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Litigation Lending Makes Its Case

Posted Mar 1, 2011 3:30 AM CDT
By James Podgers

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One business that appears to be gaining some traction in the current recessionary climate is alternative litigation financing. Several representatives of that industry told the ABA Commission on Ethics 20/20 that their products help litigants who lack financial resources to meet basic needs while their claims wend their way through the courts.

Companies that provide such financial support to consumers, businesses and, in some cases, law firms, work on the premise that "banks only lend you money when you don't need it," said Harvey Hirschfeld, chairman of the American Legal Finance Association. ALFA represents more than 20 firms that make litigation loans, about a quarter of the companies in the field. The hearing was held at the ABA Midyear Meeting in Atlanta.

"Our business is providing money to consumers where they've reached the point of asking, 'Do I lose my house to proceed with my case?' " he said.

Most of the loans made by alternative litigation financing, or ALF, companies are relatively small, usually no more than a few thousand dollars, testified Gary Chodes, CEO of Oasis Legal Finance.

Oasis has provided funding to claimants in more than 93,000 cases since it was founded in 2002, Chodes said. But he said alternative litigation financing is used in only a fraction of the total number of legal claims moving through the system, and companies are selective about the claims they back. "It would be silly for us to fund a frivolous case because we'd never get our money back," he said.

The premise of ALF is straightforward: After evaluating a case's potential for success, the lender may decide to provide funding, for a fee. If the case wins, the lender receives the loan plus the fee. If not, the lender, like the claimant and the claimant's attorney, receives nothing.

Critics claim that ALF loans are not only costly to borrowers but may create additional pressure on lawyers about whether to settle or litigate their client's case. The panel at the meeting expressed concern that these third-party relationships—in particular, loans to law firms involved in complex litigation—might influence lawyers to entertain resolutions that might not be in the best interests of their clients.

EYE ON ETHICS

In late November, a working group of the Ethics 20/20 Commission outlined some of the potential ethics pitfalls for lawyers in cases where alternative litigation financing is involved.

The Atlanta hearing was designed to gather information before the commission recommends potential changes to the ABA Model Rules of Professional Conduct or any other action.

Among the questions raised by the commission are the impact of alternative litigation financing on attorney-client privilege and confidentiality, conflicts of interest, independent judgment by attorneys, and distribution of fees.

The commission is studying ethics issues relating to globalization and the growing use of technology. It is expected to begin submitting recommendations to the ABA's policymaking House of Delegates in 2012.

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