Litigation funding is capital made available to plaintiff law firms to help them level the playing field when they are up against a large corporate defendant. Law firms who don’t have access to funding face a higher risk of being forced to settle early and cheaply because they don’t have the means to take their case all the way to trial.
Litigation funding is not a loan, it’s an investment in the outcome of a case or group of cases, with the potential case award(s) as the collateral. The funding entity puts up capital in exchange for charging interest or a share in the case outcome. The most common use of the capital is case expenses, firm overhead and advertising, however Case Works, LLC, the leading mass tort client engagement and case development solutions provider, also offers the option for the fees for these services to be deferred until case settlement through access to a funding facility.
Funding Vs. Loans
A law firm could apply for a loan, but that’s not necessarily the best option. For one thing, if the case is lost, the borrower firm must still repay the loan. Litigation funding is called “non-recourse.” That is, the funder receives a return on their investment only if there is a recovery in the case. If the case is lost, the law firm has no repayment obligation. This is the generally agreed-upon criteria.
However, like traditional lending, litigation funding is also subject to an application and underwriting process. Getting approved for litigation funding is a difficult process for a law firm, with over 95% of applicants rejected.
Getting Funding Approval
To be approved for litigation funding, the firm must show the funder that it is a good credit risk. The funding entity will conduct due diligence to determine the firms’ eligibility. With a high number of rejections, firms must show the funder that it is a worthwhile investment.
One thing that a law firm can do to increase the odds of success is to provide the potential funder with clean and accurate data about the firm’s cases from its case management system. This is especially true of personal injury and mass tort firms who handle hundreds and even thousands of cases every year.
As with any type of investment, a potential investor performs due diligence before handing over any funds. The due diligence process is when the funders analyze the firm’s docket of cases to put a value on each of them. From this value, they can then estimate what the firm’s legal fees will be, and how much they might recover. This is the collateral that guarantees the funding. The better your collateral, the more confident they are about loaning you funds with better terms.
Litigation funders value a firm’s cases through their due diligence a firm’s cases. They need information about the cases such as:
· The current legal status of the case
· Is the file complete?
· Are there any co-counsel splits on the attorney fees?
· Are there medical records that prove the alleged injury?
The funding entity will have its own procedures for evaluating an investment into a law firm’s collateral. Some will conduct the work with in-house counsel, while others may have outsourced counsel perform their due diligence.
Funding Approval with Case Management
A litigation funder looks at every aspect of a firm’s cases before making a loan offer. A plaintiff law firm must answer the question that every funder will be asking, “Can I reasonably expect to be repaid based on the value of this docket?”. So how can you increase the value of your collateral? The more you can show funders that you have strong cases, the more they will become confident in funding your firm’s cases.
Clean and accurate data is the key to demonstrating to a funding entity the firm’s worth. This is where many firms with obsolete or non-existent case managements systems fail. The funder may ask the firm to provide a list of all cases that are past summary judgment or within six months of a trial date. They could ask a firm to provide a list of the cases that represent the top 30% of the firm’s expected fees over the next year. Or they could ask the firm to provide statistics of how many new clients were signed monthly for the past 6 months. Each of these data points give the funder important information about the health of the firm and the ability to forecast revenues into the future. This is vital information that funders need to provide you with their best interest rates and the best terms possible.
Firms that have robust case management systems can provide answers to these questions quickly and easily. Good case management helps you get a better interest rate from a funder as well as improving your firm’s efficiency, benefiting clients. Plus, it will also take a huge burden off the firm when it’s time to provide the funder with the required quarterly updates on cases.
Is your firm using an up-to-date case management system? If not, it could cost the firm thousands of dollars in both lost productivity and higher interest rates for your litigation funding. Before you look for litigation funding, review your case management system first, and upgrade if necessary.
Robert D. Martorana, Esq is the owner of REMO Litigation Finance, an experienced provider of advisory and brokerage services. For more information contact: info@remolitfin.com
