Contingent Case Financing: A Brief History

of the Contingent Fee Agreement and Ethical

Issues to Consider When Financing a Client’s Case

Hugh J. Plummer, Jr.

History of Contingent Fee

Greek Origination and Roman Development

English RejectionAmerican Acceptance

6th Century B.C. Greeks & Romans Medieval England Colonial America

6th Century B.C. Greeks & Romans Medieval England Colonial America

6th Century B.C. Greeks & Romans Medieval England Colonial America

Options When Financing

War Chest Approach – Self Financing

Traditional Banks and Lending – Collateral Based Financing

Alternative Litigation Finance Companies Company A – Legal Support Line of Credit

Company B – Docket Based Collateral Approach

Company C – Accounts Receivable Based Approach

Marketplace Approach LitCap – Case Cost and Expense Approach

Ethical Considerations When Using ALF Companies

• Passing Interest

• Tex. Comm. on Prof’l Ethics, Op. 465 (1990).

• Tex. Comm. on Prof’l Ethics, Op. 558 (2005).

• Tex. Comm. on Prof’l Ethics, Op. 576 (2006).

• Fees

• Texas Disciplinary Rules of Professional Conduct 1.04

• Safekeeping Property

• Texas Disciplinary Rules of Professional Conduct 1.14

• Professional Independence of a Lawyer

• Texas Disciplinary Rules of Professional Conduct 5.04 (c)

Passing Interest

• Tex. Comm. on Prof’l Ethics, Op. 465 (1990).

• Q: “May an attorney borrow money from a lending institution for case expenses … and ethically charge, or pass on, to the client, as a part of case expenses, the out-of-pocket interest or finance charges of a lending institution?”

• A: “ … [A]n attorney may properly borrow money from a lending institution for case expenses … and charge, or pass on, to the client the actual out-of-pocket interest or finance charges of the lending institutions.”

• How To Ethically Pass Interest:

• 1. Attorney must obtain client consent

• 2. Rates must be fair, reasonable, customary, and at a lawful rate

• 3. Financing and interest rates must be directly related to the client’s case, and must not be related to firm overhead

Fees

• Texas Disciplinary Rules of Professional Conduct 1.04

• (d) “A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined… The agreement shall state the litigation and other expenses to be deducted from the recovery…”

Main Ethical Considerations

Undue Influence or Any Interference With Attorney’s Professional Judgment Regarding a Client’s Case

Ensuring Confidentiality of Client Information

Protecting the Best Interest of the Client

Ethically and Correctly Passing Interest Fees and Costs to Client

War Chest ApproachSelf Financing

Firm Capital Client Cases

War Chest ApproachSelf Financing

Cons

Ties up firm capital

Limits amount of cases an attorney can take

Money not earning interest

Ethical Implications

Increased likelihood of suboptimal investment

Inherent, albeit acceptable, conflict of interest

Conflict of interest between attorneys funding limit and client needs

Pros

No interest rates

No dealing with financial institutions

No repayment obligations

No sharing of recovery

Traditional BanksCollateral Based Financing

%

$

Traditional BanksCollateral Based Financing

Cons

Loaned only up to value of collateral

Interest rates – 6-18%

Recourse debt

Interest rate determined by credit

Monthly interest payments due

Pros

Funds used for any firm related purpose

Ethical Implications Same implication as War Chest Approach, plus paying interest on

your money Material limitation Passing interest to clients generally not allowed Attorney still bears risk since repayment is his burden –

Misaligning attorney interest with client

Alternative Litigation Funding

Investor Capital

Attorney or Law Firm

Case-related expenses

Operating Cost of

Business

Litigation Resolution

Returns

ALF Companies

• Counsel Financial

• Advocate Capital

• Burford

• Amicus Capital

• StoneStreet Capital

• Pravati

• Fulbrook Capital

• Oasis

ALF Company A Legal Support Line of Credit

Cons

Extensive due diligence

Borrowing amount determined based on analysis of all assets,

including contingent fee cases

Collateral: contingent fee cases plus personal

or firm assets

Solely commercial lending

Interest rate “usually mid to high teens”

Undue influence

Ethical Implications Waiver of work-product during extensive due diligence (not settled in many

jurisdictions) Cannot get client consent- since funds used for various purposes and cases Possible interference with attorney professional judgment

Pros

Case tracking assistance

No maximum amount of funding attorney can

request

ALF Company B Docket Based Collateral Approach

Pros

Credit line not limited to value of personal

assets– based on total value of contingent fee

cases

Cons

Maximum credit line = 5 million

Cannot pass interest payment to client

Monthly interest rate payment

Secured by portfolio of contingent fee cases

Ethical Implications

Conflict of Interest if attorney is personally liable Attorney still bears total cost risk- amount must always be paid back

ALF Company C Accounts Receivable Based Approach

Pros

Expense tracking system

Simple interest

Cons

Maximum line of credit = $3.2 million

Monthly interest payments

Funds only for case expenses

If case abandoned or lost, required to repay principal amount and

any outstanding interest

Secured by all law firm accounts receivable

Ethical Implications Conflict of Interest: Attorney still bears all risk if case lost or abandoned –

may pressure attorney to prematurely settle Client consent required to pass interest

The Market Place Approach

Marketplace Approach

• Attorney Lists Case(s)• Investor Views Cases Listed• Attorney and Investor Negotiate Interest Rate

Marketplace

Pros

Unsecured Lending

Unlimited Access to Capital

Ability to Pass Interest to Client

Simple Interest Rates

You Lose, You Don’t Pay

Funds Deposited Directly into IOLTA

Funding Based on Attorney’s Performance,

Not Credit

Due Diligence Process Only Requires

Information That is a Matter of Public Record

Negotiate Interest Rates

Cons

Funds Only Used for Case-Related Expenses