By now, people who have never considered funding litigation know, at least in part, that people can secure advances or take out loans for their litigation, life, and pension plans. In recent years, aggressive advertising by some funders has taught people that they “get cash now” – have almost instant access to these types of assets and do so well before they are mature. Even those who have sat on a lawsuit threatening to wonder what it takes to make money from it without waiting years for a settlement.
Is it really that easy for customers to gain access to their future settlements?
“With just a few clicks …”
There is hardly a consumer claim funding company website that does not advertise an application process that “takes only 5 minutes” or “makes money in just 24 hours” for the applicant. That’s how easy it can be. Faced with consumers who may have little or no knowledge of the process and who often equate it with applying for a bank loan, finance companies work hard to remove as many barriers as possible.
In fact, it’s easier to start the process than applying for a credit card or payday loan. An applicant gets the ball rolling with just a few clicks online or a short phone call. They provide their name and contact information and the name and contact information of their attorney, as well as the case number and the court in which the case is pending, if they have it. If the applicant’s case is qualified and all parties respond and all get their ducks in a row, an applicant can be approved in just one day, although it can sometimes take a little longer.
Where is the applicant?
The first consideration is the prospect’s location. Many litigation funding companies advertise nationwide and on the Internet, but not all of them operate in every state. The consumer dispute financing industry in the United States is not much older than 20 years. The regulatory climate is changing. The federal government has not yet regulated these transactions, and most state legislators have not yet caught up. Of those who have, some treat the transactions like loans. The rest have put in place a patchwork of laws to regulate some aspects of the relationship, such as the disclosure structure and the maximum fees the company can charge. Litigation finance companies avoid states in which the regulatory climate is not regulated or states that have passed unfavorable laws.
Who or what is eligible for a litigation loan?
The litigation financing company is not a lender in the traditional sense. It is an investor or he represents investors who expect a payout from the proceeds of a successful lawsuit. Considering the nature of the dispute is much more important to the process than the characteristics of the client.
Although the litigation finance company does its own due diligence, it starts with the premise that another professional – the plaintiff’s attorney – has determined that the case has some value. In fact, almost anywhere, the applicant must have a lawsuit or legal claim pending and be represented by a lawyer in order to find a source of funding in advance. Some litigation funding companies offer advances on claims in class action lawsuits, large bankruptcy proceedings, or claims against large settlement funds, such as those set up to compensate people after a disaster. The applicant usually does not have their own lawyer for these, but these are relatively rare in the litigation finance industry.
In any case, there must be an underlying claim that has value and has already been documented in some way. The need for this is easy to understand when you consider the nature of the transaction. In a lawsuit, the plaintiff’s attorney does their due diligence before deciding whether to file a lawsuit. She will examine the claim and assess its feasibility and value. She will also assess her clients’ motives and willingness to take on the rigors of litigation, which can include testimony, written investigations, motions, hearings, and settlement negotiations, all of which are experienced long before legal proceedings are initiated. As most lawyers know, personal injury litigation is not for the faint of heart. Finally, the lawyer evaluates the defendant. It helps if the defendant is a large corporation or an insurance company – the type of defendant who is more likely to make rational business decisions related to litigation and have the resources to settle or pay a judgment.
Personal injury, yes – family law, no
Eligible cases or claims usually arise from personal injury, but they could also be cases outside of your typical 18-wheel accident or slip and fall in the local open-plan store. Depending on the funder, they can include workplace discrimination, civil rights, product liability, unsafe medication, or defective medical equipment, virtually any case that results in a monetary reward. Some lenders will consider cases that do not fit a typical personal injury model, such as a contract or fraudulent commercial practice. Lawsuits that do not lend themselves well to litigation funding include those that require a non-monetary resolution, such as:
No credit check
In traditional lending, the credit check poses a high hurdle for some potential borrowers. Many plaintiffs, often unemployed and plagued by injuries, either cannot qualify for a loan or choose to pay the cost and the blow to their creditworthiness avoid. This is not an issue with litigation funding. The financier should be paid out of the settlement proceeds or the judgment amount if the case is brought to court. Even if the case is not resolved, if less than the amount of the advances is paid, or if there is no decision in favor of the plaintiff at all, the litigation financier has no recourse to the plaintiff. There is no point getting a report to check the creditworthiness of someone who is not personally liable.
Once the lender has gathered all the information about the lawsuit, the file goes to the underwriter, who assesses the strength of the application and determines whether and to what extent the application is approved.
The amount of the advance depends on how much the plaintiff needs, how the plaintiff intends to use the advances (cost of living, medical treatment, debt relief), the value of the dispute, the length of time it took to settle, the reputation and experience of the plaintiff’s attorney, regardless whether he is expecting a single advance payment, a series of advance payments, or regular monthly payments. On average, plaintiffs receive 10 to 15% of the claim value.
Lawsuit lenders do not charge any fees for an application. They do not request that any of the advances be paid back before the case is resolved. The plaintiff will enter into a contract with the litigation finance company that will include repayment of the advances and payment of additional fees from the proceeds. These fees can be a fixed amount or a percentage of the payout. Although these transactions are not loans and the lender does not charge interest in the traditional sense, the fee may, depending on the jurisdiction, include a premium that is tied to the length of time it takes to settle the case or deliver a judgment.
The plaintiff must of course sign the contract, and in most cases the funder will also require the attorney to approve the client’s funding request. Plaintiffs in all jurisdictions have the right to apply for litigation loans, but so far few states require the litigation finance company to obtain attorney approval. Since the litigation financier usually turns to the attorney to ensure that the financing company is paid out of the settlement proceeds, most companies require the attorney – who already knows the client’s wishes – to sign the agreement. This is comparable to the duty that a lawyer owes on a letter of protection to a doctor who agrees to waive payments until the case is settled.
Customers who opt for a litigation loan tend to distance themselves with a case. The common belief is that plaintiffs are waiting for a higher severance payment or even going to court if they are not under economic stress and their physical problems, such as medical problems, have already been resolved. It makes sense that when they are not hungry and the rent is paid, they consider their options more rationally.
If the case is finally settled or the judgment is made in favor of the client, the litigation loan will be paid out according to its terms, just as the lawyer will receive her contingency fee, litigation costs such as court reporters and experts will be reimbursed, and healthcare professionals will continue to receive their letters of protection. The rest goes to the customer as with any other personal injury. The client was able to enjoy part of the settlement long before the final payout and part of the proceeds after the case was settled. A bit like having your cake and eating it too.
© 2021 Copyright Tribeca Lawsuit LoansNational Law Review, Volume XI, Number 218