. The plaintiff’s attorney needs to provide documents about the case to the finance company, discuss the funding with the finance agent, and return the payment to the financer at the end of the case.

Benefits of Litigation Financing

Civil lawsuits are expensive. Litigants trying to survive and still pursue their claims can find themselves in a serious bind.

In 2016, farmer Craig Underwood had to file a breach of contract suit against his only buyer when they abruptly stopped buying his chili peppers. Underwood had no way to pay his workers or operating expenses when the defendants appealed. So he took a $4 million loan from Burford Capital, a litigation financing company.

Underwood admits it was a tough call. He knew that Burford would take a big percentage of his award if he won. But he needed money right away. When Underwood won the appeal, he received $23 million—and paid $8 million to Burford.

It was a lot of money, but Underwood does not feel it was predatory. Without the $4 million, he would have been out of business before the appeal came in. Instead, he still owns his farm.

Some civil defendants will drag out a case in an effort to force plaintiffs to accept a lowball settlement. This is especially true for insurance and product liability cases, where costly expert testimony can drive up plaintiff expenses. Litigation financing can give plaintiffs time and money for a more equitable settlement.

Disadvantages of Litigation Financing

Like any other business, litigation financers want to make a profit. Therefore, they obtain their initial funding from third-party investors who buy in looking for high returns. Litigation finance is attractive to investors because it is unregulated or poorly regulated in most states and does not fluctuate like the stock market.

To maximize return and minimize loss, most reputable litigation finance companies do not take every plaintiff who applies. Instead, they choose cases based on specific criteria.

  • Good chance of winning. Since the finance company only gets paid if the case wins and cannot recover anything if it loses, their attorneys review the case carefully to determine if it is likely to succeed. An uncertain case is unlikely to be given funding.
  • High “investment to award” ratio. Damages in the case must be high enough to warrant a loan and repayment. Some industry analysts suggest the ratio is 10:1; in other words, the plaintiff must expect to win 10 times the loan amount. In reality, the amount may be lower, but plaintiffs must be realistic about what is worth “going after” in a lawsuit before seeking financing.
  • Reasonable period for settlement. Finance companies do not want to wait years or decades for payment. They look for cases that are likely to finish within a few months. Farmer Craig Underwood’s case had already been appealed when he approached Burford for his loan.

This does not mean smaller, uncertain cases cannot obtain financing. However, they may have to turn to smaller companies for their loans.

Lack of Regulation, Lack of Control

Burford Capital, mentioned above, handles big claims for big law firms. Their CEO acknowledges that they only offer loans for cases over $5 million. Because of this high-dollar amount, Burford usually doubles their investment. As a result, there have been cases where Burford has ended up with more money than the plaintiff.

The charges are high, according to finance companies, because of the risk. If a case is lost, the firm has no recourse but to absorb the loss. To minimize their risk, firms only accept meritorious claims: Burford’s CEO estimates that approximately 90% of their cases are successful.

However, not all firms are as scrupulous. For example, a recent class-action suit against a litigation finance company in New York revealed widespread fraud and coercive behavior by the company against individuals (in this case, 9/11 victims and NFL players) who had meritorious claims and only needed financial assistance until their claims were settled.

Unfortunately, the lack of regulation also means a lack of transparency. Litigation finance companies are not necessarily required to disclose their funding sources or the nature of their contracts. With no regulatory body overseeing the financing, it is an open field for fraud and overcharging.

Some states, such as Colorado, have decided that these types of loans are subject to state lending laws, but this is not the norm.

Litigation Concerns

A final concern over the lack of regulation is the possibility of finance companies interfering in the litigation process. Theoretically, the loan is provided with no strings attached, the only requirement being that it be repaid at the agreed-upon rate when the case is won.

Realistically, however, the finance companies want to be repaid. It is foreseeable that the lender would want a seat at the table, so to speak, or want some say in how the case is presented. Companies like Burford insist they do not get involved in the attorney-client relationship, and clients are free to accept any offer they choose.

Some legal analysts have been concerned that legal funding companies may insert themselves into the negotiation process and pressure litigants to settle based on their recovery. Although the American Bar Association’s model rules encourage financial agencies to draft agreements that leave all control of the outcome in the litigant’s hands, cases like the ones involving the 9/11 survivors show this does not always happen.

Safe Ways to Utilize Litigation Financing

Litigation financing provides plaintiffs with equal access to the civil justice system. High-end lawsuits against corporate entities can be out of reach for individual litigants, and having a source of cash levels the field. Legal funding can be good for plaintiffs if utilized with a bit of forethought:

  1. Discuss the pros and cons with an attorney before making applications. An attorney is required to obtain litigation financing, but plaintiffs should review the benefits and disadvantages carefully. No attorney should “sign off” on a litigation financing application without ensuring the client understands exactly what is being requested.
  2. Have a reasonable expectation of the amount at issue, both the amount contested and the amount of the possible award. Many plaintiffs have unrealistic hopes of huge settlements and are willing to keep fighting for money they’re not likely to win.
  3. Be realistic about the time involved in the trial. Litigation finance is meant to cover the extended cost of surviving a long trial and appeal. Most plaintiffs who turn to litigation funding have exhausted their own savings and credit accounts and tapped out any family, friends, and short-term assistance. Litigation finance should be the last resort, not the first thought for litigants and their attorneys.

In short, litigation financing is best used by litigants engaged in lengthy lawsuits with expenses that cannot be covered by other means. For example, consider Mr. Underwood, who needed a $4 million boost to save his farm. Although he did not recover as much of his loss in the lawsuit as he had hoped, he kept his property.

The 9/11 survivors in the class action suit needed much less—daily living expenses and medical costs—but the fees charged by the litigation funders stripped them of more than half of their award. In one case, a victim was given a modest $25,000 loan by a funding company and had to return $64,800 of a $90,000 award. Although the survivor needed the loan, he had very little left at the end of the case.

Questions to Ask a Litigation Finance Company

With this in mind, ask your prospective finance company the same questions you’d ask any other financial institution:

  • Do you handle my type of case? As noted, some firms won’t look at any case with an award under a set dollar limit. Before submitting a request, be sure you’re asking the right company.
  • How many cases do you handle? What is your success rate? Litigation finance companies screen their cases carefully and have a good idea of what a winning case looks like. If they have an 80-90% success rate, like Burford, they know what they’re looking for.
  • How long has the company been in business? The litigation finance industry is comparatively new, but a firm should have a reasonably substantial track record.
  • Do you share your analyses with my attorney and me? Some firms only provide a flat denial of services. Firms which offer to explain why they turned down the client or recommend another finance company are preferable.

It never hurts to do some extra research. Contact the Better Business Bureau to see if the chosen company subscribes to the ABA’s best practices or do a Google search for any bad reviews or news stories.

Remember, litigation finance companies offer money with no collateral or security except the chance of winning a legal battle. If they win, they will get back their entire loan plus up to 100% of the loan value, without any state or federal oversight (at present). Plaintiffs may need this money to survive until their case settles, but if they were depending on the award to survive, they need something left after the loan is paid back.You can find out more about litigation financing and whether you have a civil case worth pursuing by contacting Morris & Dewett Injury Lawyers today.

Morris & Dewett provides this information to the public for general education and interest. The firm does not represent clients in every topic discussed in legal & injury news. The information is curated and produced based on trends in law, governance, and society to present relevant issues to the general public. Every effort is made to provide accurate information. Do not make any decision solely based on the information provided, please seek relevant counsel for each topic area. Consult an attorney before making any legal decision, consult a doctor before making any medical decision, and consult a financial advisor before making any fiscal decision. If you have any legal needs that we can assist you with, please do not hesitate to contact us.

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