Litigation financing, also known as lawsuit funding, has been around for decades in one form or another, though it has been more pervasive in recent economic times. With the fallout from mortgage-backed securities comes an increase in available funds in this new and emerging financial market. In a very broad sense, litigation financing occurs when a claimant or claimant’s attorney obtains a loan to be repaid out of the proceeds from any settlement or judgment. These loans are frequently “non-recourse” loans, meaning the lender cannot seek repayment unless the claimant makes a recovery.
Two Flavors of Funding
If a claimant can convince a lender to make a loan, it is as though recovery has already been made, and there is no incentive to cooperate in the resolution of the claim. If the claimant loses the case, then he or she nevertheless “wins” in a sense because the claimant has the loan proceeds, and the lender has no source of recovery. The plaintiff thus has the incentive to roll the dice at trial. With these kinds of loans, at least in the personal injury context, litigation and trial become more likely while settlement is discouraged.