Financing Affirmative Litigation - Installment 2
 

Sep 3, 2015
 

Last week's installment provided an introduction to financing affirmative litigation. This week's
installment discusses the underwriting processes for 4 common types of financing:

 

(1) lines of credit,

(2) recourse and non-recourse advances against settled cases,

(3) non-recourse advances against single cases, and

(4) non-recourse advances against multiple cases.

 

The next installment in this series will cover some practical and ethical issues.
 

Underwriting
 

What do funders consider when they are determining whether to provide a loan or advance?
Here’s the typical lawyerly answer: It depends. It depends on the type of financing option being
considered (line of credit, non-recourse advance, settled/pending litigation, single vs. multiple
cases). The amount being considered may also be a factor.

 

In a nutshell, funders generally consider cases by subject matter type, legal and factual merits, forum, age/time to recovery, quality legal representation, plaintiff(s), and solvent defendants.


Not every funder will provide funding for all subject matters. For example, many funders may
only consider personal injury cases, and those cases may exclude medical malpractice actions.
Other entities may only fund class action and commercial litigation cases. Others may fund
subsets of a variety of case types such as only handling patent litigation. You need to match your
case types with facilities that fund those types of cases.

 

Lines of Credit
Because a line of credit is a more traditional recourse product and the lenders tend to be more
traditional in nature, the underwriting requirements may be much more in line with what banks
use. Many providers of lines of credit may run a credit check that entails a review of credit
history and credit scoring for both the law firm and its principals. Assuming acceptable
creditworthiness, the underwriting focus shifts to a consideration of the individual cases to be
used as collateral and a firm’s ability to properly prosecute those cases. The underwriting process
may include the review of pleadings, motions, orders, and other information.


From the time the initial application is filed to the time the loan is funded, the entire process
could easily take several weeks. It would not be uncommon to have the process take about 8
weeks, especially where credit checks are involved and the case inventory is substantial.


Settled Cases
Underwriting for advances or loans against settled cases is perhaps the simplest for the various
funding options. For non-recourse advances, the funders need a copy of the executed settlement
agreement and a reasonable estimate of the time until recovery. Advances will likely be
approved if there are no encumbrances (no tax or other liens, no other prior advances), and if the
attorney/law firm has a clean repayment history for its other advances. The same factors are used
to underwrite recourse loans against settled cases, although credit applications and credit checks
may also be required.


Whereas total fundings for other options may represent only a small portion of the overall value
of the cases or their expected fees (about 10%), the fundings for settled cases can represent about
50% or more of the net settlement or fees. Applications for five- and six-figure non-recourse
advances for settled personal injury cases can be approved in hours where an attorney or firm has
a strong repayment history, but a longer timeline of a week or longer can be reasonably expected
for other case types or where no repayment history exists.


Non-Recourse Advances for Single Cases
The underwriting process and considerations for non-recourse advances for single cases require
close scrutiny of:
• The attorneys and law firms engaged in the litigation – do the plaintiff’s attorneys have the
experience, resources, and ability to properly prosecute the case against the defendant’s counsel?
• Number of parties involved – 1 v 1, multiple plaintiffs and defendants, class action or mass tort?
• Nature/purpose of the litigation – is this a meritorious action to recover damages, or is the suit
being used as leverage for other purposes?
• Solvent defendant with assets sufficient to satisfy a recovery
• Fee agreement – is the majority of the attorney’s fees contingent?
• Visibility of case request in marketplace – how many other funders have seen this case; is it
being shopped?
• Realistic trial budget projections
• The legal merits – is the case founded upon well-established points of law upon which an
outcome can be reasonably be expected, or is there another strong basis of liability? Can any
potential defenses pose legitimate threats to a recovery? What is the likelihood of a meritorious
appeal by the defendant?
• The factual merits – can the elements be proven with credible evidence? (This is particularly
true when the witnesses for the plaintiff are questionable or have problematic character flaws).
Are the experts sufficiently qualified not only to testify, but to overcome the defense experts?
• Stage of litigation/age of case/time to trial
• The true amount in controversy – what are accurate ranges for pre-trial settlement, judgment,
and post-trial settlement?
• Time and obstacles to recovery

 

Non-recourse funding of a single case is perhaps the riskiest of the options for facilities to
underwrite. The “all or nothing” aspect of funding one case requires much greater diligence than
other options where the risk is spread over a number of cases. Further, creditworthiness is
immaterial when assessing a request to fund a single case. Because the risk is greater, a case will
likely pass through several levels of review over 4 to 12 weeks before funding is advanced.

 

Non-Recourse Funding against Multiple Cases
For non-recourse funding against multiple cases, the underwriting falls between what is used for
lines of credit and single case funding. Different from lines of credit, traditional creditworthiness
is not considered, but liens, bankruptcies, or other adverse claims may be considered. The risk to
the funder is higher as the advances are non-recourse, so the cases to be used as collateral will be
examined with more diligence than used for lines of credit, but not as aggressively as the reviews
of single cases. For example, the underwriter will likely require more than an investigation of the
pleadings, motions, and orders. A deeper look into the facts, evidence, and law should be
expected, along with more than just a perfunctory review of the other criteria used to evaluate
single cases.


From start to finish, the entire process may take 4 to 12 weeks, depending on the number and
complexity of the cases offered as collateral.
Now you know a little bit about the factors used to underwrite financing options for affirmative
litigation. Check back for the next installment that will deal with practical and ethical issues
involved with litigation financing.