This practice used to be illegal in most states and viewed unfavorably by the American Bar Association … no longer. Not only is this practice legal … your lawyer doesn’t have to tell you if he borrows the money from a hedge fund leaving you on the hook potentially. Imagine not have much money but you’ve been wronged by a large corporation with deep pockets … you go to a lawyer and they take your case to fight the injustice. And at the end of it all – you get paid after the hedge fund gets paid back with significant interest … maybe 3% of the total settlement or maybe they’ll send you a bill. Yes – that’s actually happening.
When you have a hedge fund, large bank or other wealthy person financing a lawsuit … legally – who’s interests are the attorney compelled to look out for? Do you look out for the plaintiff or the one financing the lawsuit only looking for their return on investment? Only two years ago – this industry exceeded $1 billion a year.
The NY Times puts together a great timeline of the history of “lawsuit lending” HERE. Massachusetts was the first state to make this practice legal again in 1997 … prior to that – it had been outlawed for centuries.
The Atlantic asks why this is legal at all HERE:
Let’s start with the litigants. TPLF supporters allege that the practice is risk-free for plaintiffs, since, if they lose, they typically don’t have to repay the investor. But more than 95 percent of U.S. civil cases end in settlements rather than going to trial. And a closer look at one recent case demonstrates major dangers for plaintiffs if they accept a settlement that’s less than that demanded by the investor.
In this case, a Texas-based security company, DeepNines, obtained an $8 million loan from a TPLF firm to fund patent litigation against a competitor. In the end, DeepNines received a $25 million settlement. However, because of the terms of the TPLF contract, the investor received $10.1 million of the settlement, while DeepNines, after paying attorneys’ fees, netted less than $800,000 — only about 3 percent of the total settlement amount.
To add insult to injury, the investor then turned around and sued DeepNines for settling for an amount below what the investor’s financial models suggested they could receive. The case was eventually resolved through a confidential settlement.
Then they talk about this egregious example:
For example, a leading TPLF firm invested $4 million in a high-profile, controversial lawsuit brought by Ecuadoran plaintiffs against the Chevron Corporation. The firm’s contract stipulated that it would have veto power over the choice of attorneys and also receive precedence over the plaintiffs in the disbursement of any settlement or judgment funds. In all, the firm stood to earn tens of millions of dollars in the event of a successful settlement or judgment.
As for the Ecuadoran plaintiffs, their contract specified that they would receive the balance of any settlement or judgment only after eight different tiers of funders, attorneys, and “advisers” were paid first. It is unclear whether they knew what they were signing up for; according to Fortunemagazine, several plaintiffs acknowledged their approval of the 75-page TPLF contract with merely a fingerprint.
Late last year, the funder announced it was ending its involvement in the Chevron case. This occurred months after a U.S. District Court judge in New York issued an opinion finding ample evidence of fraud by the plaintiffs’ attorneys in the case.
The NY Times details many examples of people either using hedge funds to pay for lawsuits because they can’t afford it or in some cases – not even being aware that a lawyer used a hedge fund to finance a lawsuit and being held responsible for debts thereafter. You can read that HERE:
Anthony Flammia, a former New York City police officer who spent three months working in the wreckage of the World Trade Center, did not learn that his lawyers had borrowed money to pursue his claim of compensation for health problems until he received a bill for $828.93 in interest charges.
Mr. Flammia left ground zero at the end of 2001 for a job with a suburban police department. A few years later, a passer-by found him asleep in his patrol car. His health had been deteriorating, and the episode prompted him to visit a free clinic established to treat ground zero workers for the consequences of inhaling dust. He was found to have sleep apnea and scarring in his lungs. In 2007, he passed out after inhaling smoke at a house fire and was forced to retire.
Lawyers led by Napoli Bern Ripka sued the City of New York and a host of agencies and companies on behalf of more than 9,000 ground zero workers. When Mr. Flammia signed up as a client, the paperwork included a general notice that the lawyers might borrow money to pursue the case, and that they might bill clients for the interest.
The Center for Public Integrity writes HERE:
The high cost of borrowing means that many plaintiffs owe three or four times what they initially borrowed to the finance company. In some instances, plaintiffs have owed the lender their entire recovery.
The companies say they must charge high prices because betting on lawsuits is very risky. They say that the money they lend is not a loan, and thus not subject to laws in many states that forbid high-cost lending, because the money doesn’t have to be paid back if the client loses the case.
The argument has persuaded regulators in many states, including New York, that lawsuit lenders are not subject to existing lending laws. Oasis Legal Finance and LawCash, the two industry heavyweights, have been fighting state by state battles to legalize the practice.
One such hedge fund to help people fund their lawsuits is Ardec Funding … per their own website – they say for simply providing up front capital … they get 50% of whatever the take is after lawyer’s fees:
Q: What amount will Ardec buy on the Plaintiff portion of the settlement?
A: Ardec will immediately pay the plaintiff 50% of what the plaintiff is entitled too after all legal fees and disbursements are calculated. The 50% balance of your settlement will be paid as soon as Ardec finds out that the Plaintiff has no other liens against any other party involved in the case.
And it’s not just hedge funds; watch these videos from what are essentially payday lenders and ask yourself who you think is going to get a fair deal:
