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As law firms push to collect from their clients and make their budgets this year, some may be considering another option: finding investors willing to buy their uncollected billings for cold, hard cash.

Driven by a need to pay partners, boost reported revenue or offset short-term financial uncertainty, firms in recent years have been experimenting with selling their accounts receivable to third parties. The buyers include banks and other investors—including funds that typically invest in litigation.


Travis Lenkner.

The process can work in different ways. Travis Lenkner, managing director of litigation finance firm Gerchen Keller, described a hypothetical law firm looking to collect on a $100 pool of receivables.

Gerchen Keller might pay $45 for a right to the first $50 that the firm collects, Lenkner said. The investment is sure to produce a profit for Gerchen Keller unless the firm fails to collect on more than 45 percent of the pooled billings. The firm takes a loss in return for guaranteed payment up front.

Lenkner said Gerchen Keller has made a number of such deals over the past three years, but he declined to say how many or with which firms. He said firms have been reaching out more and more frequently as their fiscal years wind down and clients have failed to deliver on time.

“The partners get on the phone; they ask nicely,” Lenkner said. “The client says, ‘My budget ends when yours does so I plan to pay you Jan. 2.’”

Litigation funder Burford Capital has also financed law firm receivables at the end of the year, according to Jonathan Molot, the company’s chief investment officer.

“It’s increasingly common that a firm knows they’ll have receivables coming in the next year,” Molot said. “They don’t have the cash now, [but] they want to pay their partners.”

Molot also declined to name any firms that have reached such agreements with his company or other investors.

A former partner at Cadwalader, Wickersham & Taft told The American Lawyer that the firm sold off a portion of receivables near the end of 2015. The partner, who requested anonymity to discuss his former firm’s finances, could not identify the value of the transaction or the buyer.

Cadwalader declined to comment on the former partner’s account or to discuss whether it has ever sold receivables.

Such a move could affect law firm financial figures that are reported by The American Lawyer, potentially boosting both revenue and profits per partner for a given year. Cadwalader saw gross revenue decline 3.7 percent to $463.5 million in 2015 after remaining flat in 2014. At the time, managing partner Patrick Quinn attributed the numbers in part to a lag in collections.

Managing Risk

The practice of selling receivables to free up capital is more common in other industries, including among transportation, manufacturing and construction companies that sell invoices to so-called factoring companies. Lawyers have also been factoring receivables for decades, though the practice has typically involved small firms and plaintiffs firms that rely on contingency fees and are handling few cases at a time.

Lawyers face more restrictions than other industries when it comes to how they pass off receivables to third parties, according to legal ethicists.

“Once you say, ‘I’m going to get a stake in your fees,’ that’s conventionally viewed as fee splitting,” said Bruce Green, a legal ethics professor at Fordham Law School. “You’re giving people a percentage of your fee and they’re nonlawyers and they’re not engaged in representation.”

But Lenkner and other investors say that what they’re doing is different. Rather than taking a cut of a client’s fees, Lenkner said his company is offering capital that the firm is repaying from its own collections.

Law firms have other reasons for selling receivables besides increasing their year-end revenue. The head of Citi Private Bank’s law firm group, Naz Vahid, said that the bank has helped a handful of firms sell receivables as a way to hedge risk. (Unlike litigation finance firms, Citi does not fund lawsuits or purchase settlement payouts.)

“What we’re looking at is whether a law firm has an exposure … to an industry or company,” Vahid said.

The practice is especially helpful to law firms that rely on one or two large clients or industries for a large portion of their revenue. They might seek to unload a client’s or group of clients’ bills to protect themselves from an industry downturn or other threats to a company’s business. Citi would purchase the receivables and sell them on the marketplace.

“The bank has to have some level of comfort with that third party as well,” Vahid said.

Citi has only made this type of deal about a half a dozen times, Vahid said. But, she added, the interest from law firm leaders is growing.

Contact the reporter at ngluckman@alm.com. On Twitter: @nellgluckman.

As law firms push to collect from their clients and make their budgets this year, some may be considering another option: finding investors willing to buy their uncollected billings for cold, hard cash.

Driven by a need to pay partners, boost reported revenue or offset short-term financial uncertainty, firms in recent years have been experimenting with selling their accounts receivable to third parties. The buyers include banks and other investors—including funds that typically invest in litigation.


Travis Lenkner.

The process can work in different ways. Travis Lenkner, managing director of litigation finance firm Gerchen Keller, described a hypothetical law firm looking to collect on a $100 pool of receivables.

Gerchen Keller might pay $45 for a right to the first $50 that the firm collects, Lenkner said. The investment is sure to produce a profit for Gerchen Keller unless the firm fails to collect on more than 45 percent of the pooled billings. The firm takes a loss in return for guaranteed payment up front.

Lenkner said Gerchen Keller has made a number of such deals over the past three years, but he declined to say how many or with which firms. He said firms have been reaching out more and more frequently as their fiscal years wind down and clients have failed to deliver on time.

“The partners get on the phone; they ask nicely,” Lenkner said. “The client says, ‘My budget ends when yours does so I plan to pay you Jan. 2.’”

Litigation funder Burford Capital has also financed law firm receivables at the end of the year, according to Jonathan Molot, the company’s chief investment officer.

“It’s increasingly common that a firm knows they’ll have receivables coming in the next year,” Molot said. “They don’t have the cash now, [but] they want to pay their partners.”

Molot also declined to name any firms that have reached such agreements with his company or other investors.

A former partner at Cadwalader, Wickersham & Taft told The American Lawyer that the firm sold off a portion of receivables near the end of 2015. The partner, who requested anonymity to discuss his former firm’s finances, could not identify the value of the transaction or the buyer.

Cadwalader declined to comment on the former partner’s account or to discuss whether it has ever sold receivables.

Such a move could affect law firm financial figures that are reported by The American Lawyer, potentially boosting both revenue and profits per partner for a given year. Cadwalader saw gross revenue decline 3.7 percent to $463.5 million in 2015 after remaining flat in 2014. At the time, managing partner Patrick Quinn attributed the numbers in part to a lag in collections.

Managing Risk

The practice of selling receivables to free up capital is more common in other industries, including among transportation, manufacturing and construction companies that sell invoices to so-called factoring companies. Lawyers have also been factoring receivables for decades, though the practice has typically involved small firms and plaintiffs firms that rely on contingency fees and are handling few cases at a time.

Lawyers face more restrictions than other industries when it comes to how they pass off receivables to third parties, according to legal ethicists.

“Once you say, ‘I’m going to get a stake in your fees,’ that’s conventionally viewed as fee splitting,” said Bruce Green, a legal ethics professor at Fordham Law School. “You’re giving people a percentage of your fee and they’re nonlawyers and they’re not engaged in representation.”

But Lenkner and other investors say that what they’re doing is different. Rather than taking a cut of a client’s fees, Lenkner said his company is offering capital that the firm is repaying from its own collections.

Law firms have other reasons for selling receivables besides increasing their year-end revenue. The head of Citi Private Bank’s law firm group, Naz Vahid, said that the bank has helped a handful of firms sell receivables as a way to hedge risk. (Unlike litigation finance firms, Citi does not fund lawsuits or purchase settlement payouts.)

“What we’re looking at is whether a law firm has an exposure … to an industry or company,” Vahid said.

The practice is especially helpful to law firms that rely on one or two large clients or industries for a large portion of their revenue. They might seek to unload a client’s or group of clients’ bills to protect themselves from an industry downturn or other threats to a company’s business. Citi would purchase the receivables and sell them on the marketplace.

“The bank has to have some level of comfort with that third party as well,” Vahid said.

Citi has only made this type of deal about a half a dozen times, Vahid said. But, she added, the interest from law firm leaders is growing.

Contact the reporter at ngluckman@alm.com. On Twitter: @nellgluckman.