Cash for Clients?

In the court of law, who is your daddy?

Ethics rules prohibit a lawyer from giving or lending money to a client. In New York, a lawyer is likewise prohibited from participating in the loan financing of his clients’ lawsuits. However, in contingency cases, a lawyer is usually the one who puts up expenses up front out of his own pocket and is entitled to reimbursement at the end of the case.

These rules have created ample opportunity for litigation finance companies to jump in and make huge profits by lending money to plaintiffs against their future awards. Simply put, this is state authorized gambling and loan sharking.

The biggest problem is that the industry is unregulated and third-party lending creates certain conflicts, not only in terms of disclosure of confidential information, but mainly because of the third party, the lender, having direct interest in the outcome of the plaintiff’s case.

The question then becomes as to the “ownership” rights of the case. The individual plaintiff is no longer a human being, but a commodity. To make matters even more complex, the loan may be sold and resold between the financing companies, often leading to possible additional fees and even higher interest. These financial arrangements are similar to mortgage financing and needless to say, may lead to all kinds of problems down the rocky litigation road.

Further, because these financing companies are facing certain risks of never recouping their initial investments if plaintiffs do not prevail, their loans are considered “high risk”, and therefore usury laws do not apply. In my own practice, I have seen compounded interest up to 36% per year. When plaintiffs are desperate for money and are unable to work due to their injuries, their small loan amount will often turn into a staggering sum that they would have to repay, thus placing an extra burden on the decision making process as to the litigation strategy and the eventual outcome of the case.

Additional concerns should be noted as to the unscrupulous lawyers who disregard the ethics rules and get involved in money lending by setting up fraudulent schemes.  Under such circumstances, the client’s interests are not at hart as much as the lawyer’s financial gains in what could be considered “double dipping” into the client’s award.

In the other hand, since the costs of litigation are constantly raising, it is very difficult for both lawyers and their clients to be able to finance lawsuits and without proper financing, the plaintiff is left out in the cold without fair adjudication. At least with the availability of litigation funds, albeit at very high interest rates, this type of financing does provide some type of fairness and puts the plaintiff in a power play position against large corporate defendants, who will often spend more money on defense, instead of providing fair compensation to the plaintiffs.

In conclusion, plaintiffs must use extreme caution in taking out loans against their potential future lawsuit awards, and this measure should be used by both lawyers and their clients only after careful considerations of each individual set of circumstances.