Squeezed between an injured client who needs cash fast and a deep-pocket defendant with all the time in the world, what`s a plaintiffs` attorney to do?

Cave in and settle, in many cases. The attorneys and the clients know the suits are worth more. And the attorneys know that if they had the time to properly develop the case, they could get their clients what they deserve - not just what they need.

But the cash-strapped clients can`t wait.

More than a few entrepreneurs have figured out there`s a lucrative market in this situation - tide the plaintiffs over with the cash they need in return for a stake in the suit. If the plaintiffs win, they pay back the advance twice over - or more.

And if they lose?

They pay nothing.

No recovery, no repayment: It`s a high-risk but high-rewards gamble, and lots of people are rolling the dice.

But these new companies also raise a number of ethical issues concerning client confidentiality and the impact of these loans on the attorney`s independent judgment.

The trend began in 1996 with the Judgment Purchase Corporation, a San Francisco firm that financed appeals in return for a percentage of the final judgment (See 96 LWUSA 788; Search terms for LWUSA Archives: Ibelle and JPC).

In the last few years, the trend has mushroomed to include dozens of individual brokers and companies that extend "non-recourse funding" to plaintiffs and their attorneys in the pre-trial stage as well as the period between judgment and appeal. They find their customers through Web advertising or lawyer referrals. The companies range all over the financial map, from one-person outfits extending small loans to personal injury plaintiffs to national companies advancing millions of dollars for commercial litigation. Regardless of their size, most of these companies advance funds primarily to plaintiffs, rather than attorneys.

Though they are reluctant to disclose the details of these transactions, companies such as Law Funds, Law Finance Group and Lawyers Funding Corporation are collectively dispensing enormous amounts of money to thousands of people, ranging from pocket-change loans of $1,000 to multimillion-dollar advances. There are no restrictions on how the money is used, and the lenders do not get involved in legal strategy.

It`s a new industry, largely unregulated, and too young to have generated loss statistics. But the ultimate effect, experts say, may be to change the litigation landscape by enabling suits that would otherwise settle - or die - to go forward.

"It`s too early to tell," says Steven Gillers, a New York University law professor and a specialist in lawyer regulation. "For some people, it will allow them to stay the course; others won`t need it, and some simply won`t get enough to continue."


Robin Hood or Loan Shark?
Defenders of the practice say advance funding companies are motivated by a Robin Hood mentality: They`re out to level the playing field between unequal parties in litigation. While not exactly a giveaway, fast cash for a fee, they argue, is the only weapon plaintiffs have against big companies that string out suits to force a cheap settlement.

"Most plaintiffs are little guys," says Al Cone, a former ATLA president and founder of Florida-based Advance Settlement Funding.

"In most states, it takes eight to 16 months to get a case to trial. If a plaintiff is half head of family, gets injured and can`t work, it takes about a month for that person to be in serious financial difficulties - especially if they don`t have health insurance. They can get desperate," says Cone, who once worked as an insurance defense litigator.

"I`ve seen plaintiffs lose their homes - marriages break up, whole lifestyles change. We`re helping them stay in the game. This [kind of funding] broadens the access to justice."

Critics, however, say non-recourse funders are uncomfortably close kin to loan sharks. By advancing money at high rates to desperate plaintiffs, they are flouting usury laws, flirting with champerty and encouraging frivolous lawsuits, they argue.

"It`s a back door way around champerty laws," says Kentucky attorney Gary Weiss. "It`s pretty outrageous - they`re basically buying a share of the case."

But are they? It`s perfectly legal to sell an interest in a judgment - a judgment is, after all, an asset, a right to collect. But a lawsuit is a speculative contingency. Are advance funding companies skirting champerty law by treating the litigation as collateral for a loan?

"Champerty is an extremely ambiguous and elastic concept," says Gillers. "People think it`s fixed, but it`s not. Sometimes it`s incorporated into a statute and sometimes it just continues as a malleable, judge-created idea. Whether or not a jurisdiction wishes to interpret its statute or common law to include this is by no means clear."

He argues that as long as the plaintiff still has an economic interest in a claim he or she is bringing, it should be acceptable.

"The investor does not become the plaintiff, so one view of champerty would say that this is acceptable because the plaintiff hasn`t signed away his entire interest. As long as the plaintiff retains an interest and remains a plaintiff, it`s not champertous."

A number of states have gradually done away with such restrictions in the wake of banking deregulation during the 1980s.

"Those ancient prohibitions - whether champerty, maintenance or barratry, they are all used interchangeably - have been relaxed or completely abolished in most jurisdictions within the last 10 years," says Andrew Savage, founder of LawFunds, formerly known as Amicus Legal Funding, the largest source of non-recourse funding in the country.

"But it varies from state to state," he continues. "Here in Massachusetts, they were abolished in 1997, but what we do is still considered illegal in Maine. One of the challenges for us as an industry is education. The courts that have addressed the issue recognize that a pretty significant barrier to justice for individuals and small businesses is that the defendant is well-financed. The target of our programs is to help plaintiffs in that scenario realize the true value of their case."

But even the funders concede that the money they offer is a last resort.

"This is expensive money," says Savage. "You don`t want to use it, unless you have no other choice."


How It Works
For Richard Shapiro`s client - a paraplegic with a medical malpractice claim pending in Hillsboro County, Florida - there was no other choice.

"This man didn`t have a penny to his name, and he was going to get thrown out of his trailer," says Shapiro. "Without any assets, there was no way he could get a loan from a bank."

As in almost all states, Florida does not permit lawyers to advance money directly to clients.

Shapiro referred his client to Al Cone`s company, which advanced him an undisclosed amount (though Cone caps his loans at $5,000). "The loan allows us to continue the case until trial or a reasonable settlement. It would have been tempting for him to take far less than the value of his case because of the pressure of his immediate needs. But this guy is only 40 years old," says Shapiro. "He has lifelong care needs."

Shapiro concedes that his initial impression of advance funding companies was that they were "vultures."

"But that changed when I actually had a client who had an immediate need for money," he says. "Where else could my client have gone?"

Even though they`re legal in many states, most of these companies tread a fine line to avoid violating ethical rules. Their challenge is to make their services known to the target population, get the information they need to properly evaluate a case, and obtain assurances that they will be paid if the plaintiff wins - all without violating attorney-client privilege or compromising the independence of the attorneys involved.

Typically, ethical rules bar an attorney from recommending a source of financing to a client, but he or she may inform the client of such services, as Shapiro did. If the client applies for the advance, the attorney furnishes information about the case - if so instructed by the client - sufficient to enable the funder to assess risk, and then sends a letter of protection guaranteeing payment out of the proceeds of the settlement.

"One of the criteria is not the underlying creditworthiness of the plaintiff himself because the collateral is not the plaintiff, it`s the case," says Savage. "Every case is different, so every risk analysis is different."

The most prominent of these companies claim a repayment rate of 95 percent from those cases that end a verdict or monetary settlement - so it`s no wonder the business is mushrooming.

"There`s a huge market," says Savage. "And it`s largely untapped."

And not all the loans are nickel-and-dime advances to help plaintiffs pay the rent. Savage is currently looking at an application from a plaintiff for a $20 million advance on an intellectual property case on appeal.

But regardless of the size of the loan application, Savage urges attorneys who are advising clients to consider an advance - or considering applying for one themselves to carefully check out the company.

Look for a company that understands the ethical rules and has structured its process accordingly. Try to work with someone in your geographic area and meet with that person face to face.

"It`s easy to throw up a website. This is a high-stakes field that`s lured a lot of speculators," he says.

Check that the company is full-time and not assigning to an outside investor.

"The fundamental flaw in the legal system is that it works to the advantage of well-financed parties," says Savage. "Still, my advice to attorneys with a money crunch is the same as for a plaintiff, which is that this is going to be very expensive money. We really recommend that you seek out other alternatives, if possible. This is funding of last resort."

Questions or comments can be directed to the writer at: ddigges@lawyersweekly.com


Diana Digges