Disclaimer: The following information is provided as a courtesy, and should not be fully relied upon for an attorney to maintain compliance. It was researched in good faith, but no guarantee is made to it's recency or fullness.
Professional Rules from the Los Angeles and State Bar Association are rules for attorneys to live and die by. Thankfully, not only has litigation financing been given a thumbs up by the American Bar Association, but the California Bar Association has given it’s approval as well. Further, attorneys practicing in Los Angeles have long been cleared to engage in litigation finance arrangements. Let’s dive into the details:
Nationwide Rules
The American Bar Association has been examining the issue for some time. They eventually found it necessary to go through a process that lasted 2 years with formal internal hearings to finally nail down whether or not the practice is ethical. This resulted in the ABA publishing a whitepaper that declared a resounding GREEN LIGHT. It is absolutely ethical, and very helpful to a number of clients that would otherwise be unable to afford justice through the legal system.
However, the Bar did have concerns. What is most important is that the client be fully informed, not coerced into such a transaction, and that the client and attorney be completely free from influence from the investors/funders in the decisions they make about the litigation. From this whitepaper, the ABA put it thus:
Lawyers must adhere to principles of professional independence, candor, competence, undivided loyalty, and confidentiality when representing clients in connection with ALF transactions. In the event that the lawyer’s involvement in the funding process significantly limits the lawyer’s capacity to carry out these professional obligations, the lawyer must fully disclose the nature of this limitation, explain the risks and benefits of the proposed course of action, and obtain the client’s informed consent.
The above whitepaper is likely the most authoritative resource from a bar association that attorneys may rely on.
California
State Bar of California released it’s Formal Opinion No 14-0002. In it, it discusses only the scenario of a client being directly funded by a loan, not the attorney. It addresses recourse loans, meaning the loan needs to be paid back regardless of the outcome of the case, and has a number of guidance issues to ensure that a client is fully informed of the advantages and disadvantages. Late Harvest Financial uses non-recourse loans that directly pay for expenses, and do not charge interest. Non-recourse, of course means that if the litigation fails to produce, the lender has no recourse. The ‘investors’ walk away from recouping their money. However, this risk is taken on in exchange for partial assignment of any funds gained by the borrower through court judgement or settlement. The formal opinion mostly references a Los Angeles Bar opinion from 1999, and summarizes “Such laws should not be a barrier to a litigation funder enforcing a litigation funding contract in California. Los Angeles bar Association Formal Opinion No. 500 (1999)
Los Angeles
Los Angeles County Bar Association. Formal Opinion No. 500 (1999) was one of the earliest opinions on litigation financing. It explicitly puts forth that concerns around ‘champerty’ and ‘maintenance’ “have not been recognized by California courts and the concerns those doctrines are addressed by other protections including sanctions for frivolous lawsuits and malicious prosecution actions].
It does have rules that are great guidelines in general. For example, the financiers must maintain confidentiality and must not make any moves to influence the independence of the attorney who is representing the case. This is policy for Late Harvest Financial, and for any partners/investors. We recognize the full independence of the attorney that represents the client to make all relevant moves, advice, strategy, and management of the case.
Other main points of the opinion:
“A. The Proposal Is Not Prohibited by the Doctrines of Champerty and Maintenance.”
“B. The Proposal Does Not Violate Business and Professions Code Section 6129”
“C. Proposal Is Analogous to the Syndication of Lawsuits Which Has Met with Limited Acceptance by Courts.
The Inquirer’s proposal for financing lawsuits in exchange for the assignment of an interest in the Claimants’ proceeds is analogous to the syndication of legal claims. The syndication of lawsuits arose for the same reason that contingent fee arrangements exist: plaintiffs could not pursue claims for lack of sufficient financial resources”
Give Your Clients a Co-Branded Finance Worksheet - Free
Late Harvest Financial will add your logo and other information you request to our “Litigation Finance Worksheet”. Whether you send this to a client to fill out themselves, or help them do the calculations the result will be the same: The client will have a much better idea of where they sit with the numbers depending on which choice they make: No litigation financing win/lose, litigation financing, or to pass on litigation all together. In the vast majority of cases, the risk and financials look much better when a company chooses to use non-recourse litigation financing.