What You Need to Know About Lawsuit Loans
Many times a client can be devastated financially because of the loss of a husband or wife or other breadwinner. This can create an uncomfortable situation whereby the client asks the lawyer to loan him money based upon an anticipated future recovery in a lawsuit that the lawyer is handling.
In all but a very few situations it is unethical for an attorney to loan money to a client.
The reason for this is the obvious conflict that is created when a lawyer is owed money by a client because of a loan to the client, but at the same time has a fiduciary duty to represent the client. To avoid such conflicts, the ethical rules of attorneys have a strict prohibition against attorneys entering into financial relationships, i.e. loaning money to clients, for almost any reason.
As a result, there are a number of private lenders who have stepped into fill the void. These companies will lend money to clients based upon future recoveries in lawsuits.
Although the attorney has no direct involvement in either the lending process or the terms of the loan, the attorney may be asked an opinion regarding the chances of recovery in the case and will also be asked to agree to put the lender in a position of security in the event that there is a recovery in the lawsuit.
The market for these loans has expanded tremendously in the past couple of years. Where there used to be one or two companies there are now literally dozens of companies that will loan monies to clients based upon their lawsuits. Usually the terms of the loans are very expensive, ranging from 50% – 100% interest per year. However, the attractiveness of these loans is that are they are usually not personally guaranteed. This means that if the lawsuit turns out not to recover any monies, the clients are usually not obligated to pay the money back. While this is not always the case, this makes these types of loans attractive to clients who are in desperate financial situations.
These kinds of loans should be distinguished from litigation lending firms. In this case, an independent company will fund all of the legal expenses of the case (usually cases for large amounts of money) in exchange for a percentage of the recovery at the end of the lawsuit. These loans are usually directly with the attorney handling the case and tend to be extremely high interest, but they also tend to not be full-recourse, which means the loans don’t have to be entirely paid back if there is no recovery.
While these types of litigation lending firms are less well known, they are becoming more important in high profile cases, trademark and copyright cases in particular, where there are large legal fees required up front, but a potentially large recovery the end.
In my practice, I always discourage these loans. They create bad feelings at the end of the litigation because so much of the money that is recovered on the lawsuit is used to pay the interest on the loans. Clients should be very careful about entering into these types of agreements, but nonetheless the service is available in Illinois and is used by a fairly large number of litigants.