By now, every personal injury attorney has heard of "litigation funding" — the non-recourse sale of a portion of a plaintiff's future settlement proceeds in exchange for cash today. In recent years, the availability and use of litigation funding has grown rapidly and most attorneys now recognize the need for plaintiff financial support.
However, reminiscent of the criticism faced by trial attorneys over contingency fees, litigation funding companies must respond to the same disparagements. Defenders of the status quo seek to brand litigation funding as profiteering by scoundrels taking advantage of the downtrodden. They trot out such red herrings as champerty, usury and far flung theories of inherent conflicts to show how vexatious the practice really is. Sound familiar?
Despite the criticism, plaintiffs love it, defendants hate it and it is here to stay.
Equal Protection Requires Equal Access
The lynchpin for every privilege contemplated by our founding fathers and codified in our constitution rests in one simple principle — equal protection under the law.
Since 1786 when pamphleteer Benjamin Austin called it "a pernicious practice," contingent legal fees have been criticized non-stop. Yet today, it is the most widely used fee agreement in the United States. Why? Simple — because it works. The contingent fee system helps to achieve the goal of equal protection by facilitating access.
It is axiomatic that there can be no equal protection when access to the court system is unaffordable by a significant segment of the citizenry. The entire raison d'etre for contingency fees lays in this basic access issue. So persuasive is this point that, over the years, courts, have systematically removed virtually every barrier preventing access to the court system. From contingency fees to attorney advertising to champerty, laws preventing access, in even the most indirect ways, have bitten the dust.
However, affording a lawyer is only one part of a plaintiff's challenge. A claimant must also have the ability to sustain themselves during the pendancy of their action. After all, what good is retaining an attorney, if you can't afford the basic necessities of life? How are financially stressed plaintiffs to sustain themselves during the pendancy of their litigation, which may be the cause of their financial condition in the first place?
Litigation Funding
One answer is litigation funding. Being able to stay the course is a prerequisite to fair treatment and this simple transaction can help level the playing field with a well-heeled adversary. This fact was recognized by the Massachusetts Supreme Judicial Court in the 1997 case of Saladini v. Righellis, 426 Mass. 231, 234, when it noted: "We have long abandoned the view that litigation is suspect, and have recognized that agreements to purchase an interest in an action may actual foster resolution of a dispute."
Other superior courts seem to be persuaded by the Massachusetts court including the Supreme Court of South Carolina which relied heavily on Saladini when it abolished champerty in Osprey, Inc. v. Cabana Limited Partnership, 532 S.E.2d 269 (S.C. 2000).
In fairness it should be noted that the Supreme Court of Ohio held a different view in Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121, 2003. However, Ohio is in the minority and the doctrine of champerty may one day meet its final well-deserved death sentence at the US Supreme Court when the applicability of the 14th Amendment is determined. (Bennett v NCAAP 370 S.W. 2nd 79 82 (Ark 1963)).
What Are The Real Issues?
Aside from 15th Century English law, what are the real issues today? The perception is there is nothing in it for attorneys, at least not immediately or directly. Providing information to the funding company, administering the execution of the contract and observing the lien are all a nuisance for plaintiff's counsel. However, despite this, more and more personal injury attorneys are forging relationships with funding companies because their clients need it, and they have found that reputable experienced companies can prove to be an invaluable resource.
Cost
The most common criticism is the cost.
The average amount paid for bodily injury insurance claims suffered in motor vehicle accidents is small — less than $10,000. Thus, it should not be surprising that the average litigation funding contract is also small. Most contracts are for $1,000 to $5,000. Consumer financial products have relatively fixed transaction costs meaning that smaller deals are nearly as costly as larger ones. It follows that, because of their small size, the average fees on litigation funding contracts will unavoidably be high.
That having been said, the very growth of the business will resolve the issue of cost. The marketplace will set prices just as it does with contingent legal fees. Once there is enough experience for the true risks of these transactions to be widely known, investors will price the risk to a corresponding level. Already, fees have dropped significantly. Only a few years ago it was not uncommon to find fees of 15 percent per month compounded — with no cap. This is now rare.
There are three basic fee methods used by most funding companies:
March 29, 2004
