- Stagg Wabnik
“Financing Available” is a phrase most people see and take advantage of when it comes to major purchases such as a home, car, or family vacation. Most people also take advantage of financing for smaller purchases, such as a new television. When you buy even low-cost items online, one of the checkout options may be to pay the amount due over several months. While most financing involves a separate loan specific for that purchase, credit cards are also a form of financing people take advantage of every day.
Applying for financing and obtaining a loan requires an application process where the lending institution can get a picture of the risk involved in loaning money. If the lenders assess the situation as high risk, they may either deny the loan or offset the risk by charging a higher interest rate.
To further mitigate risk, lending institutions often pool several loans together. When lenders spread risk across several loans, they can charge lower interest rates than if each loan was handled separately, which would lead to higher levels of risk.
Pooling loans as a form of risk mitigation is a financial practice that has been utilized for decades. It is done since it has been proven extremely effective in lowering risk and financial exposure.
The concept of financing has come to the legal field with litigation financing. The idea of litigation financing is similar to that of a mortgage. Since litigation can be costly, many individuals and businesses are looking to litigation financing. Such financing allows those who would not otherwise be able to afford a legal remedy to pursue their case. Financing also allows for the ability to present a legal defense, especially when the expense is unexpected. Even if litigants are able to afford the costs, financing allows them to be spread over time, so the cost of litigation does not disrupt cash flow.
From a lender’s point of view, the concept of litigation financing is similar to other forms of financing. Lenders evaluate the risk, adjust interest and pricing accordingly, and pool loans to further mitigate the risk.
Litigation Financing is Not An Altogether New Concept
The cost of litigating a case can be very expensive, especially if the litigation process continues into the courtroom. In some areas of law, such as personal injury, the injured party may not be able to afford the out-of-pocket expenses required to bring a case. In these cases, attorneys will work on a contingency basis, which means they do not charge the client a fee unless they obtain an award through settlement or a judgment. The attorney who has taken the case on contingency is then entitled to an agreed upon percentage of the award.
Working on contingency brings a level of risk. The attorney will mitigate the risk by assessing the case, and through their experience and knowledge of the law, let the client know if they believe the case can lead to an award. If the case has little or no chance of generating income, the attorney may decline the case.
However, working on contingency is not always an option, especially when the end result of the case is not monetary. Litigation financing is yet another way that the legal system may become available to those who have a potential case or need to defend themselves but cannot afford the out-of-pocket expenses.
Concerns Over Litigation Financing
The notion of a legal system available to everyone is an admirable goal. However, third-party litigation financing is not universally seen as a step in the right direction. When a lender provides financing, the lender has a stake in the case being presented and it can be argued that information regarding that stake should be made publicly available.
In most cases, the lender has no direct interest in the case, other than the risk associated with the loan. Decisions relating to the case are often still made by the attorney and client (although exceptions exist). When the lender has no direct stake and is not involved in the legal strategy of the case, all that is being provided is money, and where the financing is coming from is irrelevant to the case itself. All that is to be obtained by full disclosure is possible information about the extent of funding obtained, which could reveal how far and how long the recipient is able to proceed in the litigation process.
Transparency in disclosing litigation financing becomes relevant to the parties involved when the lender is involved in aspects of the case other than just providing the money. Generally, the majority of lenders are passive partners with no direct involvement in the underlying lawsuit. Indeed, the American Bar Association’s (“ABA”) policy making body, its House of Delegates, issued Resolution 111A in 2020, which is a “best practices” guide for third-party litigation funding. The ABA guide states: “A careful lawyer will assure that the written undertakings accurately reflect that the client retains control of the litigation, that disclosures to the funder are limited so as not to create risks of waiver of attorney-client privilege or work product, and that the attorney retains and protects his or her ability to exercise independent professional judgment.” ABA Res. 111A (2020) at 11, n.5. However, money, in some cases, equals influence and that influence can mean being involved in the decision-making process, contributing to legal strategy, and even dictating who will litigate the case. All of these items can become relevant to a case and it creates a grey area regarding whether financing is relevant to the case. While courts often reject disclosure of litigation funding, the issue of discoverability remains a bit of a moving target. See e.g., In re Valsartan N-Nitrosodimethylamine (NDMA) Contamination Prods Liab. Litig., 405 F. Supp. 3d 612, 619 (D.N.J. 2019) (where the court denied a request for discovery of plaintiffs' litigation funding but stated it was not ruling that plaintiffs' litigation funding can never be discovered).
There is a fine line to be navigated related to litigation financing in that we want to move toward the ideal, where the legal system works for everyone equally, protects privacy and the attorney-client relationship, but still maintains a system that is transparent.