Eliminating financiers from the equation: a call for court-mandated fee shifting in divorces.

Author:Metsch-Garcia, Bibeane
 
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Divorce can be prohibitively costly. Many struggle or simply cannot afford to pay divorce attorneys' fees, and the economic effects of divorce on women are particularly acute. In the past few years, financing firms have emerged to fund nonmonied spouses, mostly women, who cannot afford to litigate divorces from their wealthy spouses. The services provided come with a hefty price tag: firms take large fees, and their involvement may lead to unethical and potentially damaging practices. This Note explains what third-party divorce finance firms are and why the use of firms is problematic, and offers an alternative, more equitable method of financing nonmonied spouses' divorce fees. Courts, not financing firms, should address any disparities in ability to pay between spouses. Mandatory fee shifting by courts would obviate the need for these financing firms that improperly profit from divorce and whose services come with many unwelcome strings attached.

TABLE OF CONTENTS INTRODUCTION I. THIRD-PARTY FUNDING OF DIVORCE LITIGATION A. Financing Basics B. The Process of Becoming a Client II. THE LAW SHOULD BAN THIRD-PARTY INVESTMENTS IN DIVORCE A. Investments Can Jeopardize Attorney-Client Relations 1. Conflicts of Interest. 2. Compromising Attorney-Client Privilege. B. Divorce-Financing Fees Are Unreasonable and Potentially Usurious C. High Rates Detract from Divorce Settlements III. COURTS CAN AND SHOULD SHIFT FEES. A. The Mechanics of Fee Shifting B. Courts Fill a Tremendous Need by Shifting Fees C. Equalizing Fees Guarantees a Fair Adjudication and Representation for Both Spouses D. Equalizing Fees Leaves the Nonmonied Spouse with the Entirety of the Ultimate Settlement and May Prevent the Use of Scorched-Earth Tactics CONCLUSION INTRODUCTION

Divorce traditionally involves two spouses, their attorneys, a judge, and perhaps children. But today, in some cases, the drama involves a new party: a divorce-financing firm. Since 2009, these firms have been investing (1) or loaning money at high rates (2) to spouses, mostly women, (3) to finance divorces. Traditional forms of funding (e.g., a standard bank loan) are often not an option for an individual whose spouse controlled the finances during the marriage and who often has no income, low credit, and little or no available collateral. (4) In addition to often having difficulty paying to litigate a divorce, women typically experience a severe decline in economic standing after a divorce. (5)

The media portrays third-party financing firms as saviors for those who cannot otherwise afford to pay for their divorce litigation. For example, reporters have dubbed one such firm and its leading attorney the "Robin Hood for divorcing women," (6) "the fairy godmother for Manhattan divorcees," (7) and the "divorce fixer." (8) The nonmonied spouse seeking financing for her divorce is typically a woman whose husband controlled the finances, perhaps gave her an allowance, and generally funded her lifestyle by making mortgage and credit card payments and meeting other financial obligations. (9) Divorces themselves are complex and expensive. In addition to attorneys' fees, spouses often pay for outside experts and investigators (10) to analyze a spouse's questionable behavior and value the monied spouse's business, real estate, stocks, and other assets, (11) resulting in a lengthy discovery process.

The media and scholars have not probed deeply into the ethics and economics of this growing practice to consider if more cost-effective and morally sound alternatives exist for potential clients of these firms. (12) Third-party divorce funding is distinct from traditional bank loans and credit cards for the following reasons: the financing firm is more involved in the outcome than a bank would be; there are moral implications of the firm explicitly profiting from divorce; and finally, divorce settlement is the only source of repayment. Unlike traditional loans where banks are repaid as long as their clients secure funding, divorce settlements are the only collateral for the third party financing firms, so these firms are more invested in the strategy of how money is spent and the goal of finalizing divorces. (13)

Third-party firms finance nonmonied spouses either through nonrecourse loans or through an investment-like funding. Either of these funding arrangements, regardless of the nominal label given or the specifics of the arrangement, resemble a contingency fee arrangement when repaid in the event of a divorce settlement. This is problematic because contingency fee arrangements in which "[a] fee [is] charged for a lawyer's services only if the lawsuit is successful or is favorably settled out of court" (14) have long been banned in divorce cases. (15) Some firms give nonrecourse (16) loans whose terms explicitly tie repayment to the finalization and settlement of the divorce. (17) Other firms provide funding in a more traditional investment form and are repaid a percentage of any settlement. (18) In either case, firms are repaid from the divorce settlement, so firms may discourage clients from reconciling or reaching a compromise that the firms view as financially unfavorable. (19) Firms often charge steep rates, particularly in comparison to shifting fees, the much more economically efficient service courts can provide. Although inability to pay is a serious obstacle for many, given courts' ability to award fees to a nonmonied spouse, (20) third-party divorce funding is not an appropriate or equitable option and should be banned.

Although regulation of this burgeoning industry may be tempting, it is not ideal. Providing oversight or transparency is unlikely to offset the economic inefficiency of adding a fifth party (in addition to the two spouses and their attorneys) to split the settlement and costs of litigation with. Regulation also cannot wash away the moral implications of a business model that condones capitalizing on the dissolution of individuals' marriages. Loans are already subject to usury regulations, (21) but the caps on interest rates have no effect on firms' heightened involvement in the litigation strategy and laser focus on finalizing a divorce for financial gain. (22) More stringent regulations may also drive these firms out of business without providing an alternative, leaving nonmonied spouses with no other option and unable to pay for their divorces. (23) For these reasons, court involvement through fee shifting provides a more comprehensive and equitable alternative.

This Note contends that third-party financing firms should be banned, and that courts should step in and order mandatory fee shifting to finance nonmonied spouses' divorce expenses. Part I provides background on this financing arrangement in the divorce context. Part II argues that third-party funding should be prohibited because it resembles contingency fee arrangements in divorces, banned because they may cause conflicts of interest, lead to waiver of the attorney-client privilege, (24) and result in disproportionate windfalls for attorneys because of the high rates they charge. Part III contends that the optimal way to deal with a spouse's inability to pay the astronomical costs of litigating a divorce is mandatory fee shifting by courts from the monied to the nonmonied spouse. The shifting of fees may be from the marital assets or the monied spouse's own finances. While the fees shifted may come out of the marital assets to be split by the spouses, at most the nonmonied spouse will bear 50 percent of the burden of her fees. In contrast, if a nonmonied spouse were financed by a third-party firm, she would be responsible for 100 percent of the fees arising from her settlement.

  1. THIRD-PARTY FUNDING OF DIVORCE LITIGATION

    1. Financing Basics

      Divorce financing has emerged as a niche service in the larger industry of third-party litigation funding, which has received significant attention from scholars, (25) advocacy groups, (26) and mass media. (27) But third-party financing has received little scrutiny in the divorce context, and not much is known about how the practice works. Unique treatment of divorce in the law is necessary because of the highly emotional and personal nature of divorce.

      The process works like this: firms such as California's Balance Point Divorce Funding (28) and New York's BBL Churchill (29) front the costs for legal fees, fraud and asset investigators, and sometimes even living expenses. (30) These firms describe such funding as a "financial lifeline" (31) to cover the sky-high costs of litigating dissolution of the marriage. (32) But in reality, these firms exclusively invest in divorces, in the form of a loan or investment, of clients with high-net-worth spouses. (33) While firms are not yet financing divorces on a mass scale, these investments will likely become more common in high-net-worth divorces because this industry is lucrative and divorce rates are high.

      These firms fall into two financing models: those that make investments (34) and those that provide loans at a fixed interest rate. (35) Some investments and loans are nonrecourse. (36) Irrespective of the label placed on the funding and the particularities of the financing arrangement, funding a divorce for the sole purpose of receiving a portion of the divorce settlement is problematic. (37) Both contingency fees and third-party financing are inappropriate in the divorce context because lawyers and firms in both scenarios have a financial interest in the divorce, may be biased in favor of reaching a settlement to ensure that they are paid, and may dissuade their clients from reconciling. (38)

    2. The Process of Becoming a Client

      A shroud of mystery surrounds the application process and how firms assess risks, choose clients, and decide what rates to charge. Some firms allow potential clients to come to them with or without an attorney. (39) The applicant then proposes a budget that the firm analyzes. (40) Firms use many criteria...

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