contingent case financing: a brief history of the contingent fee agreement and ethical issues to...
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Contingent Case Financing: A Brief History
of the Contingent Fee Agreement and Ethical
Issues to Consider When Financing a Client’s Case
Hugh J. Plummer, Jr.
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History of Contingent Fee
Greek Origination and Roman Development
English RejectionAmerican Acceptance
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6th Century B.C. Greeks & Romans Medieval England Colonial America
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6th Century B.C. Greeks & Romans Medieval England Colonial America
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6th Century B.C. Greeks & Romans Medieval England Colonial America
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Options When Financing
War Chest Approach – Self Financing
Traditional Banks and Lending – Collateral Based Financing
Alternative Litigation Finance Companies Company A – Legal Support Line of Credit
Company B – Docket Based Collateral Approach
Company C – Accounts Receivable Based Approach
Marketplace Approach LitCap – Case Cost and Expense Approach
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Ethical Considerations When Using ALF Companies
• Passing Interest
• Tex. Comm. on Prof’l Ethics, Op. 465 (1990).
• Tex. Comm. on Prof’l Ethics, Op. 558 (2005).
• Tex. Comm. on Prof’l Ethics, Op. 576 (2006).
• Fees
• Texas Disciplinary Rules of Professional Conduct 1.04
• Safekeeping Property
• Texas Disciplinary Rules of Professional Conduct 1.14
• Professional Independence of a Lawyer
• Texas Disciplinary Rules of Professional Conduct 5.04 (c)
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Passing Interest
• Tex. Comm. on Prof’l Ethics, Op. 465 (1990).
• Q: “May an attorney borrow money from a lending institution for case expenses … and ethically charge, or pass on, to the client, as a part of case expenses, the out-of-pocket interest or finance charges of a lending institution?”
• A: “ … [A]n attorney may properly borrow money from a lending institution for case expenses … and charge, or pass on, to the client the actual out-of-pocket interest or finance charges of the lending institutions.”
• How To Ethically Pass Interest:
• 1. Attorney must obtain client consent
• 2. Rates must be fair, reasonable, customary, and at a lawful rate
• 3. Financing and interest rates must be directly related to the client’s case, and must not be related to firm overhead
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Fees
• Texas Disciplinary Rules of Professional Conduct 1.04
• (d) “A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined… The agreement shall state the litigation and other expenses to be deducted from the recovery…”
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Main Ethical Considerations
Undue Influence or Any Interference With Attorney’s Professional Judgment Regarding a Client’s Case
Ensuring Confidentiality of Client Information
Protecting the Best Interest of the Client
Ethically and Correctly Passing Interest Fees and Costs to Client
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War Chest ApproachSelf Financing
Firm Capital Client Cases
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War Chest ApproachSelf Financing
Cons
Ties up firm capital
Limits amount of cases an attorney can take
Money not earning interest
Ethical Implications
Increased likelihood of suboptimal investment
Inherent, albeit acceptable, conflict of interest
Conflict of interest between attorneys funding limit and client needs
Pros
No interest rates
No dealing with financial institutions
No repayment obligations
No sharing of recovery
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Traditional BanksCollateral Based Financing
%
$
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Traditional BanksCollateral Based Financing
Cons
Loaned only up to value of collateral
Interest rates – 6-18%
Recourse debt
Interest rate determined by credit
Monthly interest payments due
Pros
Funds used for any firm related purpose
Ethical Implications Same implication as War Chest Approach, plus paying interest on
your money Material limitation Passing interest to clients generally not allowed Attorney still bears risk since repayment is his burden –
Misaligning attorney interest with client
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Alternative Litigation Funding
Investor Capital
Attorney or Law Firm
Case-related expenses
Operating Cost of
Business
Litigation Resolution
Returns
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ALF Companies
• Counsel Financial
• Advocate Capital
• Burford
• Amicus Capital
• StoneStreet Capital
• Pravati
• Fulbrook Capital
• Oasis
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ALF Company A Legal Support Line of Credit
Cons
Extensive due diligence
Borrowing amount determined based on analysis of all assets,
including contingent fee cases
Collateral: contingent fee cases plus personal
or firm assets
Solely commercial lending
Interest rate “usually mid to high teens”
Undue influence
Ethical Implications Waiver of work-product during extensive due diligence (not settled in many
jurisdictions) Cannot get client consent- since funds used for various purposes and cases Possible interference with attorney professional judgment
Pros
Case tracking assistance
No maximum amount of funding attorney can
request
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ALF Company B Docket Based Collateral Approach
Pros
Credit line not limited to value of personal
assets– based on total value of contingent fee
cases
Cons
Maximum credit line = 5 million
Cannot pass interest payment to client
Monthly interest rate payment
Secured by portfolio of contingent fee cases
Ethical Implications
Conflict of Interest if attorney is personally liable Attorney still bears total cost risk- amount must always be paid back
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ALF Company C Accounts Receivable Based Approach
Pros
Expense tracking system
Simple interest
Cons
Maximum line of credit = $3.2 million
Monthly interest payments
Funds only for case expenses
If case abandoned or lost, required to repay principal amount and
any outstanding interest
Secured by all law firm accounts receivable
Ethical Implications Conflict of Interest: Attorney still bears all risk if case lost or abandoned –
may pressure attorney to prematurely settle Client consent required to pass interest
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The Market Place Approach
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Marketplace Approach
• Attorney Lists Case(s)• Investor Views Cases Listed• Attorney and Investor Negotiate Interest Rate
Marketplace
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Pros
Unsecured Lending
Unlimited Access to Capital
Ability to Pass Interest to Client
Simple Interest Rates
You Lose, You Don’t Pay
Funds Deposited Directly into IOLTA
Funding Based on Attorney’s Performance,
Not Credit
Due Diligence Process Only Requires
Information That is a Matter of Public Record
Negotiate Interest Rates
Cons
Funds Only Used for Case-Related Expenses