A modern-day offshoot of the contingency fee arrangement is “alternative litigation financing.” Also known as third-party litigation financing, A.L.F. is the practice of making cash advances, usually to a litigant, to be repaid from the proceeds from the litigation. There is plenty of room for debate the pros and cons of this developing trend. Supporters may argue that this practice allows an injured plaintiff to take an “advance” on an anticipated recovery to address financial hardship before reaching a settlement or verdict. This is particularly useful for injured plaintiffs who cannot return to work. But attorneys associated with litigation financing may be susceptible to claims when something goes awry.
The U.S. District Court for the Northern District of Illinois recently considered this inquiry in Client Funding Solutions Corp v. Crim, Case No. 10-cv-482. In this case, a former client sued her attorney for referring her to a loan servicing company after she asked her attorney for a personal loan. The plaintiff sustained injuries arising from a commuter train accident. During the litigation, the plaintiff underwent various procedures and was unable to afford her medical and personal expenses. Instead of providing a personal loan, the attorney referred her to a litigation finance company that issued her a $108,500 loan in exchange for a 45-60% interest rate to be paid following her recovery. Although the plaintiff did recover in the litigation, she was forced to pay the litigation finance company about four times the amount of the original loan pursuant to her contract.
In turn, the plaintiff sued her attorney and alleged breach of fiduciary duty for referring her to the finance company. The court ruled in favor of the attorney holding that there was no evidence that the attorney acted in bad faith or contrary to the plaintiff’s interests when he made the referral. The court further held that there was no evidence that the rates were vastly different from those charged by lenders in similar high risk markets. Nor, was there any evidence that counsel had a financial relationship with the loan company. Thus, the court found no viable claim.
Alternative litigation financing has its risks. Any professional that utilizes or refers clients to alternative financing sources must exercise caution. Certainly, professionals should ensure in writing that the client understands the terms of any financing agreement. For a set of useful tips in making all referrals, see our prior post on the topic, here.