Legal Ethics

NYC Bar Warns of Ethics Traps in Litigation Financing

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The New York City Bar Association is warning lawyers about possible ethics problems when their clients finance litigation through third-party lenders.

Loans can be a valuable way to finance a legal claim, but lawyers need to be aware of the pitfalls, the ethics opinion says. The New York Law Journal covered the opinion and interviewed the chair of the city bar’s ethics committee, Seth Schwartz, who said the review was undertaken because of a “flood of coverage in the press.”

The opinion addresses nonrecourse litigation financing in which the loan is repaid by a litigant only if he or she settles or wins the case. Such loans are made most often in personal injury cases and typically require the litigant to pay the company a percentage of the recovery. Some critics have charged the percentages are usurious, and the available money encourages litigation, the ethics opinion points out.

From a legal ethics perspective, the opinion says, the greatest concern is that some companies seek confidential information about a case when evaluating whether to finance it. A lawyer should not disclose privileged information to a financing company unless he or she first obtains informed consent, the opinion says. The opinion also notes a risk that disclosing confidential information will waive the attorney-client privilege, but it does not take a position on the issue.

The opinion also notes these ethics issues:

• If a loan repayment agreement violates usury or champerty laws, lawyers should tell their clients and refrain from facilitating the transaction.

• Lawyers asked to negotiate or recommend third-party financing should provide candid advice about whether such an arrangement is in a client’s best interest.

• Lawyers may not accept a referral fee from a litigation financing company if it would impair their professional judgment in deciding whether the arrangement is in the client’s best interest, or if the lawyers can’t bring suit absent the funding.

• Lawyers need to be aware of the possibility of finance company influence. “While a client may agree to permit a financing company to direct the strategy or other aspects of a lawsuit, absent client consent, a lawyer may not permit the company to influence his or her professional judgment in determining the course or strategy of the litigation, including the decisions of whether to settle or the amount to accept in any settlement,” the opinion says.

Related coverage:

ABA Journal: “Litigation Finance Cos. Make a Case for Their Industry to Ethics 20/20 Commission” “Hedge Funds Invest an Estimated $1B in Lawsuits, Earn as Much as 24% in Interest” “Third-Party Litigation Funding Picks Up as UK Investors Eye US Cases”

ABA Journal: “Cash Up Front: New Funding Sources Ease Financial Strains on Plaintiffs Lawyers”

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