Third-party Litigation Funding: Understanding the Risks
| Publication year | 2011 |
| Pages | 69 |
| Citation | Vol. 40 No. 4 Pg. 69 |
2011, April, Pg. 69. Third-Party Litigation Funding: Understanding the Risks
April 2011
Vol. 40, No. 4 [Page69]
This Department is sponsoredby the CBA Lawyers' Professional Liability Committee to assist attorneys in preventing legal malpractice. For information about submitting a manuscript or topic suggestion, contact Andrew McLetchie-(303) 298-8603, a_mcletchie@fsf-law.com; or Reba Nance-(303) 824-5320, reban@cobar.org.
About the Author
Christopher B. Little, Greenwood Village, is a shareholder of Montgomery, Little and Soran, P.C.-clittle@montgomerylittle.com. He thanks Rachel Kranz, a law clerk with Montgomery, Little and Soran, for her assistance with the article. Kranz will join the firm as an associate after earning her law degree and passing the Colorado Bar exam.
I suggested my client borrow money to finance the lawsuit.
What could go wrong?
The cost of hiring experts, paying for accident reconstruction, and otherwise funding a lawsuit is becoming prohibitive for many litigants, including plaintiffs involved in personal injury lawsuits. As these lawsuits increase in complexity and duration, many plaintiffs, often on the advice of counsel, are opting to seek litigation funding from third-party sources to support their lawsuits while they await compensation for their injuries. This article is an introduction to the use of third-party vendors in a lawsuit and generally explores issues that may arise when funding a lawsuit using third-party vendors whose only interest is profit.
Overview
Vendors typically provide litigation funding in one of two ways: (1)by making payments to medical health providers who provide treatment for the litigant; or (2)by providing cash payments directly to the litigant to pay for expenses. In many cases, the funding is not considered a loan because it is contingent on the outcome of the case, and a repayment obligation may not exist if the litigant does not prevail. Nevertheless, litigation-funding companies usually assist only those plaintiffs they believe have a high likelihood of prevailing in their lawsuit. Because of the risk involved, the repayment obligations are often coupled with an extremely high interest rate.
There is very little case law in Colorado on the use of litigation funding,(fn1) and the Colorado Bar Association has yet to address it in an ethics opinion. A reported decision in New York held that a litigation-funding company may sue a law firm for allegedly helping its client divert settlement money that should have been paid to the company.(fn2) Other states have visited the issue and permit contact between the financing company and the attorney.(fn3) However, lawyers must be aware that attorney-client privilege is to be protected in these conversations unless the client gives informed consent otherwise. Several states have ethics opinions that advise lawyers to warn the client about the possibility of losing the attorney-client privilege when making disclosures to financing companies.(fn4)
The Attorney's Role
Many litigants are unfamiliar with the availability of litigation funding, so the attorney often plays a significant role in initiating the arrangement, eitherby contacting the vendor directly or referring the client to a vendor. Although most funding agreements ultimately are between the funding company and the plaintiff, vendors usually require that the attorney acknowledge the funding agreement and agree to compensate them directly from the client's recovery.(fn5) In addition, most vendors will loan money or provide medical services only if they receive periodic reports from the attorney about the status of the case and, in some occasions, will not agree to issue funds until they have received detailed analysis of the claim from the attorney. In some engagement letters, the funding company requires that the lawyer provide at least the following:
* police report or accident incident report
* witness statements
* medical expense worksheet
* defendant policy limits and/or claim number
* hospital reports
* demand letter or summary of all damages
* doctor and expert...
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