Yesterday’s New York Times ran an extensive front page article, “Investors Bankroll Lawsuits to Get Payouts”, about the burgeoning litigation finance industry.
This is an area we shall explore in this and further posts.
Essentially, there are two types of “loans”:
- so-called “loans” or “advances” made by a finance company to an injured client to help pay living or medical expenses; and
- loans made to the lawyer in order to finance the law firm’s business, a line of cases, or a particular case.
We will focus on the first type of “loan”, i.e., the direct payment to the injured client.
To term the transaction a “loan” or “advance” is a misnomer in that the client has no obligation to repay if he loses the lawsuit. The client’s obligation to repay only exists if there is a recovery. The finance agreement states that the transaction is not a loan and that the finance company is buying a piece of the lawsuit recovery.
Here is how it works:
Lou Simmons has been out of work due to his construction accident. His workers’ compensation benefits are not enough to meet his modest living expenses.
Lou seeks a “loan”. He turns to Moneybags Finance Company. Moneybags, with the cooperation of Lou’s attorney, reviews the litigation file and determines that there is a good probability for ultimate recovery.
Moneybags makes a “loan” of $10,000 to Lou, and Moneybags takes an ownership interest in the recovery. Moneybags is only repaid if money is recovered.
Lou settles his case for $125,000. Moneybags is to be repaid the $10,000 plus interest at the end of the case (30% per annum). The case settles a year to the day of the “loan”, and Lou is obligated to repay $13,000 to Moneybags.
Let us assume the following variation:
Lou gets the $10,000 “loan”, but he loses the lawsuit on a summary judgment motion.
Lou has no obligation to repay the loan. Moneybags writes-off the $10,000 principal and interest as a loss.
If you need to obtain financing, discuss this with your attorney.
Mark E. Seitelman, 11/16/10, www.seitelman.com.