New, widespread development weighs heavily on litigation system

April 5, 2012 By    

An important element in the prosecution of lawsuits filed by plaintiffs is the financial costs and potential recovery related to a given claim. A potential game changer in this consideration is third-party funding of litigation.

When claimants pursue a lawsuit, they anticipate financial recovery. Third-party funders appeal to the desire of claimants to get their money “now.” There are many reasons for this desire of an early payout, including medical needs and daily living needs. However, once the loan is made to a claimant by a third-party funder, the case outcome can be impacted greatly.

In one case, a defendant made a settlement offer, and the plaintiff’s lawyer recommended that his client accept the offer. The third-party funder nixed the deal because the settlement would not cover its loan to the plaintiff. The case was tried to verdict, and the plaintiff lost and got nothing. The third-party funder also got nothing, as these types of loans are only recoverable if the plaintiff gets a recovery.

Some plaintiff lawyers also contract for this type of funding in expensive cases such as mass torts and class actions. If this funding was not available, these funded cases may never have seen the inside of a courtroom. Again, the lawyer may be compromised in his decisions on what money is needed to resolve the case. This situation can create serious ethics concerns for the lawyer involved.

When a successful settlement or trial does occur, these loans often can consume most, if not all, of the recovered amounts in a very short time.

In a recent case, a plaintiff took out a $9,000 loan, and when the verdict was returned 18 months later she was required to pay the third-party funder $24,000 of her $27,000 share of the settlement proceeds. In another case, a plaintiff received a settlement of $168,000, and she owed the third-party funder more than $220,000. These examples raise serious questions about the nature of these funding arrangements.

A closer look
These funding companies claim that what they are offering are not loans but investments. They argue that part of the agreement they make is that if the plaintiff does not obtain a favorable settlement or trial verdict they don’t get their money back.

However, these same companies use the word “loan” in much of their advertising. In addition, these companies do a good degree of due diligence before making these loans. Before any money changes hands, they do their level best to make sure the case has merit. In fact, the actual data shows that very few of these loans ever go unrecovered.

There are also problems with disclosure of confidential information related to this type of funding. Remember, before these third-party funders will loan funds, they want to determine if the case has merit and what would be a realistic recovery. This type of analysis is very sensitive and is normally only discussed between counsel and the client. One federal court recently ruled that this communication with a third-party funder is not privileged. A lawyer who suspects that an opposing party or the client has received third-party funding can obtain this information and the opposing party’s analysis in discovery. This is not usually available.

These funding companies are trying to create laws in at least eight states that would designate the communications between the lawyer/client and the third-party funder as confidential and not subject to discovery. So far these efforts have been unsuccessful. The trend in the United States today is to limit the attorney-client privilege. Time will tell if these efforts by third-party funders will achieve their desired goal. I have my doubts.

This new development is widespread. A recent Internet search brought back more than 3 million hits for “litigation funding.” This type of funding will only encourage more lawsuits and demands for more money to satisfy the greed of these third-party funders.

Hopefully the more that is known about this funding vehicle the more it can be relegated to a memory. This funding is a growing cancer on the litigation system in our country.

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