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NYC Bar Weighs in on Litigation Financing

By Bethany Leigh Rabe, Litigation News Associate Editor – August 29, 2011

The New York City Bar Association (NYCBA) recently released an opinion on third-party litigation financing (TPLF). This opinion reminds attorneys to be vigilant of the ethical pitfalls associated with this means of funding a lawsuit.

Opinion Includes “Good Roundup” of Key Concerns
With the release of Formal Opinion 2011-2, the NYCBA joins a number of other entities that have weighed in on ethical and legal issues regarding TPLF. Among those is the ABA’s Commission on Ethics 20/20, which released an in-depth Issues Paper [PDF] last November for comment (Public Comments [PDF]).

The NYCBA opinion “is a very good roundup of several key concerns lawyers should address when their clients consider entering into non-recourse litigation financing agreements,” notes Thomas G. Wilkinson, Jr., Philadelphia, cochair of the Conflicts of Interest Subcommittee of the ABA Section of Litigation’s Ethics and Professionalism Committee.

Overview of “Third-Party Litigation Financing”
TPLF companies offer financing to a litigant during the course of litigation. The litigant must repay the amount only if the litigant settles the case or obtains a judgment. Such companies often take a percentage of the amount recovered as compensation.

The concept of TPLF has been around for centuries. (Recall here, perhaps, your law school classes that covered the concept of “champerty.”) More common in Australia, TPLF has only recently begun to reappear in the United States. This trend has prompted a flurry of discussion and debate.

Because most TPLF companies focus their efforts on plaintiffs in personal injury litigation, some view TPLF as a trap that could ensnare unwary, unsophisticated individuals. They contend the funding results in the equivalent of exorbitant interest on a loan.

Others see TPLF as a legitimate way for potential plaintiffs to afford litigation costs and living expenses during the pendency of a lawsuit. They argue this improves access to the courts.

New York Opinion Identifies Five Potential Ethical Pitfalls
The NYCBA takes the view that, no matter what one thinks of these arrangements, lawyers must be prepared to deal with the legal and ethical issues that arise. Although “[i]t is not unethical per se for a lawyer to advise on or be involved with such arrangements,” the NYCBA cautions against five pitfalls:

  • Illegality: The TPLF agreement itself may be illegal under laws governing usury or champerty in a particular jurisdiction. If that is the case, “advise the client and refrain from facilitating a transaction that is unlawful.”
  • Attorney as Advisor: If asked to recommend a source for such financing, or review or negotiate such an agreement, the attorney should candidly advise the client of the costs and benefits of such arrangements and suggest alternatives. Costs may include fees that are “excessive relative to other financing options, such as bank loans.” On the other hand, a benefit may be the client’s ability to cover expenses and avoid the need for funds forcing the client into a premature (and lower) settlement.
  • Conflicts of Interest: The lawyer must be wary of conflicts of interest. For example, when may the lawyer accept a referral fee from the financing company? How does the lawyer advise the client objectively about financing when the client cannot afford the litigation without it? Evaluate these issues carefully.
  • Waiver of Privilege: Disclosure of certain information to a TPLF company may waive the attorney-client privilege, and the “common interest” privilege may not apply. A lawyer should obtain informed consent from the client before disclosing privileged information to the TPLF company.
  • Control Over the Proceeding: Attorneys must guard against the TPLF company exerting undue control over the legal proceeding. Bear in mind that the TPLF company’s interests may not always be aligned with the client’s.

Impact on the Attorney-Client Privilege
Attorneys should consider each of the above concerns. The waiver of attorney-client privilege, however, is what perhaps strikes the most fear in the hearts of litigators.

Attorneys can take steps to avoid waiver by carefully selecting what information to produce to TPLF companies. “Any such disclosures should be tailored to the specific information needs of the financing company,” suggests Wilkinson. “It is clearly preferable to provide public record documents to the financing company rather than privileged settlement evaluations containing the attorney's mental impressions or case strategy,” he adds.

The simplest way to avoid waiver is “to require the funding company to come to its own conclusions about the merit of the case and prospects for recovery,” offers Loren Kieve, San Francisco, cochair of the Section’s Attorney-Client Privilege Task Force. This should not be problematic, as “the major funding companies have a very experienced group of litigation and ethics counsel to assist them,” Kieve continues.

The NYCBA cautions attorneys not to rely on the “common interest privilege” to prevent waiver, despite the generally accepted common interest privilege in the arguably similar context of insurer-attorney-insured. Kieve believes that the opinion falls short by not providing further analysis on this issue.

“The key point is that both the insurer and the insured have a common interest in advancing the legal position of the insured,” begins Kieve. “That is precisely the same interest a funding company has. It should make no difference to the existence of the privilege that the insured obtained insurance in advance to cover the cost of litigation, while the party obtaining litigation funding has done so after the need for litigation arose.”

“If there is an insured-insurer privilege, because both are economically aligned,” Kieve continues, “then there should also be a litigation-funding privilege based on the same rationale.” Nevertheless, he warns, “a lawyer should alert the client of the risk that a court might hold that the privilege has been waived.”

Keywords: litigation, New York City Bar Association, third-party litigation financing, ethics

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