By Earl Boyle, Esq.
Many plaintiffs’ lawyers find themselves litigating against giant corporate defendants and insurance companies with substantial war chests. Even in the most meritorious of cases, litigators can be confronted with a need to settle early or refer the case to a larger law firm, resulting in the receipt of only a fraction of the fee.
“There’s an enormous need for contingent fee litigator financing,” says Counsel Financial president Paul Cody. Since 2001, Counsel Financial has provided litigation law firms a financing alternative to personal lines of credit and recycled after-tax profits, offering loans and credit lines solely to law firms whose revenues are derived from contingency fee practice.
Litigation law firm financing companies like Counsel Financial provide loans that range from $50,000 to $5 million. Unlike banks, which often require attorney-borrowers to pledge personal assets as collateral, litigation law firm financing companies assess the case portfolio of the law firm and then lend money against the total value of the contingent fees the law firm expected to garner. As a result, these credit lines are substantially larger than banks can provide.
The attorney-borrowers remain in control of all legal decisions. They don’t provide any information that would violate client confidentiality.
Borrowing attorneys have up to four years to repay the loans, with flexible repayment terms. Those who wish to repay the entire amount sooner can do so without incurring pre-payment penalties. Fees are not assessed for any unused portion of credit lines granted so borrowers have a great deal of flexibility.
Law firms that borrow money can use the loan proceeds for all law firm related expenses—from advertising and expert witness fees to case costs, trial expenses, payroll and general overhead.
Many plaintiffs’ lawyers who go up against deep-pocketed defendants find themselves outspent and outpapered, with endless discovery demands and the like. In some instances, plaintiffs’ lawyers would otherwise not be able to continue with the case, without a loan.
In some instances, lawyers who have a relationship with a litigation funding company seek additional loans to finance entirely new practice areas.
Even lawyers who would otherwise fund litigation out of their own pockets can come out ahead by borrowing from a specialized lender. That’s because borrowing money can offer lawyers financial advantages over funding cases themselves.
Many attorney retainer agreements provide that disbursements are billable to clients. As such, treated as loans—not expenses—which means they aren’t deductible at the time they’re made. Meanwhile, while law firms wait for the case to be resolved and for that money to be paid, they’re losing out on the chance to invest that money elsewhere.
But when law firms borrow money, they can deduct the interest payments, which effectively slashes the cost of borrowing in half. What’s more, many will be able to pass along much, if not all, of the remaining interest fees to the clients.
For instance, if a law firm takes out a loan with an 18% interest rate, the firm can deduct the interest payments, making the true cost of borrowing around 9% (the exact amount will vary based on an array of tax-related factors). The firm is then allowed to pass along to clients a reasonable amount of interest on loans taken out to further their case.
The litigation funding field is still so new that companies face the challenge of educating lawyers who are accustomed to financing cases themselves. “In my opinion, most attorneys spend their professional legal careers building the net worth of their law firms by taking the profits from their cases and plowing them back into the firms,” says Hon. Joseph S. Mattina (Ret.), Special Counsel. Moreover, corporate CEOs don’t leverage personal assets to grow their businesses, why should you? Some lawyers view this course of action as a “badge of honor,” without calculating how much money it costs them, he says. “The opportunity cost of not using those assets to build personal net worth can be tremendous.”