Legal financing
Encyclopedia
Legal financing, also known as litigation financing, professional funding, settlement funding, or third party funding is a generic term used to describe the mechanism or process through which litigants (and even law firms) can finance their litigation or other legal costs through a third party funding company. These third party funding companies provide cash advance
to litigants in exchange for a percentage share of the judgment
or settlement. However, if the case proceeds to trial and the litigant loses, the third party funding company receives nothing and loses the money
they have invested in the case. In other words, if the litigant loses, he does not have to repay the money
. Accordingly, to qualify for funding with a legal financing company, a litigant's case must have sufficient merits.
Litigation funding is available in most common law
jurisdictions in the United States. The process is mostly commonly used in personal injury
cases, but may also apply to commercial disputes, civil rights
cases, workers' compensation
, and structured settlement. The amount of money that plaintiffs receive through legal financing varies widely, but often is around 10%-15% of the expected value of judgment or settlement of their personal injury
lawsuit. Some companies allow individuals to request more or less money (as needed) and have varying payout rates depending on the characteristics of the case at hand.
Similar to legal defense fund
s, legal financing companies provide money
for lawsuits but is more often used by those without strong financial resources. Legal financing companies also provide the cash advance in a lump sum fashion and generally no specific "account" is provided for the litigant. Furthermore, legal financing is more likely to be used by plaintiffs, whereas legal defense funds are more likely to be used by defendants. Money obtained from legal financing companies can be used for any purpose, whether for litigation or for personal matters. On the other hand, money obtained through legal defense funds are solely used to fund litigation and legal costs.
People often confuse legal funding with loans. On the surface, legal funding appears to possess the same characteristics as an unsecured loan with a traditional lender. In actuality, litigation funding is generally not considered a loan
, but rather as a form of nonrecourse debt
. The debt
does not have to be repaid if the plaintiff's law suit is unsuccessful. In addition, litigants generally do not have to pay monthly fees in obtaining legal financing. Instead, there are no payments of any kind until the case settles or judgment is obtained, which could be months or years away. Because such legal funding advances are not debt and not reported to the credit bureaus, the litigant's credit ratings cannot be adversely affected if a litigant obtains a legal funding advance.
Legal financing is a fairly recent phenomenon, beginning on or around 1997. In fact, it is new enough that many people do not realize that legal financing exists. The American Legal Financing Association (ALFA) was established in New York as a non-profit corporation in July 2004 and represents about 20 legal funding companies nationwide for personal injury victims. The organization's main goals are to establish standards for the legal funding industry and to serve as the liason with the public, government officials, and the media. The legal funding industry has risen from relative obscurity in the last few decades to the forefront of marketplace solutions for financially troubled attorneys
and their clients. ALFA claims that industry leaders currently review more than 40,000 funding applications per month. ALFA members are believed to have originated approximately 90% of currently outstanding legal fundings. While the ALFA itself is a non-profit organization, most legal funding companies are for-profit organizations.
, eviction
, bankruptcy
, and ruined credit. The funding may be used to benefit others, such has to keep a child in college or to pay child support. In addition, the funding can be used for surgical procedures for plaintiffs that would otherwise be unable to pay, thereby getting the needed medical procedures to improve his health and quality of life. Statistics provided from one of the larger firms within the industry demonstrate that over 62% of funds provided to plaintiffs are used to stop a foreclosure
or an eviction
action. Legal financing, which allows plaintiffs to avoid financial ruin, gives them the peace of mind needed to continue litigating their lawsuit.
People who normally do not have access to loans due to bad credit or other reasons will have access to legal financing. In contrast to banks, the underwriting of legal funding advances is based on the merits of the lawsuit. Banks
do not recognize lawsuits as assets when determining an individual's qualification for a traditional loan
. As such, many plaintiffs that may not qualify for traditional credit can qualify for legal funding.
Prior to legal financing, many litigants had to settle their legal case early or for a lesser amount just to get some cash to avoid financial troubles. Many plaintiffs would face large companies who have deep pockets and may be in no hurry to settle the case early with a fair settlement. With the rise of the legal funding industry, plaintiffs can level the playing field so the case is not simply won because one side has more money. In essence, legal funding relieves financial pressures to better obtain a fair settlement. Plaintiffs have greater access to the courts and are given greater bargaining power
when facing large corporations or other wealthy defendants.
. As such, qualifying for legal financing generally requires one to have already hired an attorney
on a contingency fee. This means that the attorney agrees to work for the injured party and is paid out of the proceeds of the case. If the injured party does not obtain an award from the case, then the attorney does not get paid. Qualification for some legal financing companies also require that one suffer an injury of a specific type, such as a personal injury
from an automobile accident or a civil rights
violation at work.
The merits of the case must also be fairly strong, such that the litigant or plaintiff himself must not be at fault. Furthermore, The defendant in the case (the person or company being sued) must also have the ability to pay, and this usually is satisfied if the defendant
is a large corporation
. The injured party's attorney must also agree to the legal financing and generally has to sign an additional agreement allowing for the legal financing. This is often a benefit to the injured party, as this means that the attorney has likely reviewed the agreement himself and has advised the injured party accordingly.
Other qualifications vary depending on the company and the case at hand. Other qualification or approval factors include the total amount of damages sought, the defendant's liability, the sufficient margin for investment
, the background of the applicant, and the state
of residence. The litigant, in applying for legal financing, may have to fill out an application form and provide supporting documents.
Another problem with litigation funding is that it may take a large chunk out of plaintiff's settlement. The amount of interest may often be high and build up over the years of litigation. After paying attorney contingency fees and the amount owed to the legal financing company, the plaintiff may recovery very little of the original claim. There is also no guarantee that the parties will settle for a greater amount when litigation is prolonged.
Industry opponents argue that litigation finance has led to a proliferation of settlement activity in the court system. In one study of civil lawsuits published in the Journal of Empirical Legal Studies, data concluded that between 80% and 92% of cases do settle. The findings, which are based on a study of 2,054 cases that went to trial from 2002 to 2005, also noted that most of the plaintiffs who decided to pass up a settlement offer and went to trial ended up getting less money than if they had taken the offer.
Some critics have argued that attorneys do not like lawsuit funding because it takes away from their fee. This is generally not true, but may depend on the policies of the legal financing company and the agreement with the attorney. The reality is that attorneys do like legal funding, because it gives them additional time to fight the case and obtain a higher settlement, which in turn allows the attorneys to receive a larger contingency fee. This extra time takes pressure off the attorneys and is generally welcomed by them.
. Yet, it appears that litigation funding has quietly become part of the
South African legal landscape, getting little to no resistance in the face of what used to be portrayed as contra bonos mores champertous agreements. A pactum de quota litis is defined as “an agreement to share the proceeds of one or more lawsuits” and it is the duty of the Court to ascertain, of its own motion, the lawfulness of such agreement as it cannot lend its assistance to the execution of agreements
and transactions which are contrary to law. An initial distinction between an acceptable and an objectionable pactum de quota litis was formulated in Hugo & Möller N.O. v Transvaal Loan, Finance and Mortgage Co, 1894 (1) OR 336. The Court held that a fair agreement to provide the necessary funds to enable an action to be proceeded with, in consideration for which the person lending the money is to receive
an interest in the property sought to be recovered, must not be considered per se to be contra bonos mores. The court was concerned about potential abuses for such agreements, such using them for purposes of gambling with litigation cases.
Several cases have provided further guidelines for such litigation financing agreements. In Headleigh Private Hospital (Pty) Ltd t/a Rand Clinic v Soller & Manning Attorneys and Others 2001 (4) SA 360 (W), the Court affirmed that an agreement to share the proceeds of one or more lawsuits is not necessarily unlawful and must indeed be considered acceptable when a litigant is not in a financial position to fund his litigation completely. In another case, the South Africa Supreme Court of Appeal held, in PriceWaterHouse Coopers Inc and Others v National Potato Co-operative Ltd 2004 (6) SA 66 (SCA), that the "[a]lthough the number of reported cases concerned with champertous agreements diminished, courts have still adhered to the view that generally they are unlawful and that litigation pursuant to such agreements should not be entertained." However, the Supreme Court sought to clarify any disagreements and took a different route. The Court ruled that (1) an agreement in terms of which a stranger to a lawsuit advances funds to a litigant on condition that his remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit is not contrary to public policy or void, and (2) the existence of such an assistance agreement cannot be the base of a defense in the action. In June 2010, in an interlocutory ruling rendered in the same case, the High Court found that the funder is, after all, a co-owner of the claim and should therefore be joined as a party to the trial. Therefore, an order for costs may be made directly against him to the extent that the funded party cannot support them even after the termination of the funding agreement.
Cash advance
A cash advance is a service provided by most credit card and charge card issuers. The service allows cardholders to withdraw cash, either through an ATM or over the counter at a bank or other financial agency, up to a certain limit...
to litigants in exchange for a percentage share of the judgment
Judgment
A judgment , in a legal context, is synonymous with the formal decision made by a court following a lawsuit. At the same time the court may also make a range of court orders, such as imposing a sentence upon a guilty defendant in a criminal matter, or providing a remedy for the plaintiff in a civil...
or settlement. However, if the case proceeds to trial and the litigant loses, the third party funding company receives nothing and loses the money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
they have invested in the case. In other words, if the litigant loses, he does not have to repay the money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
. Accordingly, to qualify for funding with a legal financing company, a litigant's case must have sufficient merits.
Litigation funding is available in most common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
jurisdictions in the United States. The process is mostly commonly used in personal injury
Personal injury
Personal injury is a legal term for an injury to the body, mind or emotions, as opposed to an injury to property. The term is most commonly used to refer to a type of tort lawsuit alleging that the plaintiff's injury has been caused by the negligence of another, but also arises in defamation...
cases, but may also apply to commercial disputes, civil rights
Civil rights
Civil and political rights are a class of rights that protect individuals' freedom from unwarranted infringement by governments and private organizations, and ensure one's ability to participate in the civil and political life of the state without discrimination or repression.Civil rights include...
cases, workers' compensation
Workers' compensation
Workers' compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her employer for the tort of negligence...
, and structured settlement. The amount of money that plaintiffs receive through legal financing varies widely, but often is around 10%-15% of the expected value of judgment or settlement of their personal injury
Personal injury
Personal injury is a legal term for an injury to the body, mind or emotions, as opposed to an injury to property. The term is most commonly used to refer to a type of tort lawsuit alleging that the plaintiff's injury has been caused by the negligence of another, but also arises in defamation...
lawsuit. Some companies allow individuals to request more or less money (as needed) and have varying payout rates depending on the characteristics of the case at hand.
Similar to legal defense fund
Legal Defense Fund
In the United States, a legal defense fund is an account set up to pay for legal expenses, which can include attorneys' fees, court filings, litigation costs, legal advice, or other legal fees. The fund can be public or private and is set up for individuals, organizations, or for a particular...
s, legal financing companies provide money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
for lawsuits but is more often used by those without strong financial resources. Legal financing companies also provide the cash advance in a lump sum fashion and generally no specific "account" is provided for the litigant. Furthermore, legal financing is more likely to be used by plaintiffs, whereas legal defense funds are more likely to be used by defendants. Money obtained from legal financing companies can be used for any purpose, whether for litigation or for personal matters. On the other hand, money obtained through legal defense funds are solely used to fund litigation and legal costs.
People often confuse legal funding with loans. On the surface, legal funding appears to possess the same characteristics as an unsecured loan with a traditional lender. In actuality, litigation funding is generally not considered a loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
, but rather as a form of nonrecourse debt
Nonrecourse debt
Non-recourse debt or a non-recourse loan is a secured loan that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower defaults, the lender/issuer can seize the collateral, but the lender's recovery is limited to the...
. The debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
does not have to be repaid if the plaintiff's law suit is unsuccessful. In addition, litigants generally do not have to pay monthly fees in obtaining legal financing. Instead, there are no payments of any kind until the case settles or judgment is obtained, which could be months or years away. Because such legal funding advances are not debt and not reported to the credit bureaus, the litigant's credit ratings cannot be adversely affected if a litigant obtains a legal funding advance.
History
In the past, plaintiffs who were not aware of legal funding often turned to credit cards and personal loans to cover litigation fees, attorneys' fees, court filings, personal finances, and living expense shortfalls while they waited for litigation to be resolved. Regardless of whether the lawsuit was successful or not, the plaintiff was still required to repay the debt, dealing with the heavy burden of monthly payments on principle and interest. Before the emergence of the Legal Funding Industry, little financial assistance was available to help injured plaintiffs survive financially while waiting years for their cases to be resolved. Some ethical rules preclude an attorney from advancing money in the form of loans to their clients.Legal financing is a fairly recent phenomenon, beginning on or around 1997. In fact, it is new enough that many people do not realize that legal financing exists. The American Legal Financing Association (ALFA) was established in New York as a non-profit corporation in July 2004 and represents about 20 legal funding companies nationwide for personal injury victims. The organization's main goals are to establish standards for the legal funding industry and to serve as the liason with the public, government officials, and the media. The legal funding industry has risen from relative obscurity in the last few decades to the forefront of marketplace solutions for financially troubled attorneys
Attorney at law
An attorney at law in the United States is a practitioner in a court of law who is legally qualified to prosecute and defend actions in such court on the retainer of clients. Alternative terms include counselor and lawyer...
and their clients. ALFA claims that industry leaders currently review more than 40,000 funding applications per month. ALFA members are believed to have originated approximately 90% of currently outstanding legal fundings. While the ALFA itself is a non-profit organization, most legal funding companies are for-profit organizations.
Benefits
Lawsuits are expensive. Legal financing can help avoid financial disaster during the pending of a lawsuit, which can take months or years. The money is used not just to pay for litigation, but also for personal matters such as to avoid foreclosureForeclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
, eviction
Eviction
How you doing???? Eviction is the removal of a tenant from rental property by the landlord. Depending on the laws of the jurisdiction, eviction may also be known as unlawful detainer, summary possession, summary dispossess, forcible detainer, ejectment, and repossession, among other terms...
, bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, and ruined credit. The funding may be used to benefit others, such has to keep a child in college or to pay child support. In addition, the funding can be used for surgical procedures for plaintiffs that would otherwise be unable to pay, thereby getting the needed medical procedures to improve his health and quality of life. Statistics provided from one of the larger firms within the industry demonstrate that over 62% of funds provided to plaintiffs are used to stop a foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
or an eviction
Eviction
How you doing???? Eviction is the removal of a tenant from rental property by the landlord. Depending on the laws of the jurisdiction, eviction may also be known as unlawful detainer, summary possession, summary dispossess, forcible detainer, ejectment, and repossession, among other terms...
action. Legal financing, which allows plaintiffs to avoid financial ruin, gives them the peace of mind needed to continue litigating their lawsuit.
People who normally do not have access to loans due to bad credit or other reasons will have access to legal financing. In contrast to banks, the underwriting of legal funding advances is based on the merits of the lawsuit. Banks
Banks
Banks or The Banks may refer to:* Bank, a financial institution- Placenames :Australia* Banks, Australian Capital Territory, a suburb of Canberra...
do not recognize lawsuits as assets when determining an individual's qualification for a traditional loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
. As such, many plaintiffs that may not qualify for traditional credit can qualify for legal funding.
Prior to legal financing, many litigants had to settle their legal case early or for a lesser amount just to get some cash to avoid financial troubles. Many plaintiffs would face large companies who have deep pockets and may be in no hurry to settle the case early with a fair settlement. With the rise of the legal funding industry, plaintiffs can level the playing field so the case is not simply won because one side has more money. In essence, legal funding relieves financial pressures to better obtain a fair settlement. Plaintiffs have greater access to the courts and are given greater bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
when facing large corporations or other wealthy defendants.
Qualifications
Legal funding companies generally do not provide legal advice, nor can they refer people to or provide an attorneyAttorney at law
An attorney at law in the United States is a practitioner in a court of law who is legally qualified to prosecute and defend actions in such court on the retainer of clients. Alternative terms include counselor and lawyer...
. As such, qualifying for legal financing generally requires one to have already hired an attorney
Attorney at law
An attorney at law in the United States is a practitioner in a court of law who is legally qualified to prosecute and defend actions in such court on the retainer of clients. Alternative terms include counselor and lawyer...
on a contingency fee. This means that the attorney agrees to work for the injured party and is paid out of the proceeds of the case. If the injured party does not obtain an award from the case, then the attorney does not get paid. Qualification for some legal financing companies also require that one suffer an injury of a specific type, such as a personal injury
Personal injury
Personal injury is a legal term for an injury to the body, mind or emotions, as opposed to an injury to property. The term is most commonly used to refer to a type of tort lawsuit alleging that the plaintiff's injury has been caused by the negligence of another, but also arises in defamation...
from an automobile accident or a civil rights
Civil rights
Civil and political rights are a class of rights that protect individuals' freedom from unwarranted infringement by governments and private organizations, and ensure one's ability to participate in the civil and political life of the state without discrimination or repression.Civil rights include...
violation at work.
The merits of the case must also be fairly strong, such that the litigant or plaintiff himself must not be at fault. Furthermore, The defendant in the case (the person or company being sued) must also have the ability to pay, and this usually is satisfied if the defendant
Defendant
A defendant or defender is any party who is required to answer the complaint of a plaintiff or pursuer in a civil lawsuit before a court, or any party who has been formally charged or accused of violating a criminal statute...
is a large corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
. The injured party's attorney must also agree to the legal financing and generally has to sign an additional agreement allowing for the legal financing. This is often a benefit to the injured party, as this means that the attorney has likely reviewed the agreement himself and has advised the injured party accordingly.
Other qualifications vary depending on the company and the case at hand. Other qualification or approval factors include the total amount of damages sought, the defendant's liability, the sufficient margin for investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, the background of the applicant, and the state
State
A state is an organized political community, living under a government. States may be sovereign and may enjoy a monopoly on the legal initiation of force and are not dependent on, or subject to any other power or state. Many states are federated states which participate in a federal union...
of residence. The litigant, in applying for legal financing, may have to fill out an application form and provide supporting documents.
Criticisms
A major criticism of litigation funding is that it encourages frivolous claims. This argument is weakened by the fact that it is in the best interests of a litigation finance company to advance money only to those plaintiffs who, in the company’s determination, have a strong chance of succeeding. The industry has come under fire from critics for potential ethical violations. In June, 2011, the New York City Bar Association addressed such ethical issues by publishing an opinion about third-party non-recourse legal funding. It stated that legal finance is “a valuable means for paying the costs of pursuing a legal claim, or even sustaining basic living expenses until a settlement or judgment is obtained.” In response to industry critics, the American Legal Finance Association (ALFA) was established in 2004 and set out to establish industry standards in the legal funding industry. Of preeminent concern is addressing issues of transparency in transactions and providing full disclosure to plaintiffs.Another problem with litigation funding is that it may take a large chunk out of plaintiff's settlement. The amount of interest may often be high and build up over the years of litigation. After paying attorney contingency fees and the amount owed to the legal financing company, the plaintiff may recovery very little of the original claim. There is also no guarantee that the parties will settle for a greater amount when litigation is prolonged.
Industry opponents argue that litigation finance has led to a proliferation of settlement activity in the court system. In one study of civil lawsuits published in the Journal of Empirical Legal Studies, data concluded that between 80% and 92% of cases do settle. The findings, which are based on a study of 2,054 cases that went to trial from 2002 to 2005, also noted that most of the plaintiffs who decided to pass up a settlement offer and went to trial ended up getting less money than if they had taken the offer.
Some critics have argued that attorneys do not like lawsuit funding because it takes away from their fee. This is generally not true, but may depend on the policies of the legal financing company and the agreement with the attorney. The reality is that attorneys do like legal funding, because it gives them additional time to fight the case and obtain a higher settlement, which in turn allows the attorneys to receive a larger contingency fee. This extra time takes pressure off the attorneys and is generally welcomed by them.
South Africa
Litigation funding is generally unregulated in South AfricaSouth Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
. Yet, it appears that litigation funding has quietly become part of the
South African legal landscape, getting little to no resistance in the face of what used to be portrayed as contra bonos mores champertous agreements. A pactum de quota litis is defined as “an agreement to share the proceeds of one or more lawsuits” and it is the duty of the Court to ascertain, of its own motion, the lawfulness of such agreement as it cannot lend its assistance to the execution of agreements
and transactions which are contrary to law. An initial distinction between an acceptable and an objectionable pactum de quota litis was formulated in Hugo & Möller N.O. v Transvaal Loan, Finance and Mortgage Co, 1894 (1) OR 336. The Court held that a fair agreement to provide the necessary funds to enable an action to be proceeded with, in consideration for which the person lending the money is to receive
an interest in the property sought to be recovered, must not be considered per se to be contra bonos mores. The court was concerned about potential abuses for such agreements, such using them for purposes of gambling with litigation cases.
Several cases have provided further guidelines for such litigation financing agreements. In Headleigh Private Hospital (Pty) Ltd t/a Rand Clinic v Soller & Manning Attorneys and Others 2001 (4) SA 360 (W), the Court affirmed that an agreement to share the proceeds of one or more lawsuits is not necessarily unlawful and must indeed be considered acceptable when a litigant is not in a financial position to fund his litigation completely. In another case, the South Africa Supreme Court of Appeal held, in PriceWaterHouse Coopers Inc and Others v National Potato Co-operative Ltd 2004 (6) SA 66 (SCA), that the "[a]lthough the number of reported cases concerned with champertous agreements diminished, courts have still adhered to the view that generally they are unlawful and that litigation pursuant to such agreements should not be entertained." However, the Supreme Court sought to clarify any disagreements and took a different route. The Court ruled that (1) an agreement in terms of which a stranger to a lawsuit advances funds to a litigant on condition that his remuneration, in case the litigant wins the action, is to be part of the proceeds of the suit is not contrary to public policy or void, and (2) the existence of such an assistance agreement cannot be the base of a defense in the action. In June 2010, in an interlocutory ruling rendered in the same case, the High Court found that the funder is, after all, a co-owner of the claim and should therefore be joined as a party to the trial. Therefore, an order for costs may be made directly against him to the extent that the funded party cannot support them even after the termination of the funding agreement.