this new form of law firm financing, a
New York State court decision in August
2015 has upheld the validity of such
funding agreements. In Hamilton Capital
VII, LLC v. Khorrami, LLP,
of credit to the defendant mass-tort
law firm. The law firm agreed to repay
the amount borrowed with interest at a
specified percentage. In addition, the law
firm agreed to pay additional "revenue
interest" in the amount of 10 percent
of the law firm's gross revenues over a
three-year period of time. The law firm
granted the lender a security interest in
its account receivables and agreed to
provide the lender with regular reports
on the status of its cases. The lender had
no role in the legal work associated with
the cases.
For several years, the law firm
enjoyed the benefits of this arrangement,
borrowing millions of dollars from the
line of credit to finance its portfolio of
mass-tort litigation. However, after the
law firm fell into default on its payments,
it sought to avoid its contractual
obligations under the credit agreement
that it had voluntarily entered into
provided for improper fee-splitting
between the lender and the law firm. In
particular, the law firm challenged the
agreement's provisions under which the
law firm granted the lender a security
interest in the law firm's receivables and
received a percentage of the revenues.
On August 17, 2015, Justice Shirley
Werner Kornreich of the New York
State Supreme Court (a trial court)
in Manhattan rejected the law firm's
arguments. The court explained that
sound public policy favors allowing law
firm financing agreements:
investment capital where the
investors are effectively betting on
the success of the firm promotes the
sound public policy of making justice
accessible to all, regardless of wealth.
Modern litigation is expensive, and
deep pocketed wrongdoers can deter
lawsuits from being filed if a plaintiff
has no means of financing his or her
case. Permitting investors to fund
firms by lending money secured
by the firm's accounts receivable
helps provide victims their day in
undermined if the Credit Agreement
were held to be unenforceable. The
court will not do so.
colleague Justice Eileen Bransten, also
observed that "there is a proliferation
of alternative litigation financing in
the United States, partly due to the
recognition that litigation funding allows
lawsuits to be decided on their merits,
and not based on which party has deeper
pockets or [a] stronger appetite for
protracted litigation."
Justice Kornreich then rejected each
of the law firm's specific challenges to
the credit arrangement. With respect
to the challenge to the lender's security
interest in the law firm's accounts
receivable, Justice Kornreich quoted
from two earlier court decisions, one by
Justice Bransten in late 2013 and the
other from Delaware,
interest in both a law firm's earned and
not-yet-earned fees:
"inappropriate" for a lender to have
a security interest in an attorney's
contract rights. Yet it is routine