RD LEGAL FUNDING SMARTER MONEY FOR GROWTH. Legal Funding 101

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1 1 Legal Funding 101 Joseph Genovesi, President of RD Legal Funding gives a brief synopsis of the legal funding industry. In this white paper, the reader will gain a basic understanding of a few methods that can be used for legal financing.

2 2 DO I NEED LEGAL FUNDING? As most plaintiffs and attorneys know, litigation can be a drawn- out process that can take up an enormous amount of time and resources. These delays are detrimental to all plaintiff- side parties involved with the case. Plaintiffs can be subject to lost wages, medical and legal expenses, and of course, lost time and energy. The attorneys involved with these cases are similarly put out they are often working on a contingency fee basis. As a result, it may be months or years until attorneys receive payment for their work, if they receive it at all. Fortunately for both plaintiffs and attorneys, there are ways to access funds before an award is distributed so expenses can be paid off, lost and missing wages can be accommodated, and life can resume an air of normalcy. Litigation Financing, also referred to as Legal Funding or Legal Lending, provides a solution to case and settlement delays. TRADITIONAL FUNDING PERSONAL LOAN or PERSONAL LINE OF CREDIT Personal loans and personal lines of credit are two of the most common types of financing. The main difference between these two types is that the lendee receives a personal loan in a single bulk sum, whereas funds from a personal line of credit can be withdrawn over time. BANK LINE OF CREDIT A bank line of credit provides a source of funds that can be made accessible to the borrower at any time. Interest is only paid on funds that are withdrawn. Typically, this credit is secured by collateral. Compared to other types of funding that will be discussed below, Bank Lines of Credit typically charge less interest on return. However, as mentioned above, Bank LOCs are more difficult to obtain for attorneys, who often lack the collateral to secure a line. PARTNERS CASH Partners in a law firm will often contribute their own personal funds to finance the firm. A potential downside of using partners cash to finance a firm and its legal proceedings is lost

3 3 opportunity cost. Though this method of funding does involve a significant personal risk, it decreases the risk of owing return percentages or of paying late fees. CREDIT CARD Businesses use credit cards much as an individual would use a credit card. This can pose a high risk for an institution such as a law firm awaiting a settlement payout. If a bill is not paid on time, the institution can face an interest rate of up to 30% and a series of late fees FEE SHARING Attorneys can share fees with each other, as long as they are not bound by certain ABA restrictions. Fee sharing is beneficial because when you are sharing costs, your personal expenses are reduced. Also, creating a referral fee arrangement is a great way to generate new leads. Plus, if you are for some reason unable to litigate a case, you can still earn income for referring a client to another firm. ALTERNATIVE FUNDING Litigation financing is a method of lending where the litigation itself is treated as collateral. This means that either the inventory of a single specific case, an entire case load, or an entire law firm is considered when creating a funding agreement. Once these inventories have been accounted for, plaintiffs or attorneys can receive capital to use against existing lawsuits or case inventories. Usually, the requirements for receiving alternative funding are less stringent than those of traditional lending. In some cases, an attorney will not have to worry about paying back an advance until after a case has been settled. Pre- settlement funding has higher rates than post- settlement funding. Pre- settlement funding is non- recourse, meaning that if the attorney or plaintiff does not win his or her case, the lendee is not obligated to repay the lending company. This is beneficial for the lendee, but riskier for the lender. Because of this, pre- settlement lenders offer advances in smaller sums, at higher interest rates. While post- settlement funding can only be used against an individual case, it has much lower interest rates. Post- settlement funding is also non- recourse and less risky for the lender than pre- settlement. Since the case has already reached a settlement agreement between all

4 4 parties, there is much less chance of non- payment, and thus the lender is able to offer greater advances at more advantageous rates. TYPES OF ALTERNATIVE FUNDING ATTORNEY LINES OF CREDIT Securing a line of credit through a third party funder is often a better solution for attorneys than securing a bank line of credit. Alternative funding companies do value the case load as an asset, and will use it as collateral. Lines of credit can be given from a private institution, LOC is viewed as a form of alternative lending. In essence, a line of credit supplies a source of funds that is accessible to the borrower at any time. Interest is only paid on funds that are withdrawn. This credit can be secured by collateral, as with a personal loan; or, it can be an unsecured line of credit. Also similar to personal loans, lines of credit can be difficult to qualify for. CASE COST FINANCING Case Cost Financing is essentially a line of credit (LOC) with a technological service that can track the LOC on a case by case basis. This method is best used on a short- term basis. Costs can qualify as a case expense, and can then be recouped from the cases themselves. Case cost financing is popularly used in contingency fee cases i. When properly executed, the interest from case cost financing passes onto the plaintiff. Because of the associated low cost, Cast Cost Financing may be a good potential option for contingency fee attorneys. As with everything, case cost financing comes with a caveat. It is incredibly difficult to qualify for, and often comes with a modified fee agreement that must be presented to the plaintiffs. Furthermore, it is difficult to find a qualified provider with the appropriate technology to track the LOC. ACCELERATED STRUCTURED SETTLEMENT Some settlement awards may be given as structured settlements. If the settlement recipient requires immediate access to some of the money in this account, it is possible to accelerate either the full payment, or in certain situations, a portion of the payment, from the structured settlement. While this can give the recipient immediate access to cash, it can potentially push the recipient into a higher tax bracket, temporarily. Moreover, this option is very expensive, and all advances are steeply discounted. Most experts would advise against an accelerated structured settlement.

5 5 VOUCHER FUNDING Many states appoint attorneys to represent plaintiffs or defendants who otherwise would not have access to professional counsel. A voucher essentially serves as a promissory note to pay an attorney who has completed a case and is awaiting payment. Voucher funding is a system by which these attorneys can receive accelerated fees. Voucher funding operates on the same premise as attorney fee acceleration, in which the funding company purchases the fee amount and advances the sum to the attorney (see ATTORNEY FEE ACCELERATION). The state is responsible for paying the funding company. In normal circumstances, vouchers are paid off on a short- term basis. However, voucher funding has become more popular during the recession, as certain municipalities have fallen into poor financial standings. In many cases, voucher delays have been extended, increasing the demand for voucher funding. APPEALS FUNDING Appeals funding and judgement/ verdict funding are only applicable to cases that have already been decided and are being challenged, or have been challenged, in the court of appeals. Appeals funding has risks similar to those found in pre- settlement funding, because the appeal could be lost by the plaintiff s side. Rates are usually in between those found in pre- settlement funding and post- settlement funding. ATTORNEY FEE ACCELERATION Attorney fee acceleration is a type of post- settlement funding that can only occur after the outcome of a case has already been determined and agreed upon by all parties. An attorney or plaintiff may want to look into post- settlement funding if a settlement has been offered, but delays will prevent the award from being paid out for a significant amount of time. Post- settlement funding generally has lower interest rates than pre- settlement funding, and is very low- risk for the lendee, because all remaining major risks are accepted by the lender. There are two main risks that the lender accepts in post- settlement funding. The first is obligor risk, or, in other words, the lendee accepts the risk that the obligor (for example, the defendant, or their insurance company) will not be able to pay the settlement amount. This could happen for a number of reasons, including the obligor filing for bankruptcy, or simply refusing to pay the agreed upon amount.

6 6 The second risk that the lender accepts in post- settlement funding is the risk of a long payment delay. For example, once a settlement is agreed upon, delays can prevent the award from being paid out for months, or even years. It is common to see delays built into class action cases due to legal processing, Medicare or Medicaid liens, or in any compromise hearing where a minor is involved. Lenders typically offer non- recourse advances, meaning that if an advance was given on a settlement that, for one of the above reasons, did not pay out, the lendee would not owe the lending company. Attorney fee acceleration is a strictly post- settlement funding option. An attorney might consider applying for his or her fee to be accelerated if there is a delay in settlement distribution for any reason. Fee acceleration is a great way to help an attorney receive fees that would otherwise be left unpaid for an unknown amount of time. This type of funding is best if an attorney needs an immediate cash flow, and waiting for a delayed settlement could damage the practice. IS FEE ACCELERATION RIGHT FOR ME? Fee Acceleration is incredibly beneficial to attorneys who are stuck with payout delays and are in immediate need of capital. The plan can be very flexible, as an attorney can take out cash advances in portions. Moreover, as long as the collateral is present (in that settlement), the lendee can request multiple advances. As opposed to a Line of Credit, Fee acceleration does not require a monthly interest payment, nor does it require secured collateral. Similarly, Fee Acceleration is easier to qualify for than Line of Credit. Fee Acceleration has better rates than pre- settlement funding due to the different risk profile. Unlike many other types of both traditional and alternative funding methods, Fee Acceleration does not require a credit history in order to qualify. Entering a fee acceleration agreement removes obligor risk from the attorney. The lender assumes the risk of an obligor being unable to pay the settlement award. For the lendee, the risks are very low. The application for fee acceleration is based almost entirely on the case in question, as opposed to the attorney s or law firm s assets. The next page will provide two Fee Acceleration case studies to show the different ways this option can benefit your firm. FEE ACCELERATION CASE STUDIES CASE STUDY #1 Client A is a sole practitioner specializing in personal injury and medical malpractice litigation. He has been slowly ramping up the practice, and currently has several promising cases being

7 7 litigated. Almost all of Client A s case load is worked on a contingency basis, so any losses in his litigation can be a big setback. Unfortunately, Client A is in a situation where one of his PI cases resulted in an unexpected defense verdict. Now, there are costs associated with this case that must be paid, including expert witnesses and depositions that were used in the course of the trial, with no attorney fee forthcoming. Client A, as is the case with most smaller solo firms, does not have a lot of assets, nor a large enough case load, to qualify very easily for bank loans, bank LOC or litigation company LOC. There is another PI case that has reached a settlement, and Client A is expecting a $200,000 attorney fee to come soon. However, Medicare has already indicated that they are filing a lien against the settlement, tying up the attorney fee with no clear indication as to how long it will take to be sorted out. Client A has the potential to wait 6 months or longer before it is resolved and payment can be made on his fee. Client A uses Fee Acceleration to apply for a $75,000 advance against the $200,000 fee. Qualification is easier than loans and LOC, since funding is only against this specific case and not the personal or business finances of Client A. Advancement of $75,000 against the fee is secured, and Client A now has funds at his disposal to pay the costs associated with his lost case as well as various miscellaneous business and personal expenses. Client A has use of cash flow now, limiting the time risk of attorney fee payment, and will not have to pay back anything until the settlement finally pays, whenever that may be. CASE STUDY #2 Client B is a partner in a mid- sized plaintiff s litigation firm, consisting of 2 other partners and other lawyers/staff. The firm handles a wide range of plaintiff s cases, including injury, discrimination and harassment. Client B has a particular emphasis on class action litigation. Recently, the firm was involved in a major MDL against a pharmaceutical company concerning the injuries caused by one of their drugs. A global settlement was reached in the litigation, and the special master has awarded Client B a $3 million fee as part of the common benefit fund. Final approval of the settlement is not expected for 6 months or longer. Client B is currently ramping up lawsuits in another class action concerning a popular medical device. Momentum has been building and many potential plaintiffs are coming forward looking for attorneys to handle their cases. Client B would like to have funds available for advertising and marketing his firm s services in this latest class action case. Fee Acceleration is used for a $1 million advance against the $3 million fee owed. That money is now available at Client B s disposal to add more plaintiffs to his case load in this progressing medical device litigation.

8 8 IN CONCLUSION If you re awaiting a settlement payout that has a delay; if your business needs a boost to draw in more clients and potential cases; if you want to diversify your interests but are a bit below budget; if you are a plaintiff and high legal and medical fees are putting a damper on day to day living, then legal funding may be right for you. LEARN MORE RD Legal Funding has the resources to provide you with excellent litigation financing to help you recover case expenses, expand your caseload, and receive delayed payments. For more information, call toll free for a consultation, or view our website at