Filed Under:Claims, Litigation

Funding Litigation

The Real Cost to Fair Claims Resolution

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

Loans in complex commercial claims, on the other hand, are designed to support the expenses of litigation and do not shift the incentive off of the claimant as much. There are still other business factors that can drive settlement, but they may not exist when litigation funding is in place.

Cost-Prohibitive Proceedings

Negotiation can become futile the longer a case drags on and the principal balance of the loan increases. Eventually, it will seem as though the defendant is negotiating against a brick wall over which he or she cannot see unless the loan and its terms are revealed in discovery. 

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. 

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