Lawsuit Funding – the truth behind the BUSINESS
Often times personal injury lawyers are asked about “legal funding” I wanted to go over a few points about legal funding so more people can be educated. Say you were in a car accident, and maybe your attorney is reasonable certain there will be a settlement at some point, you may opt to borrow some of the money before the case is final.
Legal funding, or as they are now known all over America ‘Lawsuit funding’ started to spread its wing in 1997. It is relatively a new ‘industry’ but one that has already garnered much attention due to its ‘controversial’ nature. Voicing one’s opinion about it is not easy as there are two sides involved, one that is made up of industry members, lobbyists the ‘pro’ side and the other made up of insurance companies, legislatures and finance experts the ‘con’ side. Depending on what views you have regarding this nascent industry and its ‘products’, you are sure to incur the wrath of one of the sides. In recent times, numerous bills have been filed in the state legislature for ‘regulating’ this industry. With the help of this article, we would like to share our perspective on this industry its different aspects and even on whether it needs to be regulated.
Lawsuit funding is basically ‘cash advances’ offered to plaintiffs and / or attorneys which are provided with a ‘promise’ to be repaid once the case settles or a favorable verdict is reached in court. They are termed as ‘funding’ instead of ‘loan’ for a reason, as they are ‘non-recourse’, meaning the borrower (plaintiff) does not need to pay back the loans if the case is not settled or an unfavorable verdict is reached. Moreover, the companies themselves don’t want to term the products as loans, the reason for it we will discuss later in this article.
Currently, the total business done by major players in the Lawsuit funding industry is over $100 million each year. The business is still in nascent stages and the companies involved in lawsuit funding, find it a lucrative field with chances of exponential growth in the coming years. Why is there so much hoopla over it and why it’s such an attractive field that new entrants are entering the business almost every week, these questions can only be answered once one knows how the business works.
How it works
Lawsuit funding companies advertise about their products / services with campaigns like “Need cash now? Get a cash advance for your pending lawsuit”. A plaintiff sees these advertisements and approaches the company. The company asks the plaintiff or in most cases the attorneys representing the plaintiff about the case details. Once the documents are submits, they evaluate the merits of the case and hand over the money to the plaintiff if they find the case ‘suitable’. The pre settlement funding advances can be anywhere between $500 to over $100,000 depending on the nature of the case and what the funding company estimates the value of the eventual settlement or verdict
The lawsuit funding company charges an interest per month, over the amount it has advanced but rather than saying ‘interest charged’ they prefer using the term ‘fee charged’ and call it ‘monthly fee’.
If the case is settled or the plaintiffs is awarded damages he / she needs to pay back the amount (principal) given as advance along with the cumulative ‘monthly fee’. If the plaintiff loses the case he / she owe the funding company nothing.
The ‘don’t pay if you lose’ nature of the funding is what attracts plaintiffs to apply for these type of funding and also works as a great PR tool for the funding companies.
NOTE – The State of Florida and the Florida bar association prohibits its members from getting involved in any process of evaluation by a Lawsuit funding company. (We think this this is a good policy for personal injury lawyers
Monthly Fee (Interest rate)
This is where the problem and ‘controversial’ nature of the business lies. The average interest rate (what is termed as monthly fee) charged by the leading industry players is in between 2.5%- 5% P.M. At times, it can be as high as 15% P.M.!
Let’s look at it in a detailed financial perspective –
Suppose a plaintiff gets a funding of $10,000 for his /her case from the funding company at an interest rate of 3.5% P.M.
If he eventually gets a settlement or is awarded the damages claimed, this is what he / she will owe the company –
After 1 year- $15,639
After 2 years – $23, 632
After 3 years – $36,960
That means if somehow the case drags on for 3 years, which is likely in a lot of cases, the plaintiff will owe nearly 4 times the amount he borrowed. This is when we chose an interest rate below the median of what the industry charges; sometimes the interest rates are as high as 100% a year.
This is the perhaps the most significant reason why the lawsuit funding industry doesn’t terms its products as Loans and instead terms it as ‘advances’, as soon as you tell someone that you are providing them a loan, the first question they ask is – what is the interest being charged? What better way to conceal the information than selling the product under a different name.
The other significant reason for not calling the products as loan is to avoid falling under the usury laws. The usury laws arethe laws which prohibit a business entity or individual from charging excessive rates for the loans offered.
The funding companies project their ‘cause’ as helping the plaintiffs when they are in dire straits. They offer reasoning that if they will not offer their services the plaintiffs will be compelled to take lower value settlements as due to their financial condition, they won’t be able to fight their cases for a long time. The question to be asked is – don’t all types of predatory loan providers prey on distressed borrowers?
Currently, there are no regulatory authorities who govern the conduct and practices of this type of funding companies. Unlike other financial institutions which have fiduciary duties toward their clients, the lawsuit funding companies don’t come under any rule of law in terms of how they conduct their business or what interest rate they charge etc. It seems like the companies themselves don’t want to be regulated and are trying to avoid regulations. What else can explain the refusal to use the term ‘loan’ and advertising non-recourse funding, if not to avoid the regulatory authorities?
We agree that at times a plaintiff has to go through daunting financial times, especially plaintiffs of personal injury cases and at those times they need immediate money but that should not be a reason for a company or an organization to take advantage of. We don’t dispute the fact that in some cases getting a funding like this can really help but being attorneys ourselves we know law is not all that simple. One cannot ‘estimate’ anything when a case is sub judice and it affects the client-attorney relationship when a client starts estimating about monetary compensation he/she will be awarded.
Additionally, we will advise plaintiffs to make use of lawsuit funding only when they have exhausted all other options available to them. It can be a really painful experience when after fighting for long, when a judgment is declared and compensation is awarded, most of it goes in paying the funding and in such circumstances instead of questioning the reasoning behind taking such funding in the first place, most plaintiffs complain that the attorney or law firm representing them couldn’t get a ‘fair’ compensation awarded to them.