Litigation Finance as the Factoring of Legal Receivables
As we’ve noted in other editions of this blog, it is commonplace for critics to describe litigation funding as a novel practice that threatens to undermine well-established practices and traditions in the legal system. There are many reasons why this characterization is not true, and this post identifies another. Litigation finance is very much like a business practice that has been around for centuries – factoring.
Factoring is a transaction in which an investor – the factor – purchases the accounts receivable owed to a business for less than their face value. The business gets cash immediately and the investor acquires the business’ right to collect the accounts, which should be worth more than the purchase price. In many situations, factoring can be non-recourse, which means that the factor bears the entire risk of collecting on the receivables.
Businesses of all kinds are at least familiar with factoring, and have been using it more often in light of the recent economic climate. You may have heard radio advertisements by investment companies that offer to purchase the accounts receivable of small businesses, improving the business’ cash flow and reducing their need for credit lines to fund operating expenses. Factoring and financing has become more popular as banks lend less to small businesses.
Litigation financing is a form of factoring. The litigant with a valuable claim is in much the same position as a business with accounts receivable: he or she has an expectation of a future income flow. The third-party litigation financier is in the same position as the factor who makes a non-recourse purchase of the right to receive future income.
When litigation finance is viewed as a form of factoring, it seems far less threatening than the critics of litigation finance might suggest. Those critics contend that litigation financing will encourage plaintiffs to pursue riskier cases with dubious merit, leading to a flood of frivolous cases that overwhelm the courts and unfairly inflate litigation costs across the economy. But factoring has not promoted risk or unsustainable practices in the non-legal fields where it has been used. Businesses are not significantly more likely to sell to unreliable customers just because they can sell their accounts receivable to a factor. In the final analysis, litigation financing, like factoring, is another instrument for assuring the efficient flow of capital.
Topics: litigation finance, legal reform, third-party funding, litigation costs, lawsuit loans, non-recourse financing, factoring, alternative litigation funding
Works Cited:
Joseph Genovesi, Factoring Legal Receivables — How This Growing Area of Specialty Lending Helps Attorneys & Their Clients, ABF Journal (April 2014) available at http://www.abfjournal.com/articles/factoring-legal-receivables-how-this-growing-area-of-specialty-lending-helps-attorneys-their-clients/
