Investment Tip? Legal Lending: Place your Bets!

November 18th, 2010. By Hunter West

Would you entertain an investment that pays up to 24 percent annually? Sound too good to be true? A Ponzi scheme? 

Au contraire, Mon ami. Litigation is the new investment playground, my darlings… 

One aspect of the legal system that will surprise some is the growth in legal lending. That’s right—the business of lending (for profit) in order to fund litigation. 

Lawsuits are expensive. The larger legal houses may have the financial clout to self-finance. However for the remainder, financing the action in order to get you through to the settlement (and the payoff) can be a hardship, if not impossible. 

So lawyers borrow money to fund lawsuits from entities that are in the business of doing just that. 

The New York Times recently ran a fascinating story based on an investigation by the Center for Public Integrity, a non-profit based in Washington. There are a number of firms that specialize in floating loans to legal firms in order to finance lawsuits—presumably, after their efforts to secure financing through ordinary channels (the charted banks) fall through. 

In comes Counsel Financial, based in Buffalo and financed by CitiGroup. There’s also LawFinance Group. And LawCash, based in Brooklyn. They come to the rescue when traditional forms of financing fail the law firm, providing the cash at a healthy rate of interest and recouping the loans when the settlement comes through. 

Surprised? Alan Zimmerman, founder of LawFinace Group, certainly was at the initial revelation that this kind of thing was both possible, and needed. Zimmerman practiced law in California for two decades until 1992, when fate led him down a slight detour. 

As Zimmerman tells it, a legal acquaintance asked if he would lend to a client who had won a sexual harassment lawsuit that had been appealed. The client needed money for living expenses to avoid taking a smaller settlement. While the terms of the loan were not revealed, Zimmerman invested $30,000 in the case. Meanwhile the defendant in the case almost immediately dropped the appeal and paid out the settlement. 

Zimmerman recovered his original investment together with an almost overnight profit of $20,000. 

An interesting way to make money, he thought—and subsequently turned it into a business. LawFinance Group has invested more than $350 million in litigation since 1992. 

Counsel Financial bills itself as the largest lender, with more than $200 million in loans on the books. The firm charges 18 percent annual interest. 

Not a bad rate of return. What’s even better for the legal firm taking out the loan is the fact interest costs can be passed on to clients in most states. Thus, zero cost. 

The only danger—is losing the case. If there is no settlement, the loan has to be repaid. The legal firm is on the hook for the loan, and there have been bankruptcies. 

With more money available for litigation, proponents say that it levels the playing field between plaintiff and well-heeled defendant. Unless a plaintiff finds a lawyer who will take on a case pro bono or has the capacity to self-finance, many legitimate lawsuits never see the light of day. 

How can one individual take on a corporation? With so many financing options now at hand, plaintiffs stand a better chance of getting into court. It champions the cause of justice for all. 

However, critics maintain that the money train drives not only justice, but also nuisance lawsuits. The reason is that investors looking to grow their legal lending business will seek out cases with sometimes-questionable merit—simply to make the loan and collect the interest. 

That said, investors are also very careful about the cases to which they lend. Especially for the big ones, a lending firm will often take months investigating a case along with the legal firm, in order to determine its viability, and capacity to win. Everybody wants to make a profit. But then you also want to recover your principle, too. 

It’s a roll of the dice—and there are those who come down on both sides of the argument as to the value, or the wisdom of legal lending. 

But 18 percent rate of return? What are my CDs making me now? 

Ardec Funding, a lender in New York backed by a hedge fund, advanced $45,000 to a Manhattan lawyer hired by the parents of an infant who suffered brain damage at birth. The jury award in the trial was $510,000. Ardec, according to The New York Times article, is collecting $900 a month against the loan until the award is paid. 

That translates to an annual rate of return of 24 percent. 

24 percent? Good God, there’s just as much risk in the stock market, and the stock market isn’t paying out 24 percent! 

Geez, sign me up…

Tags: Lawsuit Investing, Legal Funding, Legal Lending

This was posted on Thursday, November 18th, 2010 at 12:14 pm and is filed under lawsuits, Lawyers . Feel free to respond, or trackback. Read our comments policy.