Litigation funding firms and workers comp cases
A reader asks for information about "litigation funding" firms. These are companies that offer an advance to claimants to fund litigation. I had never heard of these types of organizations being used in workers compensation cases, so this question sent me digging. Who better to offer an opinion than an expert? Alan Pierce of Alan S. Pierce & Associates is an employee’s attorney. Since his firm specializes in representing the interests of injured workers, I asked him if he could weigh in on the matter. Here are his comments:
“I will begin with this caveat - I am no expert on the matter and have never utilized a legal funding company. With that in mind, I can offer a few thoughts that might be helpful to your readers.
There are two general situations when services of such a company are used. The first is to advance cash to a plaintiff in exchange for a repayment at a rather high interest rate when the case settles. The risk to the lender is that if the case is lost there is no re-payment.
An attorney may not advance monies - that is clear. Legal funding companies have been created in the last few years. We hardly ever see these companies being involved in workers comp cases for a couple of reasons. First, unlike a tort case, a workers comp case often does not result in a settlement. All my tort cases either settle or go to trial with a verdict being the result, therefore, on clear liability tort cases there is likely to be a settlement or judgment. This is not the usual path with workers comp. A claim may indeed settle by lump sum or, more commonly, it may not: The employee will receive weekly benefits for the period claimed with no lump sum occurring.
Second, we sometimes see legal funding in workers comp cases to "buy out" a structured settlement. In many states, selling a structured settlement for cash in a workers comp case is either prohibited by the contract or by statute. Often, the funding company simply will not purchase a workers comp structure.
Some attorneys discourage clients from contracting for a cash advance because the money is usually dissipated long before the case settles and it is ultimately expensive to the client. Also, it may lead the client to reject a reasonable settlement offer which, after legal fees and repayment, leaves the client little, increasing the likelihood that the client will opt to 'roll the dice' at trial. If the client loses, the attorney and the funding company get nothing. Most attorneys want their clients to make rational settlement decisions without the added burden of a loan to be re-paid.
Another area that is less controversial is using a funding company to loan money to the attorney to cover litigation expenses. This is a more conventional situation and in accordance with IRS regulations treating litigation expenses as 'loans' to the client as opposed to business expenses. Usually these arrangements are with more traditional lending sources, although legal funding companies do these loans as well.
I would stress that it is the very rare workers comp case that commands the necessary case expense for an attorney to justify going this route. Most of my cases involve expenses in the hundreds of dollars or, rarely, one or two thousand dollars. We have the client pay if they can, or we disburse and recapture later.”
Many thanks to Alan for his perspective. If there are any other attorneys who have thoughts on the matter, we would encourage comments.
The New York Bar’s Committee on Professional Ethics and the Pennsylvania Bar Association’s Professional Guidance Committee (pdf) have both offered opinions on the issue, although it should be noted that the opinions are not workers compensation-specific, they have more to do with the industry at large.
