Litigation loans for clients in dire need of money to pay the rent or for an attorney trying to cover case expenses are generally viewed by lawyers as a costly option of last resort.
That perception is part of a stigma that litigation lender Brian Walters said the industry has justly earned, with some vendors charging astronomical interest rates and adding “big-time fees” on top of loans.
But not all litigation funding operations are the same, according to Walters, who heads Jenkintown, Pa.-based LawSuit Funding Solutions. Walters said he is trying to change lawyers’ perception of litigation funding—from something they view as more trouble than it’s worth—to a vehicle that can lead to a larger recovery for a client by providing the resources needed to see a case through, rather than settling too early due to lack of funding.
“The problem with most attorneys is they’ve all had one or two bad experiences with a litigation funding company and they shut down and say they don’t want to do this anymore,” Walters said.
Dean Lipson, who runs Blue Bell, Pa.-based Covered Bridge Capital, also said the industry has been tarnished by “bad actors.”
“There are companies out there that take advantage of consumers. An entire industry gets painted with a broad brush, I’m sure personal injury attorneys would be very sensitive to this because they seem to get attacked as well,” Lipson said.
But litigation funding can be highly beneficial, if an attorney knows what to look for in a lender, Walters said, with avoiding high interest rates being a primary concern.
“You have some companies charging 4 or 5 percent a month with big-time fees on top. A client could borrow $3,000 and owe $10,000 in three months,” Walters said. “Don’t go with the first company; you have to go out there and kick the tires, ask the right questions.”
McLaughlin & Lauricella co-founder Slade McLaughlin recalled the horror story of a client who many years ago came to him with $5,000 in litigation loans before her case had even been established.
“The interest was so out of control that when the litigation started two years later, $5,000 had grown to $90,000,” McLaughlin said.
However, McLaughlin said litigation loans are sometimes a “necessary evil” and finding companies with reasonable rates and establishing a ongoing relationship with them is key to effectively utilizing litigation funding.
“I work with companies that are very reasonable,” McLaughlin said. “If the client borrows $5,000, the client will never owe more than double, $10,000.”
Matthew Casey of Ross Feller Casey said it’s important for lawyers to understand when the subject of litigation funding comes up, that they are not their client’s financial adviser and that the client has to make his or her own decision on whether to pursue a loan.
“Having said that, it is inevitable, especially for a family confronting catastrophic injury, that funding needs arrive prior to the conclusion of the litigation,” Casey said.
Casey added, “Unless the funding needs relate to essential activities of daily living like shelter, food, and clothing and perhaps medical necessities, we tend to discourage our clients from seeking funding that may have a higher than usual interest rate.”
McLaughlin said he won’t allow clients to borrow money unless their case is strong, and under that same principle, some lenders won’t offer money.
For Walters, “the biggest thing we look at is who the attorney is,” he said.
“If the attorney takes strong cases and has a good win percentage, that’s the number one thing we look at,” he continued. “Number two is how strong the case is and what the client is going to use that money for.”
Lipson said in addition to examining the client’s injuries and liability theories, he also looks at insurance.
“We want to make sure that if the client does prevail, there’s going to be an insurance company there to pay the claim at the end of the day,” Lipson said.
Walters said the vetting process and building a rapport with attorneys helps to establish a good reputation in the field.
“Our business thrives on regulars, and when I say regulars I mean the attorney. A lot of the national companies have their commercials on TV” directed toward the plaintiff, Walters said, “but we’re going to pitch to the attorney, and pitch to him about why we’re the best out there … I’m looking to work with the attorneys over the next 15 to 20 years, I’m looking to foster those relationships.”
Lipson added that despite the stigma, the demand for litigation funding is increasing.
“The demand is huge and I think a big part of it is that insurance companies are playing hardball,” Lipson said. “They don’t want to pay reasonable amounts that should be commensurate with the case. Everything is a lowball and that has created this market.”
But with that demand comes a slew of competitors, Walters and Lipson said.
“It’s gotten very competitive because there’s no barrier to entry,” Lipson said. “If you’ve got a couple dollars and a friend who’s an attorney, you’re in business.”
Given the ease in which a litigation funding vendor can spring up, Lipson said he believes tighter regulation of the industry is coming.
Litigation funding “is a solution to a market problem, and then ultimately someone will complain because there are some bad actors out there that will prompt the legislature to regulate it,” Lipson said. “These days we have layer upon layer of government, there’s nothing out there that’s not regulated.”
In terms of loans for the purpose of footing litigation expenses such as discovery costs or hiring experts, some attorneys feel that it is never a good idea.
Scott Cooper of Schmidt Kramer in Harrisburg said using litigation funding to cover case expenses inherently leads to conflicts.
For example, Cooper said if a lawyer is loaned $100,000 for a case and is offered a settlement lower than the desired value by a defendant, that lawyer might be tempted to tell his or her client to accept the settlement in order to be able to pay back the loan, rather than risk going to trial and losing, thus putting the attorney in debt.
“If you’re doing personal injury work and you’re saying you’re good at it, you should be able to advance the cost and put your money where your mouth is. Or you refer the case out,” Cooper said.