A friend of mine, who until recently was in the medical marijuana business, tells me there is a daily newsletter he and his colleagues all subscribe to. They need it because developments in the field are constant, fluid and rapid. I think there should be a similar publication for litigation financing.
In recent weeks I’ve read stories about and decisions rendered in cases in Georgia, Illinois, New Jersey, Minnesota and several circuit courts of appeal on matters related to lit financing. Issues have included public policy, the enforceability of lenders’ liens against settlements, lawyers’ ethical obligations to lenders when their cases settle, whether the presence of third-party financing is discoverable, and a host of other fun stuff. I saw that one state is actually considering legislation mandating the disclosure of the details of funding arrangements in all litigation matters. And the New York Times just did its second article on how litigation financing is driving certain personal injury cases, from abdominal mesh to city fall downs. It’s enough to fill a daily newsletter easy.
Things were simpler a century ago when laws against champerty and maintenance meant that parties had to finance their own lawsuits and banks and lawyers were prohibited from helping them. Some states, Connecticut included, never adopted the robust body of statutory and common-law prohibitions on providing plaintiffs with the wherewithal to get to the finish line, but even here there was no ready marketplace for financing litigation. In the last few years all that has changed. Now a plaintiff and her lawyer have many alternatives available.
I’ve always been uneasy about these relationships because of the potential for conflict inherent in promising to protect a lien which I know might be subject to challenge on all sorts of grounds. While our ethics rules mandate sequestering funds of a client in which third parties have an “interest,” the interest must be a legally cognizable and perfected one, not some inchoate wish or hope. What if I believe the “interest” is bogus and without foundation? I’ve counseled no end of lawyers in just that situation, when other lawyers try to assert informal PJR’s on cases and settlements belonging to their clients. I’ve managed to thread the needle, and none of my clients have been found to have violated any ethics rules, but it’s truly a minefield.
Don’t get me wrong. I’m not against lit financing. Having represented many, many plaintiffs, I know how deep–pocket defendants and insurance companies can delay things to force claimants to the settlement table, where they will be offered cheap money. And I’ve seen a fair amount of unethical lawyer financing, which I don’t condone but certainly understand. There is a grievance decision where the committee, while reprimanding a lawyer for helping a client out, admitted that his motives were pure and understandable. He lent the client money to avoid his arrest for failure to pay child support. He didn’t even ask to be paid back.
A few years ago, the lit financing industry tried to get a law passed here which would have legalized its business. In exchange, it was going to agree to cap the fees. (Some of this financing is way beyond usurious. It’s more like loan sharking than commercial lending.) I don’t know why it didn’t pass, but it may be that certain commercial interests thought that lit financing, like contingent fees, would promote more and weaker lawsuits. I’ve never bought the lie about contingent fees promoting junk litigation; lawyers are too smart to waste their time on worthless claims. In 40 years, I’ve seen very few truly “frivolous” lawsuits. They are much rarer than the chamber of commerce would have us believe.
Creating a legal framework for this enterprise would go a long way toward resolving some of the ethical grey areas. If a client tells me she wants to finance her litigation, and I know the loan might be subject to attack on one or more grounds, do I have a duty to tell her that? Can I ethically sign an acknowledgment of lien knowing that my client is going to challenge it anyway? Wouldn’t that be engaging in a fraud?
Maybe the alternative to legislating this field is to modify Rule 1.8(e) to allow lawyers to provide financing to their clients with appropriate safeguards such as mandatory third-party review and advice and capped interest and fees. If this can be legally done, why should a bunch of hedge fund investors reap all the profits? Or maybe I will start a daily litigation financing newsletter. I’ve always had more questions than answers anyway.
Former Connecticut Chief Disciplinary Counsel Mark Dubois is with Geraghty & Bonnano in New London.