Duhaime's Law Dictionary

Litigation Loan Definition:

A loan made by a third-party to litigation, typically a finance company, to a litigant to finance the litigation, and often on harsh terms.

Related Terms: Champerty, Litigation, Maintenance

Also known as lawsuit loans or litigation funding loans.

In Fausone v USClaims, Justice Altenbernd of the District Court of Appeal of Florida:

"A search for litigation loan on the internet will rapidly produce the websites of various organizations willing to buy a portion of a plaintiff's claim. The literature also uses the terms litigation finance, injury funds, cash advance settlements, advance settlement funding, lawyer funding, or pre-settlement advance to describe these transactions."

"Beginning in October 2000, Ms. Fausone began selling interests in her lawsuits to organizations that buy such interests. These transactions are often referred to as litigation loans but the law does not regard them as loans because the corporation that gives money to the plaintiff has no right to recover from the plaintiff in the event that the lawsuit is unsuccessful."

litigation loan spoof adJulia McLaughlin, in her Vermont Law Review article, described a litigation loan as follows:

"Litigation funding companies constitute a relatively new and unregulated money-making business. Litigation funding companies advance money to injured claimants in exchange for a share of the proceeds related to the claim. The advance is accomplished according to the terms of an litigation loan agreement. The service provided - a cross between a usurious loan and a futures market in damages awards - is sometimes referred to as a litigation loan.

"The word loan is a misnomer because the advance is conditional in nature and is repayable only upon receipt of a cash recovery by the plaintiff.

"Although subject to many different names, six criteria typify a litigation loan:

  • a cash advance;
  • made by a nonparty;
  • to a plaintiff in a personal injury civil action;
  • in exchange for an assigned share of the litigation proceeds, if any;
  • arising out of settlement or judgment; and
  • payable at the time of recovery.

"The absence of a legal obligation to repay the funds advanced if financial recovery is denied arguably shields the industry from the existing usury legislation designed to protect consumers from predatory lenders.

"It is no surprise that Las Vegas, the glitzy city of high rollers where the odds overwhelmingly favor the house, is described as a hub of the litigation-funding industry."

Litigation loans are indeed controversial. In Saladini v Righellis, the Supreme Judicial Court of Massachusetts declined an application to set aside a litigation loan:

"On September 23, 1992, Saladini and Righellis entered into a written agreement (agreement) pursuant to which Saladini agreed to advance funds to Righellis to allow him to pursue potential legal claims he had arising out of his interest in real estate in Cambridge. In return, Righellis agreed that, if pursuit of his claims yielded any recovery, the first amount recovered would be used to reimburse Saladini, and that Saladini would, in addition, receive 50% of any net recovery remaining after payment of attorney's fees....

"We ... no longer are persuaded that the champerty doctrine is needed to protect against the evils once feared: speculation in lawsuits, the bringing of frivolous lawsuits, or financial overreaching by a party of superior bargaining position. There are now other devices that more effectively accomplish these ends....

"Other States that no longer recognize the doctrine of champerty have continued to scrutinize an agreement to finance a lawsuit with care. We shall do likewise. This means that if an agreement to finance a lawsuit is challenged, we will consider whether the fees charged are excessive or whether any recovery by a prevailing party is vitiated because of some impermissible overreaching by the financier.... We shall be guided in our analysis by a rule of what is fair and reasonable, looking to all of the circumstances at the time the arrangement is made to determine whether the agreement should be set aside or modified...

"The doctrine of champerty may also be unworkable or have harsh results. Rather than punishing the owner of the legal claim who has entered into a champertous agreement, the doctrine bestows on him a windfall. In this case, for example, Righellis would be permitted to retain the full benefit of the positive result achieved in the Putnam Manor lawsuit, while he would not have to honor his obligations to Saladini, the person whose support made pursuit of the lawsuit possible."

In Rancman v. Interim Settlement Funding Corporation (SFS), Justice O'Connor of the Supreme Court of Ohio refused to recognize a litigation loan using these words:

"Maintenance is assistance to a litigant in pursuing or defending a lawsuit provided by someone who does not have a bona fide interest in the case. Champerty is a form of maintenance in which a nonparty undertakes to further another's interest in a suit in exchange for a part of the litigated matter if a favorable result ensues. The doctrines of champerty and maintenance were developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law.

"The ancient practices of champerty and maintenance have been vilified in Ohio since the early years of our statehood. Maintenance is an offense against public justice, as it keeps alive strife and contention, and perverts the remedial process of the law into an engine of oppression. We have held the assignment of rights to a lawsuit to be void as champerty. We have also said that the law of Ohio will tolerate no lien in or out of the legal profession, as a general rule, which will prevent litigants from compromising, or settling their controversies, or which, in its tendencies, encourages, promotes, or extends litigation....

"The advances sub judice constitute champerty because FSF and Interim sought to profit from Rancman's case. They also constitute maintenance because FSF and Interim each purchased a share of a suit to which they did not have an independent interest; and because the agreements provided Rancman with a disincentive to settle her case....

"Equally troubling is a champertor's earning a handsome profit by speculating in a lawsuit and by potentially manipulating a party to the suit. The FSF agreement reads: '[Rancman] acknowledges and fully understands that FSF may, will, and should make a substantial profit on this agreement.' However, a lawsuit is not an investment vehicle. Speculating in lawsuits is prohibited by Ohio law. An intermeddler is not permitted to gorge upon the fruits of litigation."

In Giuliani v Region of Malton, Justice Murray of the Superior Court of Ontario bared the terms of the litigation loan between Lexfunds Inc. and the plaintiff, Patrizia Giuliani, at ¶51-52:

"The loan agreement provides, inter alia, that:

  • The borrower may use the loan proceeds only for the purpose of funding legal disbursements and/or living and rehabilitation expenses;
  • The full amount of the loan is advanced to the plaintiff's law firm within 48 hours following receipt of a loan advance request form;
  • The litigation proceeds are security for the debt of $150,000;
  • Except in circumstances where the borrower terminates the retainer of the borrower's law firm before the resolution of the proceedings, recourse of the lender against the borrower for payment of the borrower's obligations shall be limited to the litigation proceeds;
  • There is an underwriting fee in the amount of 7.5% of the amount of the loan granted and such fee is to be added to the borrower’s obligations;
  • The lender is entitled to an early payment fee if the repayment of the loan occurs within 24 months following the date the loan proceeds are advanced to the borrower. The early payment fee will equal 24 months of interest calculated on the full amount of the loan as provided in the contract less the number of months that the loan has been outstanding. (Note: according to the schedule of interest payments provided, the amount of 24 months interest is $206,936.72 so that the total amount owing at the end of the 24 month period is $368,186.72);
  • Interest is determined and compounded monthly on the outstanding loan balance at the rates stipulated in the contract and interest on the outstanding loan balance is to be accrued and capitalized and added to the borrower's obligations.
  • The borrower is required to repay the amount outstanding on the loan in full on the 15th of the month following settlement. Any amounts not repaid bear interest, including interest on capitalized interest as provided in the agreement until the repayment in full of all amounts outstanding is made.
  • The annual rate of interest for the loan is stated to be 42% calculated monthly with an effective annual interest rate of 51.10%.

"In this case, the loan agreement seems to say that if there is no recovery, no money is owed to the lender. On the other hand, the whole arrangement, including the interest rates charged by the lender, is in effect a contingency arrangement which allows the lender to make huge profits from the proceeds of litigation rather than from a commercially normative interest rate on a risky loan....

"The interest rate on the loan obtained by the plaintiff for disbursements is unconscionable. It is turning the world on its head to assert, as does Ms. Chittley-Young, that this is an access to justice issue and that ordering interest payments on the Lexfund is reasonable. This loan agreement does not facilitate access to justice. This loan agreement does nothing to advance the cause of justice. It is difficult to believe that any lawyer would refer a vulnerable client to such a lender."


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