Obtaining a Loan to Fund Litigation Costs
Adopted: October 20, 2006
Opinion explores the circumstances under which a lawyer may obtain litigation funding from a financing company.
Inquiry #1:
ABC Litigation Funding (hereinafter "ABC") is a company that offers non-recourse loans to personal injury lawyers who need to borrow funds for expenses advanced in contingency cases. Lawyer is interested in obtaining financing for a large personal injury case for which he has already advanced some of the expenses. Lawyer will be unable to complete the matter unless he receives help with the costs.
Can a lawyer enter into a contract with a litigation funding company to finance the costs and expenses of a contingency fee case?
Opinion #1:
Yes, provided that the litigation funding company's practices are lawful and the lawyer otherwise complies with the Rules of Professional Conduct. Rule 1.8(e) specifically permits lawyers to advance the costs and expenses of litigation to clients. Before there were litigation funding companies, lawyers borrowed money from banks or drew from a line of credit to assist with costs associated with litigation. Such practices do not violate the fee sharing restrictions in the Rules because the lawyer could repay the loan with funds from any source and the amount to be repaid was unrelated to the lawyer's contingency fee in any given matter.
Financing arrangements that do not require that repayment be a percentage of the lawyer's fee in a given case or restrict repayment from a specific source of funds should be treated no differently than bank loans or lines of credit.
Inquiry #2:
Suppose that ABC's non-recourse loan is contingent upon Lawyer's willingness to give ABC a lien on the recovery in one or more of his pending personal injury cases.
May Lawyer obtain financing from ABC under these circumstances?
Opinion #2:
No. Lawyer may never put a client's funds at risk to obtain a loan. Lawyer, however, may put up his own assets, including his contingent fee in the case, as collateral to secure a loan.
Inquiry #3:
Suppose Lawyer puts up law firm assets as collateral for the loan from ABC. ABC now requires Lawyer to provide it with information about the nature and value of his clients' cases so that it can determine the amount to be loaned. ABC agrees not to be involved in any of Lawyer's cases and Lawyer has assumed that he will retain complete control of the matters.
May Lawyer contract with ABC under these circumstances?
Opinion #3:
Lawyer owes a duty of confidentiality to every client, and may not disclose information learned in the course of the representation without informed consent from the client. Rule 1.6. The nature and value of a case is certainly client confidential information, and Lawyer may not supply ABC with any confidential information without first seeking the client's informed consent. Consent will be informed only if Lawyer has had a full and frank discussion with the client concerning the advantages and risks of disclosure, including the risk that disclosure may result in a waiver of the attorney-client privilege.
Inquiry #4:
Assume ABC's financing agreement requires the lawyer to repay the amount borrowed plus a fee equivalent to 100% of the amount of funding ABC provided. So, for every dollar the lawyer borrows, he will have to repay two dollars if the case is successfully tried. If the lawyer is unsuccessful and there is no recovery, he will owe nothing to ABC Financial. ABC suggests that Lawyer can pass along the 100% financing charge to the client as an expense of litigation.
May Lawyer pass along the expense of obtaining litigation financing to the client?
Opinion #4:
Lawyer may pass along the expense of obtaining litigation financing to the client only if 1) the lawyer obtains informed consent, in a writing signed by the client, before Lawyer enters into the agreement with ABC, 2) the financing expense is not clearly excessive under the circumstances, and 3) the funds borrowed will be used only to pay expenses incurred on behalf of the client. Rule 1.5(a) and (c).
For consent to be fully informed, the fee agreement must evidence that the client understands and agrees that the lawyer will borrow funds to pay for litigation expenses incurred in the client's case, that the client will be responsible for the repayment of the interest or fee charged in the event the case is successfully tried (as defined by the financing company), and that the client agrees to the amount and terms of repayment. Disclosures about the terms of repayment must explain the client's responsibility in the event the ultimate recovery is substantially less than the damages sought or the client terminates the lawyer's services prior to completion of the matter. Furthermore, prior to asking the client to sign the fee agreement, a lawyer must discuss other financing arrangements, their availability, and the risks and advantages of each. See Rule 1.0(f).