• Legal Lending
  • February 24, 2011 | Author: Kyleen Hudson
  • Law Firm: McCumber, Daniels, Buntz, Hartig & Puig, P.A. - Tampa Office
  • We don’t get paid until you get paid! Sound familiar? Variations of that statement are plastered all over billboards, phonebooks, commercials and magazines in our more and more litigious world. The underlying premise is that Plaintiff’s attorneys will cover the costs and expenses of bringing a lawsuit so that allegedly wronged individuals may seek restitution regardless of their ability to pay. 


    What happens if a Plaintiff’s attorney also cannot cover the costs and expenses associated with bringing a law suit? One option is to borrow the money from private companies, a practice referred to as legal lending. 


    Legal lending may encourage barratry, as well as create situations where power shifts may arise.  According to 4-1.2 of the Florida Rules of Professional Conduct, “a lawyer shall abide by a client's decisions concerning the objectives of representation-and shall consult with the client as to the means by which they are to be pursued. A lawyer shall abide by a client's decision whether to make or accept an offer of settlement of a matter.” If a client wishes to settle, it is the attorney’s obligation to settle the claim. If a client wishes to litigate despite likelihood of success or costs involved out of principle, it is the attorney’s obligation to continue to litigate. Although, attorneys are also charged with advising their client(s) regarding the decisions they must make, this role should not be influenced by the attorney’s personal preferences or potential financial gain. It is also improper for a private lender to retain the ability to make decisions in lawsuits based on the funding provided. If any of these factors are considered, the focus law suit becomes a business decision by the investor and the borrowing attorney leaving the client with little or no say which is why it is improper.


    Funding may be appropriate in situations where the investor has no involvement in the litigation and is merely the source of the funds. To some extent, this would not be much different than a traditional contingency fee arrangement. However, even in these situations the borrowing attorney may be influenced by the need to repay the debt which is not discharged if a suit is ultimately unsuccessful. Thereby, creating a situation where the attorney may advise the client to continue litigating a questionable claim rather than drop the suit or settle for less than is owed. The borrowing attorney may also take into consideration that private sources of legal financing are paid back with interest sometimes exceeding 15% which is the client’s responsibility. With high costs of litigation, added interest for private loans may lead to the Plaintiff owing more than they receive from a law suit.    


    Attorneys also need to be aware of potential waiver of attorney-client privileged information when divulging case information to potential investors. Legal lending is a business and private investors are not going to loan money without evaluating the claim. Providing potential investors with case background, valuation and assessments may constitute waiver of the attorney-client privilege and jeopardize confidentiality if the client consents to providing it to the investors. If there is waiver, the information may not be objected to and must be disclosed to the opposing party, if requested in discovery.  The mere fact that a suit is being funded by a private lender will likely prompt new discovery inquiries, aside from the information disclosed to these lenders, as well.


    In summary, legal lending creates potential for several ethical violations. This along with the risk to borrowing attorneys due to the non-dischargeable nature of legal loans may prompt the borrowers to be more selective in the suits they file that depend on financial support from a private institution.  On the other hand, borrowers may view funding available through legal loans as an opportunity to take more risks and spend more money litigating, rather than settling or not filing suit, in hopes of a big return.

    For more information on this topic, please contact the author, Kyleen Hudson, at [email protected].