Cash Up Front
Posted Oct 08, 2004 06:31 am CDT
Plaintiffs lawyer Marc Bernstein usually has 150 to 200 active medical malpractice cases that eat up money as well as time. While the costs of maintaining all that litigation are constant and predictable, the big paydays aren’t. Until recently, that is.
Now, when Bernstein nails down a settlement or has assurance that a judgment will be paid, he can get that much-needed money right away by turning to R D Legal Funding. “You can run into a serious cash-flow problem, and it satisfies the short-term need,” says Bernstein, who practices with two other lawyers in New York City’s Bernstein & Bernstein. He has gotten advances of as much as $100,000 and doesn’t hesitate to do so when gearing up for trial and waiting for accounts receivable.
Big law firms doing corporate and defense work have long been able to get lines of credit from banks. But those lenders looked the other way when plaintiffs lawyers and their clients wanted money.
“For years, lawyers have been restricted in what they can finance,” says Mark Pruner, a lawyer and vice president of marketing with R D Legal Funding based in Englewood, N.J. “Now there are finance organizations in place that are comfortable with the kind of collateral lawyers can provide.”
The company typically buys a $100,000 fee due in six months for $82,000, with the fee lessened if the money arrives sooner. Launched in 1997, it saw 500 percent growth last year. And it’s not alone in the litigation funding industry; financing plaintiffs law firms is a big growth area. As many as 100 companies, from simple brokers to larger enterprises, offer a variety of ways of funding lawyers, their clients or both.
The industry began on a small scale little more than a decade ago with cash advances to individual plaintiffs needing money to keep their lives or their lawsuits going. Some companies require the money be spent only on living expenses and medical bills, while others advance cash only for litigation expenses. Some don’t care how the money is used as long as they stand to make a profit.
There are niche markets for appeals and settlements promised but not yet paid. Money sometimes is advanced for flat fees, sometimes for a percentage of the take. Cash advances on individual cases often are nonrecourse, meaning if the case goes south the debt goes away.
One or more variations of the litigation finance industry operate in all states. Only some 28 of them are friendly–or at least not too unfriendly–to so-called pre-settlement funding. Those cash advances go to plaintiffs before trial or settlement, with monthly interest rates ranging from 2 percent to 4 percent in some states to more than 6 percent in Texas, 8 percent in California, and as high as 15 percent in Nevada. These rates sometimes are compounded and can approach 200 percent annually.
An Age-Old Concept
The rise of litigation financing has brought new and greater scrutiny to the ancient and increasingly quaint concept of champerty, in which a third party maintains a lawsuit or seeks to gain financially from it. Such laws have been narrowed, bent or thrown out in many states.
The Massachusetts Supreme Court ruled in 1997 that it would no longer recognize common-law doctrines of champerty, barratry and maintenance. “We have long abandoned the view that litigation is suspect, and have recognized that agreements to purchase an interest in an action may actually foster resolution of a dispute,” the court said. Saladini v. Righellis, 687 N.E.2d 1224.
Three years later, the South Carolina Supreme Court followed suit, noting that “other well-developed principles of law can more effectively accomplish the goals of preventing speculation in groundless lawsuits and the filing of frivolous suits than dated notions of champerty.” Osprey v. Cabana Limited Partnership, 532 S.E.2d 269.
Brooklyn, N.Y.-based Plaintiff Funding Corp., doing business as LawCash, is one of the larger and more reputable companies that fund individual plaintiffs. It offers nonrecourse advances ranging from $500 to $100,000.
LawCash President Dennis Shields says cash advances can’t be too large or too small. “We want to give them enough money but also keep it on a tight rope,” he says. A big cash advance might cause plaintiffs to refuse fair early settlements, which would be shared with LawCash, and to roll the dice at trial. If the plaintiffs lose, they don’t have to repay the advance. And a small cash advance might encourage plaintiffs to settle early for too little, which means a smaller share for LawCash. “They might say, ‘Hey, $50,000. That’s all I need,’ ” Shields says.
Two law professors known for being on opposite sides of the fence in the tort reform debate take different paths to the same conclusion about the litigation funding industry: Let the marketplace decide.
“They come in after the lawyer, so it has nothing to do with frivolous litigation,” says Lester Brickman of the Benjamin N. Cardozo School of Law. In the tort reform controversy, Brickman has argued that contingency fees are too high in most cases because they involve little risk for the lawyer.
On the other side, Anthony J. Sebok of the Brooklyn Law School says: “People who don’t like nonrecourse funding are really saying they don’t like our legal system. Poor people often have to prematurely end litigation or settle for less because of the expense.” Many funding companies have folded during the past few years. Most recently a big player, Themis Capital Corp. of Dallas, dropped out, and others are rumored to be winding down.
Overall, the industry is seeing a loss on investment of 3 percent to 9 percent, says Wayne Walker, who left Wall Street after 30 years to found Pinehurst, N.C.-based CapTran, which funds plaintiffs in personal injury cases but is expanding to offer collateralized loans to lawyers.
The kind of expertise Walker brings–many years in senior positions at major Wall Street firms–is seen as helping to drive rates down in the litigation finance industry. “Most of the negative issues are slowly eroding, and this business will be a fairly common thing,” says Walker.
Much of this is, after all, venture capital with calculated risks. San Francisco-based LawFinance Group Inc., which specializes in discount purchasing of judgments on appeal, once lost $750,000 on what looked like a sure thing. “But there are no sure things in the law,” says Alan Zimmerman, LawFinance’s president. “If you did just one case, that’s gambling. If you do hundreds, which we do, then it’s a portfolio.” His company advances from $25,000 to $1 million on individual cases and has laid out more than $60 million over the past 10 years, says Zimmerman, who as a lawyer represented financiers, mortgage bankers and financial institutions and eventually decided to get into finance himself.
Zimmerman and co-founder Michael Blum also occasionally make straight commercial loans to law firms; in the last six years, the amount of these loans totaled more than $20 million. This year, Zimmerman says, they began a marketing program and are focusing on that area of the business.
“We intend to be a major player in a segment of the marketplace where banks aren’t comfortable,” he says.
Rocky Road to Champerty
Meanwhile, in the industry’s original segment, a lot of mom-and-pop shops providing less than $5,000 to plaintiffs at high interest rates have come and gone. Many of them got their start from Perry Walton, a nonlawyer who pleaded guilty to a charge of extortionate collection of debt in Nevada in 1997, according to an article in the Wall Street Journal. Walton did not respond to an ABA Journal request for an interview, but he told the newspaper he was innocent and pleaded guilty only because he was unable to pay defense lawyers after authorities seized his assets.
In 1998, Walton got into the litigation funding business and has had hundreds of takers for his two-day seminars–the price of admission being $12,400–on how to build litigation funding portfolios. His own operation, Future Settlement Funding Corp., ran into trouble in Ohio.
Acting through another company, Future Settlement advanced an Ohio plaintiff $7,000 at an annual interest rate of more than 180 percent. The woman settled her case and sued to rescind the contracts on the ground they were usurious. The trial and appellate courts agreed. But the Ohio Supreme Court, on its own and without briefing, made a widely criticized ruling that the cash advance was champerty and therefore illegal. Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121, 2003-Ohio-2721.
That ended the business for presettlement direct funding for Ohio plaintiffs. “The decision doesn’t really deal with the risks and benefits of nonrecourse funding,” says Brooklyn Law School’s Sebok. “There might be need for regulation developed legislatively. But this way, events can overtake the promise and the idea itself.”