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Legal financing

Legal financing (also known as litigation financing, professional funding, settlement funding, third-party funding, third-party litigation funding (TPLF), legal funding, lawsuit loans and, in England and Wales, litigation funding) is the mechanism or process through which litigants (and even law firms) can finance their litigation or other legal costs through a third party funding company.

Similar to legal defense funds, legal financing companies provide money for lawsuits but are more often used by those without strong financial resources. Furthermore, legal financing is more likely to be used by plaintiffs, whereas legal defense funds are more likely to be used by defendants. Money obtained from legal financing companies can be used for any purpose, whether for litigation or for personal matters. On the other hand, money obtained through legal defense funds is solely used to fund litigation and legal costs.

Legal financing companies provide a nonrecourse cash advance to litigants in exchange for a percentage share of the judgment or settlement. Despite some superficial similarities to an unsecured loan with a traditional lender, legal financing operates differently from a loan. Litigation funding is generally not considered a loan, but rather as a form of an asset purchase or venture capital. Legal funding advances are not debt and are not reported to the credit bureaus, so a litigant's credit ratings will not be affected by a litigant obtaining a legal funding advance.

Legal financing companies normally provide money in the form of a lump sum payment, and generally, no specific account is established for the litigant. If the case proceeds to trial and the litigant loses, the third-party funding company receives nothing and loses the money they have invested in the case.[1] In other words, if the litigant loses, they do not have to repay the money. In addition, litigants generally do not have to pay monthly fees after obtaining legal financing. Instead, no payments of any kind are made until the case settles or judgment is obtained, which could occur months or years after legal funding is received. Accordingly, to qualify for funding with a legal financing company, a litigant's case must have sufficient merit that the company deems its investment in the case to be worth the risk.

In tort litigation, legal financing is most commonly sought in personal injury cases, but may also be sought for commercial disputes, civil rights cases, and workers' compensation cases.

History

While third-party litigation funding is not a new concept, it is relatively new to the United States and has its roots in the old English principles of champerty and maintenance. Some U.S. states still prohibit or materially limit champerty and others allow it with some restrictions.
Little financial assistance is available from traditional sources to help injured plaintiffs cover the cost of litigation or pay their personal expenses while a case remains pending. Plaintiffs may turn to credit cards and personal loans to cover litigation fees, attorneys' fees, court filings, personal finances, and living expense shortfalls while they wait for litigation to be resolved. The obligation to repay that debt is not affected by the outcome of the plaintiff's lawsuit.
In many jurisdictions, and throughout the United States, attorney rules of ethics preclude an attorney from advancing money in the form of loans to their clients.
The introduction of legal financing provides qualified plaintiffs with a means of paying the cost of litigation and their personal expenses, without having to resort to traditional borrowing.
Qualification for litigation financing
Legal funding companies do not provide legal advice to applicants, nor do they provide referrals to attorneys. Thus, to qualify for legal financing a plaintiff must have already hired an attorney. To apply for legal financing, the plaintiff must complete an application form and provide supporting documents.
As legal financing companies only recover their investment if the plaintiff recovers money from the funded lawsuit, the merits of the plaintiff's case must be strong, meaning that the plaintiff has a strong argument that the defendant is liable for the damages claimed in the lawsuit. The defendant in the case (the person or company being sued) must also have the ability to pay a judgment, whether by virtue of its own financial strength or through insurance coverage. The injured party's attorney must also agree to the legal financing and generally must to sign an agreement consenting to the legal financing.
Additional qualification or approval factors may include the total amount of damages sought, a sufficient potential margin of recovery to justify the investment, the background of the applicant, and the laws of the applicant's place of residence.
Some legal financing companies limit their investment to specific types of lawsuits, such as a personal injury claim or commercial litigation.

Benefits

Lawsuits are expensive and may progress slowly, over a period of many months or years. During that time, many plaintiffs may feel considerable financial pressure and may need money to pay the costs of litigation, as well as the costs of supporting themselves. When obtained during the course of tort litigation, legal financing may help a plaintiff who has immediate needs, such as medical care, and cannot afford to wait until the litigation concludes to obtain money. A severely injured plaintiff might have significant personal expenses due to disability or loss of income and may face significant personal and medical debt, and as a result, may feel considerable pressure to enter into an early settlement. A defendant may recognize a plaintiff's financial need and offer a low settlement in anticipation that the plaintiff will not be able to afford continued litigation.
The desperate situation of plaintiffs is reflected in a finding by the American Legal Finance Association, an industry group for legal financing companies, that over 62% of funds provided to plaintiffs are used to stop a foreclosure or an eviction action.

Types

Litigation funding has two major divisions: consumer financing, commonly referred to as pre-settlement funding or plaintiff advances, and commercial financing. Consumer financing generally consists of small advances between $500 and $2000. Prominent consumer financing companies include LawCash, Oasis Financial, and RD Legal Funding. Commercial financing for companies to pursue legal claims generally is dedicated toward the payment of attorney fees and litigation costs.
Litigation funding may also come in the form of crowdfunding, in which case hundreds or tens of thousands of individuals can help to pay for a legal dispute, either investing in a case in return for part of a contingent fee or offering donations to support a legal right that they believe in.
One concern about litigation funding is that it is costly to the plaintiff, and may take a very large chunk out of the plaintiff's eventual settlement or verdict. After paying attorney fees and the amount owed to the legal financing company, the plaintiff may receive little or no additional money beyond any amount received from the advance.
There is some concern that, if widely adopted, litigation finance could prolong litigation and reduce the frequency of settlements of civil lawsuits.
A study of civil lawsuits published in the Journal of Empirical Legal Studies found that between 80% and 92% of cases settle.
The study found that most plaintiffs who decided to pass up a settlement offer and proceed to trial ended up recovering less money than if they had accepted the settlement offer.
The legal financing industry has come under fire from critics for actual and potential legal and ethical violations. For example, some companies have been found to violate state usury laws (laws against unreasonably high interest rates), champerty laws (laws prohibiting third parties from furthering a lawsuit for an interest in the recovery), or to require action by the applicant's lawyer that might be unethical under state rules of professional conduct.
A major criticism of litigation funding is that its cost is disproportionate to the risk accepted by litigation finance companies.
As lenders thoroughly evaluate claims before they agree to provide financing, they have a very high likelihood of recovering their fee at the conclusion of the plaintiff's case, and further limit potential losses by providing financing in amounts that are relatively small as compared to the plaintiff's anticipated recovery.
In June 2011, the New York City Bar Association addressed some of the ethical issues raised by lawsuit financing in an ethics opinion about third-party non-recourse legal funding. It concluded that with due care a lawyer could help a client obtain legal financing and that non-recourse litigation financing “provides to some claimants a valuable means for paying the costs of pursuing a legal claim, or even sustaining basic living expenses until a settlement or judgment is obtained.”
Many lawyers advise clients to pursue legal financing only as a last resort when other forms of financing are not available
In recent years, criticism of legal financing or litigation financing has gathered steam owing to some high-profile cases and questions over the validity of the claims made therein. One of these notable cases include an international legal battle financed by UK-based litigation financing firm Therium.
The case involved self proclaimed heirs of the Sultan of Sulu and the Malaysian government, which was ordered to pay $14.9 billion as compensation by Spanish arbitrator Gonzalo Stampa. The award was eventually struck down by the Hague Court of Appeal on June 27, 2023.
Statements by the claimants' lawyers Elisabeth Mason and Paul Cohen regarding the financing provided to the litigants and that "investors don't invest lightly in such matters" prompted a number of critics to call for stronger European laws around litigation financing.
In 2022, the European Parliament called on the European Commission to introduce regulations covering third-party litigation funding (TPLF).
The demand followed a report by German MEP Axel Voss on the same issue.
In an article published in 2021, Voss said that there was a growing financial practice in Europe, “which involves investing in lawsuits and arbitration proceedings in the hope of collecting a hefty share of the winnings. It is happening largely in the shadows. The practice is known as Third Party Litigation Funding (TPLF). Litigation funders identify cases with potentially large returns and typically pay the legal fees and other costs for the claimant, in return for a percentage of any award or judgement".
Voss asserted that litigation funders "say they offer access to justice for people who could not otherwise afford to bring cases. Yet if we listen to how funders describe themselves to their investors, providing ‘access to justice’ is clearly not their goal"
Mary Honeyball, former MEP and former member of the European Parliament’s Legal Affairs Committee, said no case "highlights the need for stronger EU regulation of litigation funding than the $15 billion arbitration award against the Government of Malaysia in the Sulu case"