Fin

How does legal funding work
for law firms and clients?

SAp

Attorneys and their clients spend months or even years on cases, often sacrificing much of their income. They invest thousands in fees and costs. Then, they wait for a settlement or a court victory.

Before litigation funding companies existed, plaintiffs had few options for dealing with financial challenges associated with legal disputes. Learn how these specialized lenders work with law firms and their clients to finance legal claims.

How Litigation Financing Works?

Before the advent of litigation funding, businesses entangled in commercial disputes had a narrow path forward. They could either:

1. shoulder the costs on a retainer basis,

2. seek attorneys willing to work on a contingency fee arrangement or,

3. in less favorable circumstances, drop the case altogether.

The emergence of litigation financing, an industry that bridges the financial gap for plaintiffs and law firms alike, has transformed this landscape.

Here's how it reshapes the legal battlefield:

▪ Investment in Potential: Litigation funds invest in legal claims by purchasing a portion of the potential future settlement or verdict. This investment is typically non-recourse, meaning the funder loses its investment without any further liability to the claimant or law firm if the case doesn't succeed.

▪ Risk and Reward: By removing the traditional risk associated with debt, litigation funding provides immediate financial relief. Unlike debt payments, which are seen as expenses and detract from profits, litigation financing is recognized as revenue. It can even be tax-deductible, offering a fiscal advantage.

▪ Protection of Privilege: The growing body of case law supports the confidentiality of communications between funders and funded parties, safeguarding them under attorney-client privilege. This legal shield complicates opponents' efforts to uncover funding arrangements, thus preserving the strategic advantage.

Case Collateral Considerations

Complex litigation rapidly escalates costs, placing a heavy financial burden on plaintiffs needing more significant resources. These costs include:

▪ legal fees;

▪ expert witnesses;

▪ discovery procedures.

Litigation funding offers a solution by providing a non-recourse investment in lawsuits.

This arrangement grants claimants financial relief without the obligation to repay if the case doesn't result in recovery. Thus, plaintiffs can concentrate on their legal challenges without financial distractions.

Building on Kenneth P. Weinberg's previous discussions in "Dispatches from the Trenches," this section highlights efficient strategies for preparing collateral packages.

Ensuring your collateral descriptions are clear and thorough is crucial for maintaining rights in case of default or foreclosure and ensuring a strong position against challenges.

Why Lawyers and Plaintiffs Opt for Litigation Funding?

In the complex legal battles, plaintiffs and their attorneys face significant financial pressures.

Traditional loans, with their rigid requirements and repayment obligations, often exacerbate rather than alleviate this burden.

Litigation funding emerges as a viable alternative, offering a more flexible and case-centric approach.

Here’s how it compares to traditional financing methods:

Unlike traditional loans, litigation funding customizes a funding package based on the unique aspects of legal cases. Here's why it stands out:

1. No Credit Checks Required: Litigation funding focuses on the strength and merits of the case.

2. Contingent Repayment Terms: Repayment is only required if the case is successful and funds come from the settlement or verdict.

3. No Increase in Debt Burden: Since litigation funding is non-recourse, it does not add to the plaintiff's or law firm's debt load.

4. No Direct Influence on Case Outcome: Funders take a hands-off approach, ensuring that attorneys can focus on winning the case.

The Financing Process for Law Firms

Securing litigation funding is a strategic move for law firms looking to alleviate financial pressures while pursuing justice for their clients.

Unlike traditional loans, legal funding is non-recourse, meaning repayment is contingent upon the case's success.

This process involves the funding company carefully evaluating the case, focusing on its merits and the likelihood of a favorable outcome.

Litigation Funding Application Checklist for Law Firms

To streamline this process, here's a practical checklist for law firms considering litigation financing:

▪ Case Documentation: Gather all relevant case documents that detail the nature of the case, the parties involved, and the legal strategy. This includes complaint filings, case briefs, and preliminary judgments or rulings.

▪ Financial Projections: Provide an estimate of the total case costs, including legal fees, expert witness fees, court costs, and any other anticipated expenses.

▪ Historical Case Outcomes: Compile data on similar cases handled by the firm, highlighting outcomes and settlements. This demonstrates the firm’s track record and the potential value of the current case.

▪ Client Consent: Ensure that the client is fully informed about the funding process and consents to the application for litigation funding. This might require a signed agreement or acknowledgment.

▪ Underwriting Information: Be prepared to provide detailed information for the underwriting process, which may include the firm’s financial history, the experience and success rate of the attorneys handling the case, and any potential conflicts of interest.

▪ Funding Terms Review: Carefully review the terms of any funding offer, including the funding amount, the repayment conditions, and any fees or charges. Understand the implications of the funding agreement on the firm’s and client's financial positions.

▪ Negotiation Preparedness: Be ready to negotiate the funding terms to secure the best possible deal for your firm and your client. This may involve discussing the funding amount, the repayment percentage, and fee caps.

Advantages and Challenges of Litigation Funding

Litigation funding revolutionizes how plaintiffs manage legal expenses, shifting from reliance on the personal credit, which often exacerbates financial strain, to a more sustainable model.

This approach provides crucial upfront funding for case-related costs in exchange for a stake in potential winnings, effectively removing the repayment obligation if the case is unsuccessful. This non-recourse nature ensures plaintiffs aren't further burdened by debt from unsuccessful litigation.

Additionally, the confidentiality of funding agreements maintains strategic advantages, though it keeps the financial dynamics obscured from other parties involved in the case.

Despite concerns over potential influences on legal strategies, litigation funding standard practice emphasizes a supportive role. This enables legal teams to focus entirely on achieving the best outcomes without the distraction of financial pressures.

Benefits for Law Firms and Their Clients

Law firms continuously evolve to meet and exceed their clients' expectations. They strive for successful case outcomes and to provide added value that distinguishes them in a competitive market.

Here’s where litigation funding shines.

1. CLE Training: This is more than an obligation; it's an opportunity. Law firms that offer CLE training as part of their service package comply with professional standards and empower their clients. By educating them on relevant legal issues, firms foster a deeper understanding and a stronger attorney-client relationship.

2. Thought Leadership: It’s about leading from the front. Firms that produce insightful, forward-thinking content demonstrate their expertise and position themselves as industry leaders, attracting clients who value informed representation.

3. Broad Experience: Leveraging a firm's business professionals' vast experience can provide clients with a comprehensive perspective on their legal challenges and offer solutions beyond the courtroom.

Downsides of Litigation Funding

While litigation funding offers critical financial support, concerns linger about its potential impact on the attorney-client relationship and case strategy.

1. Pressure to Settle: Some worry that funding might push plaintiffs towards settlements that are less than what they could potentially win in court. However, funders often prefer a hands-off approach, focusing instead on supporting the attorneys' legal strategies.

2. Awareness and Understanding: The complexity of litigation funding agreements can sometimes be daunting. Law firms must ensure their clients fully understand the terms, benefits, and any implications of entering into such agreements.