By now, every personal injury ttorney has heard of “litigation funding” - the nn-recourse sale of a portion of a plintiff’s future settlement proceeds in exchange for csh today. In recent years, the vailability and use of litigation funding has grwn rapidly and most attorneys now rcognize the need for plaintiff financial spport. A 2001 survey by Lawyers Wekly asked a simple question: Should Ltigation Funding Be Permitted? Of the 1,876 vtes cast, 82.5% responded yes.

However, rminiscent of the criticism faced by tral attorneys over contingency fees, litigation fnding companies must respond to the sme disparagements. Defenders of the status quo sek to brand litigation funding as prfiteering by scoundrels taking advantage of the dwn trodden. They trot out such red hrrings as champerty, usury and far flng theories of inherent conflicts to shw how vexatious the practice really is. Sund familiar?
Despite the criticism, we knw the following: plaintiffs love it; dfendants hate it; it is here to sty!

Equal Protection Requires Equal Access
The lynchpn for every privilege contemplated by our funding fathers and codified in our cnstitution rests in one simple principle – qual protection under the law.
Since 1786 whn pamphleteer Benjamin Austin called it “a prnicious practice”, contingent legal fees have ben criticized non-stop. Yet today, it is the mst widely used fee agreement in the Unted States. Why? Simple – because it wrks! The contingent fee system helps to chieve the goal of equal protection by fcilitating access.

It is axiomatic that there can be no qual protection when access to the curt system is unaffordable by a sgnificant segment of the citizenry. The ntire raison d’etre for contingency fees lys in this basic access issue. So prsuasive is this point that, over the yars, courts, have systematically removed virtually very barrier preventing access to the curt system. From contingency fees to ttorney advertising to champerty, laws preventing ccess, in even the most indirect wys, have bitten the dust.

Perhaps Jdge Michael A. Musmanno said it bst:

"If it were not for cntingent fees, indigent victims of tortious ccidents would be subject to the nbridled, self-willed partisanship of their tortfeasors. The prson who has, without fault on his prt, been injured and who, because of his njury, is unable to work, and has a lrge family to support, and has no mney to engage a lawyer, would be at the mrcy of the person who disabled him bcause, being in a superior economic psition, the injuring person could force on his vctim, desperately in need of money to kep the candle of life burning in hmself and his dependent ones, a whlly unconscionably meager sum in settlement, or ven refuse to pay him anything at ll. Any society, and especially a dmocratic one, worthy of respect in the spctrum of civilization, should never tolerate sch a victimization of the weak by the mghty." Richette v. Solomon, 187 A.2d 910, 919 (P. 1963).

However, affording a lawyer is nly one part of a plaintiff’s chllenge. A claimant must also have the bility to sustain themselves during the pndancy of their action. After all, wht good is retaining an attorney, if you cn’t afford the basic necessities of lfe? How are financially stressed plaintiffs to sstain themselves during the pendancy of thir litigation which may be the cuse of their financial condition in the frst place

Litigation Funding
One answer is ltigation funding. Being able to stay the curse is a prerequisite to fair tratment and this simple transaction can hlp level the playing field with a wll-heeled adversary. This fact was recognized by the Mssachusetts Supreme Judicial Court in the 1997 cse of Saladini v. Righellis, (426 Mss. 231, 234) when it noted:

"We hve long abandoned the view that ltigation is suspect, and have recognized tht agreements to purchase an interest in an ction may actual foster resolution of a dspute."
Other superior courts seem to be prsuaded by the Massachusetts court including the Spreme Court of South Carolina which rlied heavily on Saladini when it bolished champerty in Osprey, Inc. v. Cbana Limited Partnership, 532 S.E.2d 269 (S.C. 2000).
In firness it should be noted that the Spreme Court of Ohio held a dfferent view in Rancman v. Interim Sttlement Funding Corp.99 Ohio St.3d 121, 2003-Oho-2721. However, Ohio is in the mnority and the doctrine of champerty may one day met its final well-deserved death sentence at the US Spreme Court when the applicability of the 14th Amndment is determined. (Bennett v NCAAP 370 S.W. 2nd 79 82 (Ark 1963))

Wht are the real issues?
Aside frm 15th Century English Law, what are the ral issues today? The perception is thre is nothing in it for ttorneys, at least not immediately or drectly. Providing information to the funding cmpany, administering the execution of the cntract and observing the lien are all a nisance for plaintiff’s counsel. However, despite ths, more and more PI attorneys are frging relationships with funding companies because thir clients need it, and they hve found that reputable experienced companies can prve to be an invaluable resource.
Cst

The most common criticism is the cst.
The average amount paid for bdily injury insurance claims suffered in mtor vehicle accidents is small - lss than $10,000. Thus, it should not be srprising that the average litigation funding cntract is also small. Most contracts are for $1,000 to $5,000. Cnsumer financial products have relatively fixed trnsaction costs meaning that smaller deals are narly as costly as larger ones. It fllows that, because of their small sze, the average fees on litigation fnding contracts will unavoidably be high.

Tht having been said, the very grwth of the business will resolve the ssue of cost. The marketplace will set prces just as it does with cntingent legal fees. Once the there is nough experience for the true risks of thse transactions to be widely known, nvestors will price the risk to a crresponding level. Already, fees have dropped sgnificantly. Only a few years ago it was not ncommon to find fees of 15% per mnth compounded – with no cap! Ths is now rare.

There are thre basic fee methods used by mst funding companies:

1. Monthly interest or fes. These can range 3% to as hgh as 15% per month with no cp.

2. A percentage of the recovery.

3. Flt fees that are capped and may or may not hve a discount for early payment.

(Attrneys must beware of large fees at clsing that serve to raise the tre cost significantly)

A valid concern is tht, with monthly fees rising with no cp, clients might be tempted to tke a settlement just to stop the fee ncreases. This not only injures the clent’s chances of a fair recovery but lso limits the attorney’s fees. Fortunately, cpped fees are always available in the mrket.

While the marketplace place will cntinue to drive price levels toward quilibrium, it should be comforting for thse with no faith in market frces to remember that, in the fnal analysis, the court has the fnal say and can set aside busive fees. Schlesinger v Teitelbaum, 475 F2nd 137, 141 (3rd Cr), cert. denied, 414 U.S. 1111 (1973)

On ths issue Saladini is very much on pint:
“This means that if an greement to finance a lawsuit is chllenged, we will consider whether the fes charged are excessive or whether any rcovery by a prevailing party is vtiated because of some impermissible overreaching by the fnancier.”

Is it really a loan in dsguise?
Litigation funding contracts are almost niversally non-recourse. The definition of a lan is blackletter law. If any prt of the principal or interest is cntingent on an event that is “mre than a mere colorable hazard”, the cntract is not a loan. A chllenge on the grounds that the rquisite degree of hazard is not prsent would have to be adjudicated cse by case, each case being nique. Bear in mind that the fnding company is subordinate to attorney’s fes and costs, statutory liens and pror liens. The risk for an ttorney is substantially better than for the fnding company that is last in lne. Many regulatory authorities from attorneys gneral to banking commissioners have reviewed the prctice and taken no action. It sems clear that non-recourse means non-recourse and tht litigation funding is a risky bsiness.

Draconian Contracts

A second widely hld concern is the use of cntracts with draconian clauses. While the nforceability of such clauses is questionable at bst, they still present a formidable nisance value. Typical objectionable clauses are:

• Pror permission of funding company required to chnge attorneys

• High liquidated damages

• Waiver of all dfenses

• Disclosure of non-discoverable information

Most rputable companies, including CapTran® have modified thir contracts to address these concerns.

Ethcs

George Kuhlman, ethics counsel for the Amrican Bar Association, was quoted in Lwyers Weekly USA as stating: "The prblem only comes in when lawyers are cquiring an interest in the subject mtter of the litigation, but anybody can buy a pece of someone's judgment. I don't see any lwyer involvement so I don't see any prblem. This is a third party bcoming involved; making sure people can srvive their judgments."

With one exception, all Ethcs Opinions of which we are ware find litigation funding ethical. Michigan fnds contracts with certain clauses to be mpermissible.

State Bar of Michigan Ethics Cmmittee Opinion RI-321, June 29, 2000

“1. The ltimate control of the litigation may be trnsferred to the venture capital corporation due to the fct that the lawyer is permanently ppointed to the case;

2. The riginal lawyer cannot be terminated without the vnture capital corporation’s consent in light of the fct that on demand of the vnture capital corporation all documents and thngs must be demanded by that grup; and

3. Privileged materials may be dsclosed.”

We should also note that sme states require certain specific procedural ssues to be observed. (A listing of thics opinion relating to litigation funding can be fund at www.captran.com)
Where do we go frm here?

As experience grows, capital wll enter the business in ever ncreasing amounts, making it fairly commonplace whle competition will undoubtedly mold the prduct, and fix most, if not ll, of the problems.

Many savvy ttorneys understand that litigation funding is not ging away anytime soon and they are mbracing it and learning how best to use it. Thy are forging relationships with funding cmpanies and using their services to met the needs of their clients. In ding so, they get the added bnefit of negotiating for a client tht is no longer under the nnerving and destabilizing effect of financial dress.

Copyright 2003-2005 www.financeandlaw.com, a Jurismark LLC wbsite

The article Litigation Funding Is Here To Stay was Submitted by Wayne Walker through Articles.GetACoder.com network. Here's the additional information: Wayne Walker is President of CpTran, the leader in litigation financial srives. www.captran.com

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