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PROS AND CONS OF THIRD PARTY LITIGATION FUNDING

Third party litigation funding services are trending. They have been around in some form for many years, but now they are taking on a new prominence as litigation becomes ever more prevalent, sophisticated and accessible to the masses.

Civil lawsuits are expensive. I’ve pointed out in my blog that the beauty of our system of justice in America is that plaintiff’s attorneys are willing and ethically able to bear their client’s costs and the risk of winning their case. This serves the dual purpose of discouraging attorneys from considering frivolous cases and allowing injured victims access to civil justice regardless of socio-economic status.

This model has promoted a proliferation of litigation funders who serve different purposes. Some litigation funding companies are dedicated to pushing forward a specific agenda by enabling a case to be filed and prosecuted when it might otherwise not be, due to financial considerations. Think Facebook co-founder, Peter Thiel’s funding of the lawsuits that shuttered the doors of Gawker Media.

Other litigation funding services loan money directly to the plaintiff using the lawsuit as collateral. This can be a viable option for cash-strapped litigants considering that plaintiff’s attorneys are ethically bound not to loan money to clients. However, the amount of interest and costs for these loans can be quite high and clients should be made well aware of the financial responsibilities and consequences of entering into any of these agreements.

This scenario was the subject of a recent Illinois case, and although neither the client nor attorney had to repay the loan, the plaintiff’s attorney did not get out unscathed.

In Prospect Funding Holdings, LLC v. Saulter, 2018 IL App (1st) 171277 (March 13, 2018), an attorney arranged for his client, a plaintiff in a wrongful-death suit, to borrow $25,000 from a litigation funding company under a purchase agreement governed by Minnesota law. The case settled, the money was not paid out of the proceeds and the client failed to repay the company, which then sued both client and attorney.

The case caused the Illinois court to consider an issue of first impression concerning an attorney’s liability to a business that loans a client money to be repaid, plus fees and interest, from any settlement or judgment. The Illinois court rejected the litigation funder’s arguments finding the key documents unenforceable because they violated Minnesota law prohibiting a third party from having a contingent interest in litigation. Also, the funding company could not base its claim on a violation of the Illinois Rules of Professional Responsibility governing lawyers because it is not provided by the rules. However, the court warned the plaintiff’s attorney may still suffer ethical consequences for failing to hold the settlement funds in his trust account and referred the matter to the disciplinary commission. The key takeaway here is that third party litigation funding services should be used sparingly and ethically, with all parties being fully informed of the consequences of such an arrangement.

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