Midyear Meeting

Litigation Finance Cos. Make a Case for Their Industry to Ethics 20/20 Commission

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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 today that they believe they are meeting a need of consumers with potential legal claims for damages but who lack the financial resources to meet their needs while those cases wend their way through the legal system.

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, which represents more than 20 firms that make litigation loans to claimants to cover their living expenses while their cases are pending. Those firms make up about a quarter of the companies in the field, he told members of the Ethics 20/20 Commission during its public hearing today 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, a company headquartered in suburban Chicago with satellite offices throughout the United States. 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.

In late November, a working group of the Ethics 20/20 Commission published an issues paper (PDF) that outlines some of the potential ethics pitfalls for lawyers in dealing with cases in which alternative litigation financing is involved. Today’s hearing is part of the commission’s process of gathering information on the subject before determining whether to consider developing specific recommendations on how those ethics considerations might be addressed, either by revising the ABA Model Rules of Professional Conduct or other actions.

Among the questions raised by the issues paper 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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