Litigation Expenses: Interest Charged to Lawyer Passed on to Clients

July 18, 2012, 4:30PM. By Chris Hernandez

New York, NYIn Opinion #754 dated 2/25/2002, the New York State Bar Association’s Committee on Professional Ethics pronounced that attorneys financing a lawsuit with borrowed money may pass the interest costs onto their clients.

At the time of the opinion, the U.S. litigation finance industry was virtually nonexistent, and the question of whether it was ethical to include interest and fees as part of case costs had not been widely addressed.

In the time since the opinion, the legal lending industry has grown substantially and a number of new lenders with legal experience have entered the field. “While banks have essentially gotten out of the business of lending to contingency based law firms, the need for funding has never been greater for personal injury firms” says Richard Silverstein, President of Case Funding Inc., a specialty finance company based in New York and Nevada serving the legal community. “There are only a handful of lenders with the experience and capital that are actively funding contingency law firms,” he adds.

Most states allow attorneys to borrow money to fund their cases, and most also allow the attorney to include reasonable interest and fees on the loan to be included in the case cost expense, and then repaid from their clients’ settlement proceeds.

Many plaintiffs’ lawyers defend the practice, reasoning that it helps level the playing field because they face such a great financial disadvantage when taking on large corporate defendants.

Lawyers incur thousands of dollars in bills over the course of litigating a case, from filing fees and litigation support to hiring expert witnesses and travel. In most situations, the attorney is required to pay these costs upfront and cannot recoup these expenses until after settlement. But borrowing is expensive and rates can exceed 30 percent per year, representing the risk inherent in this type of lending. If the cost can be included in the case expenses, it lowers one of the hurdles lawyers face when deciding whether or not to borrow.

Considering the cost of funds, it is not surprising that lawyers would want to share the financial burden. In New York and most other states, lawyers are allowed to include interest and fees on borrowed money, provided that they inform their client and the interest charges are “reasonable.” Most state bars have written their own ethics opinions on the matter.

“Adequate working capital is an invaluable resource for litigators working on a contingency basis,” said Mr. Silverstein, “and often makes the difference between achieving a favorable outcome or not. The fact that the attorney can include interest and fees in case expenses helps spread the cost among all that benefit from the settlement.” Legal Funding can give firms the flexibility they need to mount an effective case against deep-pocketed law firms retained by large insurance companies.