Financing Lawsuits

Today's NY Times mentions that hedge funds have entered the business of financing (purchasing advances from) companies that finance plaintiffs' lawsuits.  One such company (the only one the article mentions), LawCash, came to my attention some time ago when a NY court went out of its way to question a transacion in which LawCash received a nice return on a "loan" to, or investment in, a plaintiff named Echeverria.   The decision was criticized by Anthony Sebok.  The essential idea is that plaintiffs' attorneys can finance lawsuits through contingent fees, but third-party financiers can do even better by investing in the claim; LawCash gives plaintiff up to 10% of the claim in advance, collects a very high interest rate (plus fees) plus principal if P wins, but inasmuch as it is structured as a non-recourse investment, the investor receives nothing if P loses. Sebok argued that the arrangement did not amount to the dreaded champerty because inasmuch as the suit had already been filed, the investor could not be said to have encouraged the lawsuit.  I guess a doctrinal decision deserves a doctrinal parry. LawCash insists it is an investor, not a lender, because of NY's usury laws.

The good thing about hedge fund or other investment is that the market for this sort of financing will become more competitive. Plaintiffs will get a fair deal if they can shop among third-party financiers who do not guide the litigation or settlement process, by the way.  A neat feature of the business, once it is competitive, is that plaintiffs will have a means, indeed something akin to an information market, of evaluating their own claims.  At present, plaintiffs rely on their attorneys who have mixed incentives about raising or lowering plaintiffs' expectations.  Outside investors have experience with large numbers of lawsuits and as they bid for plaintiff business, plaintiffs will get an idea of what their lawsuits are worth. In turn, both plaintiffs and defendants might be more likely to settle if this "market" gave its opinion as to what the claim was worth.

Is there any reason we should discourage this sort of market?

Comments

[Plaintiff's Lawyer]

As a plaintiff's lawyer who does significant commercial litigation on contingency fees, here are my thoughts. There is nothing inherently wrong with businesses that "invest in" lawsuits that are already under way. The problem, of course, will be the kind of lawsuits for which a market like this will develop. Stated differently, a plaintiff in a high stakes commercial case -- say where the damages exceed $5 mm -- is much less likely to need the cash inflow from a LawCash-like business. Quality commercial plaintiff's lawyers who work on a contingency will be able to assess the merits of the case and will taken them only if the lawyer believes that he can prevail. The stronger the case, the more likely the plaintiff's lawyer will be to advance the expenses of litigation.

On the other hand, I suspect that the kinds of lawsuits for which an investment market will develop will be "sub-prime," so to speak. The potential damages will be significantly smaller, the quality of lawyering (on both sides, given the stakes) will be diminished, and the risk of strike suits will be greater. Just as some law firms take large numbers of low-grade contingency fee cases to operate "on volume" -- a few good ones will pay for the dozens of meritless ones, so too will this investment market. Investors in lawsuits will likely not evaluate particular cases on the merits, but look at a series of variables (e.g., lawyers' win rates, judge's leanings, awards in particular jurisdictions, etc.) to calculate the odds that their "portfolio" of lawsuits is more profitable than not.

Also, as an aside, how would you mitigate the risk of trading on "insider" information?

[Raw Data]

It seems to me as simply another way of laying-off risk, which is socially-useful as a general rule.

The only obvious criticism is that it might facilitate more litigation. However if one believes in markets, then that might be just fine.

[anon]

Can you link to the NY Times article?

[slevmore]

I agree that a developing market is less important for larger claims and sophisticated (repeat) players. The same point should be emphasized with respect to the observation that this market spreads risk; it is more thna that if the market provides an assessment of the worth of the claim. Now it is arguable that plaintiffs don't really need this valuation (except that they can alter their consumption) because they can wait for the results of trials, but of course defendants might also learn from the market, and so we might save trial costs. The irony is that these markets might reduce litigation more than they will increase it. (More claims are financed but many more cases might settle.)

In all these information markets one wonders about inside information. Optimistically, market participants will judge when prices are moving because of insiders' attempted manipulation. But a little regulation here and there might be expected (no trading in your own claim, for example).

[George Liebmann]

There is--or was-- a policy against barratry and maintenance, which rested on non-frivolous concerns. Litigation is a form of social conflict, albeit a reasonably peaceable form, though those who have been sued have reason to feel differently about it, Rules requiring parties to fund their own claims rest on a policy in favor of social peace. Case law under such a view is assumed to be exemplary, not pervasive; legal norms should be largely self-enforcing, a view summarized in Grant Gilmore's famous declaration "In hell there will be nothing but law, and due process will be meticulously observed."

While the emotional fuel behind the proposal is that supplied by the seriously injured individual plaintiff seeking what Aristotle and Aquinas called corrective justice, in this age of class actions the practical effects will range much further. Class actions, whatever the pretenses to the contrary, are really about distributive justice, not corrective justice; they are efforts to alter the distribution of goods in society, not merely about the vindication of settled expectations. They already result in the distribution of huge sums on the basis of highly discretionary determinations about the definition of classes and the recognition of class representatives, most of which are unpublished, invisible, unreviewable (at least in the short run), and subject to little accountability. The most fertile source of judicial corruption in American history was hitherto the operation of protective committees in bankruptcy cases prior to the 1938 amendments to the bankruptcy code. This depressing body of experience is now being replicated in class action cases. The proposal, by bringing even greater economic interests to bear, would make this problem worse. It casts upon the judiciary burdens which, human frailty being what it is, the judges are simply unequipped to carry. Those formulating proposals for changes in public policy, even changes assumed to be economically 'rational', must reckon with 'the crooked timber of humanity.'
It is a malancholy comment on the interests of today's lawyers and legal academics that this particlar blog has attracted so few comments. If it related to the financing of abortions, there would be twenty times as many. This observation is not intended to guide your future efforts!

[Chuck Siegle]

Hi,
I was injured at a homeless shelter run by Catholic Charities when two residents broke into a fight and the lone female security guard stepped back and refused to break up the fight. The combatants were pushed into me breaking my right foot and leg with head injury. I was then pushed into second Plaintiff who suffered facial fractures and migrains for both Plaintiffs.
Shelter has had history of violence and has had to call 911 for fights many times in the past. Their failure to excercise due diligence in hiring the correct security is a direct result of Plaintiffs injuries.
Can you refer or take the case?
Chuck

[Thjohnsoniii]

It appears that this form of potential litigious financing may finally give the little guy a chance in court, in the form of an equalizer against larger companies that conduct themselves abusively while acting with a sense of impunity. Consider the claims made by people like Sophia Stewart, author of the Third Eye, who, in her case, has provided meritorious evidence from the heretofore original work to successfully claim ownership of all copyrights and trademarks to the multi-billion dollar motion picture franchise starring Keanu Reeves and Laurence Fishburn, entitled THE MATRIX, all series 1,2,3 and 4, The battle remains hush-hush but still silently and intensely goes on; however, she has yet to benefit from the billions in profits experienced by the Wachowski Brothers or the distributor Warner Brothers.