![]() Financing Agreements the United States have long prohibited anyone other than a lawyer from holding an ownership interest in a law firm. As a result, a U.S. law firm must consist exclusively of attorneys. This differs from the practice in many other countries, where law firms may be part of an integrated enterprise including other professionals. The U.S. ethical rules also prohibit what is termed "fee-splitting" of attorneys' fees with a non-lawyer. These rules have been interpreted to prohibit dividing legal fees between attorneys and non-attorneys, even including non- attorneys who may assist with operating the law firm or with a specific legal matter. unlike in many European, Asian and Latin American legal systems, is the mass tort action. In this type of litigation, a group of people with similarly caused injuries join together to pursue their claims in a single litigation or a consolidated group of litigations. Another legal institution more common in the United States than elsewhere is the contingent-fee litigation, in which an attorney represents a plaintiff or group of plaintiffs, with the understanding that the attorney's fee will be a percentage of the plaintiffs' recovery. Most mass tort cases are also contingency-fee cases. Since these cases are often protracted and difficult, the law firms that specialize in handling them often have cash-flow issues. For example, a group of plaintiffs may wish to file a meritorious case asserting that they have suffered serious injuries, and alleging tens or hundreds of millions of dollars in collective damages. But almost invariably, the individual plaintiffs will be unable to pay any legal fees except as a share of the ultimate recovery. Indeed, the plaintiffs may not even be able to cover the day-to-day operating expenses of running the litigation, such as discovery expenses and experts' fees. If the law firm ultimately succeeds in proving or settling the case, it will eventually collect enough money to pay all its expenses and, if it selects its cases well, earn a lucrative legal fee. But the time between when an injured plaintiff walks in the door and when his or her case is resolved will usually be measured in years. A law firm may be able to cover the costs of one or two such cases but usually need some form of financing arrangement with a lender to cover its cash flow needs between judgments or settlements and paydays. By now, many lawyers are familiar with third-party litigation funding entities. These are entities that are willing to invest in a pending or proposed litigation, in return for a share of the recovery if the case is successful (and with no expectation of recovery if the case is unsuccessful). However, as litigation becomes more complex and expensive and law firms' overall cash flow needs increase, new forms of litigation funding are developing to finance the law firms themselves, particularly mass-tort or class- action firms handling virtually only contingency-fee matters. In one type of funding arrangement, similar to factor lending, the lender agrees to make a line of credit available to the law firm. The firm may draw upon the line of credit to fund its operating expenses. The lender is entitled to be repaid its principal, plus interest, plus in some cases a portion of the law firm's revenue. This new form of law-firm-funding plays a valuable role in making it possible for law firms specializing in mass-tort and class action cases to pursue these cases on behalf of plaintiffs who will often have sound legal claims, but where neither the plaintiffs themselves nor their lawyers have the funds to pursue them. However, the legality of such funding arrangements is being challenged on the ground that they represent a sharing of fees between the lawyers and the non-lawyer funding entity. practice group. He has extensive experience representing parties in complex commercial litigations and, in particular, in business, securities and real estate controversies. 360 Lexington Avenue, 14th Floor New York, New York 10017 212.922.9335 Fax ganfershore.com |