Financing Affirmative Litigation - Installment 1
Aug 25, 2015
Financing Affirmative Litigation
I daily speak with attorneys, and sometimes clients, about financing affirmative litigation where
some or all of the attorneys’ fees are contingent. I’m impressed by the various methods by which
money can be loaned or advanced for a single case, or against expected fees from an inventory of
cases. What concerns me is the lack of overall awareness on the part of attorneys of the various
financing options and the associated details to those options, especially as several options offer a
tremendous amount of flexibility pertaining to the number and type of cases, and the pricing and
Below is a discussion regarding several financing options currently available in the marketplace.
Next week’s post will deliver an overview of the underwriting considerations for the various
funding types. Future posts will consider comparisons and practical and ethical considerations.
Firms, Clients, and Case Types
Types of Practices: The financing of affirmative litigation is available for a broad range of civil
litigation well beyond personal injury matters and is used by large national firms, boutique
practices, solo practitioners, in-house counsel, and everyone in between.
Types of Clients: Funding against single cases can also be had for range of individual and small mid-
and large-sized business clients in commercial settings.
Types of Cases: Financing can be on a case-by-case basis or against a list of cases in a firm’s
inventory. The types of cases can include IP enforcement/infringement, breach of contract,
shareholder/consumer fraud, and other business torts. Funding is available for class actions and
mass torts, along with single-event cases.
Important Note About Recourse vs. Non-Recourse
When the funding is recourse, the obligation to repay is unconditional. In non-recourse
situations the obligation to repay is contingent and does not arise unless and until an actual
recovery in the underlying case(s) is realized. The distinction between the two cannot be
Lines of Credit
The Skinny: Lower Rates, Longer Approval Process, Unconditional Obligation to Repay and
Possibly Unclear Security Interests, Available to Attorneys and Firms Only
One of the most prevalent forms of financing is a line of credit. This product is available through
some banks as well as a number of non-bank funding sources. In short, money is loaned to a
firm, and that loan is secured against the expected fees from the firm’s current inventory of
The amount of the loan represents a fraction of the anticipated fees. The loan is repaid as fees are
received in accordance with the terms of the loan agreement.
The lines of credit are considered recourse loans because there is an unconditional obligation to
repay the loan, irrespective of the outcome of the cases used as collateral. The underwriting
processes for lines of credit may be lengthy, but in some instances the rates for lines of credit
may be less expensive than some other forms of financing because the attorney assumes the risk
of loss for the cases used as collateral. Unlike the other options described below, the
underwriting for lines of credit will likely involve a review and consideration of a firm’s and its
attorneys’ credit scores.
The amounts available for lines of credit can be as little as something in the tens of thousands of
dollars to several million dollars.
When a line of credit is extended, the loan is secured when a UCC statement is filed against the
cases in a firm’s inventory. Here’s the rub, however – which cases are subject to the secured
interest? Are all the cases, some of the cases, only cases in inventory when the loan was given or
the UCC statement filed, future cases, or some sort of combination of all of the above? The loan
agreement may specify which cases are supposed to be subject to the UCC filing, but do the
UCC filings accurately reflect those cases? Complications can arise when the firm looks for
other financing options that may also consider security against one or more of a firm’s existing
or anticipated cases.
The Skinny: Low Rates with Recourse and Non-Recourse Options, Advance Amounts May Be
Limited, Available to Attorneys, Firms, and Clients
Funding for firms is available against the expected proceeds from settled cases, and is also
available for clients in personal injury and other civil litigation. The interest rates/fees may tend
to be lower for settled case advances than for other forms of financing because the risk to the funder is lower. Additionally, the underwriting process for settled cases may be considerably
shorter and easier, and a wider range of funding amounts is available.
Both recourse and non-recourse funding options are usually available in most jurisdictions.
When the advance is non-recourse, the obligation to repay the funding advance is contingent and
does not arise until an actual recovery is received. For non-recourse advances, the amount of the
advance may be 50% or less than the full amount of the expected fees or recovery due to the
contingent repayment obligation.
Advances for anticipated attorney’s fees are secured against the settled case(s), and a UCC
statement may be filed. Because the number of settled cases in a given inventory are small, the
UCC statement may clearly specify the cases subject to the security interest and may not create
the confusion that may be associated with lines of credit. Advances to clients may be secured by
a notice of lien sent to the attorney directing him to satisfy the lien from the recovery proceeds he
Single Cases in Litigation
The Skinny: Non-Recourse, Higher Rates, Reduced or Shared Risk, Increased Likelihood of
Full Prosecution of Case, Empowering Clients with Limited Budgets, Available to Attorneys,
Firms, and Clients
Non-recourse funding advances are available to cover costs such as experts’ fees and for
attorneys’ hourly fees (assuming that at least 50% of the attorneys' fees are contingent under a
blended fee agreement) for single cases. The non-recourse aspect allows clients and their
attorneys to bring meritorious actions despite financial limitations that would otherwise prevent
the pursuit of those claims. Cases that are sufficiently funded have a greater likelihood for
success (resources can be used to obtain more highly qualified experts, for example) and for
higher recoveries (cases can fully mature to permit higher settlements or can go to trial with a
greater expectation of a positive verdict). If, however, the case is unsuccessful, the neither the
client nor the attorney is obligated to make any repayment because the funder assumed the risk
Attorneys and their firms do not need to “front” the costs for litigation, freeing that money for
other investment or use. Where some or all the attorneys’ fees are contingent, the greater
likelihood of success and higher recoveries may yield higher revenues for the attorneys and their
firms. A number of other tax and interest related benefits can also be gleaned through the use of
non-recourse litigation funding.
Clearly non-recourse funding for single cases is highly risky for the funders, so the eventual fees
and rates will be substantially higher when compared to other options. As a general rule, funders
are looking for a return of 2.2x to 3x the amount of the advance to be repaid within 2 years. Fees
that are included in the advance may include application, underwriting, and facilitation fees that
equal 10% or greater of the advance itself. Of course, repayment terms can be stepped to reflect
early payment or where litigation is prolonged. Funders usually look for a percentage of the
overall recovery as part of, or in addition to, the repayment. While 5%-15% has been the norm,
some more aggressive funders have started looking for much higher percentages of the recovery.
The advances available have traditionally started on low end at about $500,000 and can easily
reach into the tens of millions of dollars. Reputable litigation funders will typically only consider
cases with large amounts in controversy and where substantial advances are being requested.
These funders will engage in meaningful due diligence in the underwriting process. A growing
set of investment groups offers smaller amounts, but the underwriting may be less stringent and
the availability of further funding may be hampered.
Multiple Cases in Litigation
The Skinny: Non-Recourse, Lower and Varying Rates, Reduced Risk, Available to Attorneys
Non-recourse funding is also available against a list or matrix of cases in inventory and is very
similar to a line of credit in terms of ratios and time to underwrite. Unlike a line of credit the
repayment obligation is contingent upon obtaining recoveries for the cases used for collateral.
This major difference drastically mitigates the risk of loss for law firms. In addition, the funder
may choose to not consider the credit scores of the firm and its attorneys, and only look to the
merits of the cases involved.
Another difference may lie in the rates and fees incurred. Depending upon the mix of cases and
the funder, a straight percentage rates may be charged (20%-35% per year is not unusual), or low
percentage rates may be combined with a percentage of the contingent attorneys’ fees received as
they are realized. Because the funder is assuming a greater risk by extending the money on a
non-recourse basis, the funder may look for a greater return when a settlement or judgment is
The amounts of the advances can play into the rates and fees. Typically, advances over $1M can
warrant lower rates and fees than smaller advances. The transaction costs for the advances,
despite the amount, do not vary much, and smaller advances secured by fewer cases may pose a
higher risk to the funder.