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The New Trend of Lenders Bankrolling Cases: What Does It Mean For You?

November 26, 2010

 Taking a civil action in federal court averages a cost of $15,000, the Federal Judicial Center reported last year.  Cases involving technical and scientific evidence can cost $100,000 or more.  Faced with corporate defendants and insurance companies with deep pockets, lawyers are turning to lenders to pay for the cost of the trial, the banks, hedge funds and private investors charging annual rates of 18% and more.  This industry, borne out of the need to level the playing field between well-financed corporate defendants and trial lawyers is now an estimated billion dollar industry. 

According to the New York Times, the new lenders work “sits somewhere between banking and gambling.”  Experienced lawyers evaluate the cases, consulting with data bases showing the results of similar law suits.  Then, they place their bets, the law firms generally required to pay back the loans even if they  lose.  Firms that do not live up to the projections –and cases can  have surprising information come to light even at the eve of trial–can struggle to make payments, and firms with bad bets struggle to make payments and have even filed for bankruptcy protection. 

What impact will this have on your case?  The New York Times and the Center for Public Integrity found that the new industry does even the playing field, allowing more people to have their day in court with the cases decided by merit rather than by money. But, the practice also creates new risks for the client.  Lawyers, who do not have the resources to front these cases, are taking large loans at interest rates of 18% or more per year.  In most states, the lawyers do not have to tell their clients of their financial burden even though they may be under pressure to settle the case as the interest mounts higher and higher.   In most states, lawyers can and will  charge the clients for the interest payments.

So, what should a potential plaintiff do?  Be wary before signing with a lawyer who cannot afford to take the case all the way to trial.  Be certain that the firm has the resources to pursue the case.   There are many small and solo law firms whose lawyers do  not regularly go to court and hence, may not have the experience to accurately ascertain  the odds on your case. 

When you are considering a law firm, ask if any of the full-time lawyers employed at the firm go to court regularly, and if not, how litigation is managed. (Solo or small  firms may farm litigation cases to trial lawyers who work full-time elsewhere in exchange for one-third to one-half of the fee. Can a law firm, without  hands-on experience in litigation, know when and how to gamble on a law suit? )If  litigation is not a regular part of the law firm’s work,  ask yourself if you want to place a bet on an inexperienced litigation law firm with a loan that you will be obliged to pay back–with interest– out of any award you receive.    

For more details, please read “Investor Bankroll Law Suits to Profit from Payouts,” www.nytimes.com/2010/11/15/business/15lawsuit.html.

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