Due to the high cost of litigation and the time it may take to reach a settlement or obtain a verdict, sometimes a party to a lawsuit will seek sources of funding in order to continue a case, for personal expenses incurred while a case is pending, or both. Pre-settlement lawsuit funding provides a potential source of funds to plaintiffs in personal injury cases, but usually comes at a high cost.

Pre-settlement lawsuit funding typically comes in the form of a non-recourse cash advance, provided to an injured person in return for a promise to repay the advance after the lawsuit settles or a victory in court. As this is non-recourse funding, the injured person does not have to repay the advance if the lawsuit is unsuccessful.

Due to the risk involved in issuing non-recourse funding, the fees associated with this form of pre-settlement funding are usually significant. This form of funding also raises legal, ethical, and practical concerns that should be taken into consideration before a plaintiff applies for pre-settlement funding.

How Pre-Settlement Lawsuit Funding Works

Pre-settlement advances are offered as non-recourse funding, which means that an injured person has no obligation to repay if the lawsuit is lost. If the ultimate settlement or verdict is smaller than anticipated, the amount that must be repaid by the plaintiff never exceeds the amount of the injured person's share of that verdict or settlement.

The process by which a plaintiff may receive pre-settlement funding for a pending personal injury case is as follows:

1. An injured person contacts a company that offers pre-settlement lawsuit funding, sometimes at the suggestion of an attorney.
2. The finance company contacts the lawyer who is handling the case, and obtains information about the case.
3. Based upon that information provided, the finance company estimates the value of the likely eventual settlement or verdict, and offers a cash advance to the injured person based upon that estimate.
4. The finance company's fee for providing the advance may be a flat fee, or a monthly fee that accrues each month the loan is outstanding.
5. When the case settles, or the defendant pays after losing in court, the loan and associated fees are paid to the finance company.
6. The plaintiff repays the advance up to the amount of the plaintiff's share of any verdict or settlement.

For legal reasons, these advances are not characterized as loans, but are typically instead characterized as venture capital.

The amount of funding that may be available to a plaintiff will significantly, depending upon the nature of the case, the amount of the projected recovery and the company involved. Many companies offer pre-settlement funding advances in amounts from $500 to $25,000. A few companies may offer amounts up to $100,000 or more.

The fees charged for the advances also vary depending upon the company and the type of case. Some companies will fix the fee for the advance up front. Others will charge a monthly fee for each month between the time the funding is issued and when it is repaid, sometimes as high as 15% per month.

When Is Pre-Settlement Funding Appropriate?

Litigation can take a very long time. Sometimes, cases drag on for years. Even if an injured person's attorney is paying all of the legal expenses associated with the litigation, during the time it takes to resolve a case the injured person needs to have enough money to get by. If the injured person is unable to work, has reduced income, or has expenses associated with care or disability, it may not be possible to wait until the end of the lawsuit before obtaining funds.

Although the high fees are premised upon the risk to the finance company that are associated with non-recourse funding, the companies in this line of business choose their cases carefully in order to minimize risks. If they offer you an advance they believe that you will receive money from your lawsuit.

Given the fees involved in pre-settlement funding, it is important for injured people to consider any available alternatives before choosing this option. This type of financing should ordinarily be the last resort. If you decide to obtain pre-settlement funding you should check with several companies, in order to obtain the most favorable terms.

Ethical Issues

You may wonder, why can't injured people simply borrow money from their lawyers? The answer is that when a lawyer becomes a creditor to a client, a conflict of interest is created that may interfere with the attorney-client relationship. State bar associations thus prohibit lawyers from lending money to clients.

Lawyers may feel that it is unethical to seek this type of high-cost funding for a client. It is thus possible that an attorney won't agree to sign any contract with a settlement financing company. Also, some states prohibit lawyers from signing onto liens of the type necessary to secure this type of funding. A pre-settlement funding company may attempt to work around those issues by requiring that the injured person sign the contract, with an advance issued only if the attorney signs an acknowledgement of the client's instruction that the loan and associated fees be repaid from any eventual verdict or settlement.

At least one state (Florida) prohibits lawyers from participating in the settlement funding company's evaluation process. Absent lawyer involvement, it is unlikely that a finance company would be able to obtain enough information about a case to risk issuing non-recourse funding.

Legal Issues

In order to avoid usury laws (laws against charging excessive rates of interest), the funds you receive from a pre-settlement funding company will not be described as a "loan". The advance might be described as a "cash advance", 'investment", or as "venture capital".

Technically, the contract between the finance company and the plaintiff is not an agreement to repay the amount received, and is thus not a loan. Instead, it is a promise to pay a portion of any eventual verdict or settlement, with the possibility that the plaintiff will not recover from the lawsuit. No matter what happens, a person who receives pre-settlement funding keeps the full amount of the advance.

A concern raised by critics of pre-settlement funding is that the availability of funds might encourage plaintiffs to file frivolous lawsuits. That concern, however, does not consider the fact that lawsuit funding companies want to be repaid and thus aren't likely to offer funds to plaintiffs who don't have strong cases that justify substantial awards. Similarly, it will often be in the strongest cases for which a plaintiff is most in need of money before the conclusion of a lawsuit, and the absence of sources of funding can force premature and inadequate settlements.

Court Rulings

A Michigan court¹ held invalid a lawsuit funding contract where the defendant's liability had been established, holding that as the plaintiff was certain to recover some amount of money the funding company's advance was no longer contingent, and thus that the plaintiff only had to repay the principal (without interest) under Michigan's usury laws. While other states may draw different conclusions from similar facts, it remains necessary that the amount be in some manner contingent - otherwise, it is a high interest loan.

An Ohio court² similarly discharged a plaintiff's obligation under a lawsuit funding contract on the basis of a common law doctrine called "champerty" - a prohibition against the sale of a party's interest in a lawsuit. The court's rationale was that lawsuit funding company sought to profit from the injured woman's case, and that lawsuit funding could create a disincentive to settle a case if the plaintiff would have to pay the entire amount of the settlement to the finance company. A response to the first argument is that if it is acceptable for an attorney to profit from an injured person's case, why should it not be permissible for a finance company? A response to the second argument is that had the woman not received the funding, she may have been forced to settle the case for far less than its value.

Summary

Pre-settlement lawsuit funding should be considered as a last resort, and should normally be sought only after all other funding options are exhausted.

• Due to the high cost of this type of funding, any decision to accept an advance should be made very carefully.
• When seeking pre-settlement funding, it makes sense to apply for funding with several companies in order to obtain an advance with the lowest possible fees.

 Footnotes

1. Lawsuit Financial, LLC v. Curry, 261 Mich.App. 579, 683 NW 2d 233 (2004).

2. Rancman v. Interim Settlement Funding Corp., 99 Ohio St. 3d 121 (2003).