The Ethical Rules Governing Florida Lawyers Who Help Their Clients Find Litigation Financing
“Timing is everything,” as the saying goes. When it comes to obtaining litigation financing, timing may not be everything, but it counts for a lot. A case from Michigan illustrates that a party’s access to litigation financing can depend upon when it seeks the loan.
Because borrowing involves interest costs, it makes financial sense to delay any kind of borrowing until it is absolutely necessary. Of course, this principle applies to parties in litigation who are hard-pressed to cover their litigation costs. If they must borrow to keep their cases going, they should wait until the latest reasonable time.
But waiting can be enough to turn what would be a legitimate litigation financing agreement into a contract that violates consumer financing laws, particularly the laws against usury. That’s the lesson of Lawsuit Financial, LLC v. Curry, a Michigan case that invalidated a litigation financing agreement. In that case, the plaintiff had a potentially valuable personal injury claim and retained a prominent attorney on a contingent fee basis. She received a verdict for $27 million, but the defendants challenged the jury’s verdict. While this challenge was pending, she entered an agreement with a litigation financing company, receiving $75,000 and pledging a portion of her recovery. A few months later, she received an additional advance of $100,000 after amending her agreement with the lender. Finally, she entered a third amended financing agreement, after which she received an additional $2,500. According to the agreements, she was obliged to pay the lender $875,000 or 10% of her recovery, whichever was greater. Eventually, she settled the case for $4.7 million. But the plaintiff, supported by her trial counsel, refused to pay the lender. Another suit followed in which the lender claimed that the plaintiff had, among other things, breached the loan agreement and/or converted the lender’s rightful proceeds of the lawsuit.
The Michigan Court of Appeals eventually ruled that the lender was not entitled to recover for breach of the loan agreement. The main question on appeal was whether the agreement created a loan in violation of Michigan’s usury laws. The lender argued that it did not because the agreement did not create an absolute right to recovery. In other words, the agreement did not create a “loan” within the legal meaning of the term because, if the plaintiff did not recover anything from the case, she would not have to pay any money back. Like the trial court, the Court of Appeals rejected the lender’s position. It held that the loan agreement was unenforceable under Michigan’s usury laws because the timing of the loan agreement was such because, as a practical matter, the plaintiff did have an obligation to repay the loan. The Court of Appeals reasoned that, by completing the loan agreement after the verdict was in, the parties both knew that the plaintiff was going to actually have an obligation to repay, and the difference between the amount loaned and the amount repaid exceeded the limits of lawful interest.
Obviously, this case serves as a lesson to lenders, who are unlikely to make loans once the verdict is in – especially not in Michigan. But there is a lesson here for borrowers as well. The legality of litigation financing usually depends upon the fact that the loan is “non-recourse.” That is, that the lender cannot collect in any circumstance and is only entitled to repayment if the borrower wins the case. If the loan application is made too close to the end of the case, the lender may decline, regardless of how promising the case is, because it does not want to risk a result like the one in Curry.
Works Cited:
Lawsuit Fin., L.L.C. v. Curry, 261 Mich. App. 579, 683 N.W.2d 233 (2004).
