David v. Goliath revisited: funding companies help level the litigation playing field.

Trial lawyers who represent tort victims know it, and defense lawyers do too: Time is almost always on the side of the defendant. The longer a case chums through the pretrial process, the less likely the parties will face off before a jury or judge and the more likely the plaintiff will settle for merely a fraction of the damages claimed.

Only 3 percent of tort cases filed in state or federal court are tried to a verdict, according to data from the Bureau of Justice Statistics, a research arm of the U.S. Department of Justice. Some cases that don't make it to trial are dismissed because of a legal or factual flaw, but most cases--about 75 percent--are settled. (U.S. Dep't of Justice, Bureau of Justice Statistics, Trials and Verdicts in Large Counties, 1996 (Aug. 2000).)

One reason cases settle is that trials are risky and expensive--for both sides. But plaintiff lawyers say most of their clients settle because they simply can't afford to wait the nearly two years it takes for the average case to come to trial.

It's expensive to be injured. Medical bills mount quickly, and often they are not covered by insurance. A disabling injury can result in demotion or job loss, leaving the victim with little or no way of avoiding financial ruin.

"So many plaintiffs are in dire circumstances," said Al Cone, a retired plaintiff attorney in Ocala, Florida, and a former president of ATLA. "They need money now, not a year or two from now. And a lawyer can't ethically lend money to clients or take them to a banker to get a loan." The only money the lawyer can advance is the cost of trial preparation, he said.

Enter Advance Settlement Funding, a company Cone launched in 1998 to provide loans to cash-strapped plaintiffs. It's one of dozens of a new breed of finance enterprises commonly called "litigation funding" companies.

Their services vary. Some, like Cone's, issue checks to plaintiffs only. Others also advance money to plaintiff lawyers to help defray costs like experts' fees. Some limit their funding to parties that have won at trial and are facing an appeal of the verdict.

On the surface, these cash advances would seem little different from the standard loans that banks make every day. But one key requirement of that typical bank loan is missing in an advance from a litigation funding company: collateral.

Litigation funding sources provide money to applicants on a strict contingency basis. If the plaintiff loses, the funding company gets nothing back--not even the principal. And given that plaintiffs win fewer than half of all tort claims that go to trial, this is high-stakes business.

So why would a reasonably prudent investor want a piece of this action? Because the rewards can be as high or even higher than the risk. If the plaintiff wins, the funding company often reaps a gain of 100 percent or more on its investment.

Funding company executives say the burgeoning industry provides a much-needed service to plaintiffs who have long been outgunned by deep-pocket defendants. The plaintiff is still like David going to battle against the corporate Goliath, funding proponents say--it's just that these companies give David a bigger rock for his sling.

"We help plaintiffs go the distance, allow them to hold out for a better settlement," said Andrew Savage, founder of Law-Funds, LLC, based in Boston. By removing external financial pressures on plaintiffs, he said, these companies enable a case to be resolved on its merits.

When things go well, it's a "win, win, win" transaction, Savage said. The plaintiff wins, the lawyer wins, and the funding company wins.

But not everyone is cheering. Critics of the new industry say funding companies take advantage of desperate plaintiffs, create conflicts of interest, and may even violate usury laws by charging exorbitant interest rates or fees.

"All personal injury lawyers would love to see their clients get a little money to last them however long a case takes, but the clients don't realize what it will cost them," said Steven Bagen, a Gainesville, Florida, plaintiff lawyer who recently took his concerns before a Florida Bar AssOciation ethics committee.

Last summer, the committee approved an advisory opinion that would have given an ethical green light to Florida lawyers considering litigation funding for their clients or cases. But at a meeting in January of this year, the committee decided to reconsider its decision after Bagen told them one of his clients had been approached by a funding company that offered to advance money at an excessive rate.

"The loan was for $8,000, and he would have had to pay back $25,000, and that was for [a loan] under a year," Bagen said. "It's a promise of easy money. They say we can fund you however many thousand you need, and clients are suckered in by this. But a year or two down the road, they're having to pay triple or quadruple what they got."

The Florida committee decided to take its opinion under advisement, referring it to a subcommittee for further study, until a meeting scheduled for mid-June. At that point, "committee members could table it, or vote to adopt it, or vote not to adopt it, or change it," said Lili Quintiliani, an assistant ethics counsel with the Florida Bar Association. "Ultimately, it could go before the board of governors, and then they could do the same thing--table it, or adopt it, or not, or change it."

Most state bar associations that have looked into funding companies have issued opinions that allow lawyers to use them, according to Savage. "They say it's permissible, but it has pitfalls, and the lawyer needs to be cautious," he said.

A key concern is conflict of interest, said Stephen Gillers, a legal ethics professor at New York University School of Law.

"There's a danger that the lawyer's head will get turned," Gillers said. "For example, the opportunity to settle a matter may arise, and the lender may prefer settlement because it can cash out its investment and get the compensation it bargained for.

"But it may be in the client's best interest to hold out for more. The lawyer should ignore the lender's desires, but this may result in alienating a lender" that the lawyer may want to turn to again in future matters, Gillers said.

Other concerns that raise the eyebrows of ethics experts include a possible breach of client confidentiality--the lawyer must be careful what information is revealed to the funding company--and a potential compromise of the lawyer's ability to make objective and independent decisions, especially with regard to whether a client should accept litigation funding at all, Gillers said.

Funding companies also must steer clear of states that enforce the centuries-old legal doctrines of champerty, barratry, and maintenance, which prohibit nonparties from promoting or investing in lawsuits. Most states have abolished these "ancient and imprecise" laws, Gillers said, because modern rules dealing with conflicts of interest and solicitation are adequate to deal with the evils these doctrines were meant to address. But in some states, like Maine, the doctrines live on in common law or statutes.

Bagen said his only concern with litigation funding is its price, which he thinks should be regulated. Most states have usury statutes that cap interest rates to protect consumers. But "these agreements avoid usury laws through a technicality because a contingent loan doesn't come under them," Bagen said.

Advance Settlement Funding's Cone said he looked into this issue before setting up his company. "This is not usury," he said. "I researched this, and Florida courts and many others have said that if repayment is contingent on the happening of an uncertain event, it's not usury."

Savage agreed. "It's impossible in any jurisdiction to have a usurious situation in a contingency arrangement. If that were not the case, every venture capital investment would be usurious, and contingent fees would be too."

Other funding company principals added that the high rates they charge are justified by the high risks they take in underwriting cases.

"You have to look at the risk taken by the person who is putting up the money, and then analyze what is a fair return," said Alan Zimmerman, president of San Francisco-based LawFinance Group, Inc., which provides financing primarily for parties that have won a judgment that is being appealed. ATLA has endorsed the company's appeal-finance program.

Echoing Savage, Zimmerman said, "It's like venture capital used to finance business, and I can tell you that [venture capitalists] don't put money out at 10 percent."

Bagen said he doesn't buy the high-risk argument because the people who screen the cases are usually experienced personal injury lawyers or former insurance adjusters who know a good case when they see it.

"The risk is infinitesimal, minuscule," Bagen said. "The cases are screened very carefully. This is not a contingent loan. The risk is slight, if there is any risk at all."

Savage disagreed, saying LawFunds has lost as much as $100,000 in a single transaction. "We're going through the same type of growing pains that any lawyer opening up a contingency-based law firm goes through," he said.

Yet business is booming. "We receive approximately five new applications a day," Savage said. "In the two years we've been in business, we've received in excess of $250 million in applications. And we fund approximately 10 percent of the applications we receive."

Zimmerman estimated the number of advances his company makes as "in the hundreds" annually.

Citing proprietary concerns, funding entrepreneurs are reluctant to discuss specifics about profits and losses. Cone declined to reveal even how many advances his company makes a year.

Savage said his company has been "happily successful." And hinting at success, Zimmerman said, "We're still in business after seven years." Cone said his three-year-old firm has not yet turned a profit.

All's well that ends well

No two funding companies are the same. Some are small operations that lend modest sums to a limited number of plaintiffs. Others employ large staffs, including advisory panels of lawyers and experts, and extend funding to plaintiffs and their attorneys before trial, after a verdict or settlement (when disbursement of proceeds is being held up by administrative details), or during an appeal.

Some prefer to charge a flat fee to be paid to the company when the case is closed, while others charge interest on the loan, sometimes at a rate that increases over time. Some limit investments to small amounts of money; others advance millions for the right case.

In small companies like Cone's, the decision whether to fund remains with the principals. But larger companies usually farm out the decisions to panels composed of lawyers, judges, and other litigation experts.

"We look for cases with strong liability, clear and demonstrable damages, and a strong attorney who has a proven track record," Savage said.

Gordon Vann's situation is a good example of the type of case that makes the cut. A 75-year-old owner of an auto body shop that rented space for its operations in Berkeley, California, Vann was sued by the shop's landlord in 1991 for environmental damage to the property.

He turned the matter over to his liability insurer, Travelers Indemnity Co., which refused to mount a defense on his behalf. He then contacted San Francisco lawyer Philip Pillsbury, who filed a bad-faith claim against the insurer.

"In the course of litigation, we learned that Travelers had a pattern and practice of turning down claims like Vann's because they are expensive to defend," Pillsbury said.

The case went to trial in 1997, and the jury awarded $26.4 million, which included $25 million in punitive damages. Then Travelers threatened to appeal if Vann didn't settle for $10 million. (Vann v. Travelers Indemnity Co., No. 727815-4 (Cal., Alameda County Super. Ct. Feb. 14, 1997).)

"Here's a guy who is living a hand-to-mouth existence," Pillsbury said. "He was in bankruptcy, the IRS was seeking to attach his house, his business was gone, and he and his wife--who had Alzheimer's --were in poor health. He couldn't stand an appeal that would take years."

Zimmerman's LawFinance offered to help. It offered Vann "a sum in the low six figures to allow him to continue his modest lifestyle" during the appeal if he agreed to pay back twice that amount if he won, Pillsbury said. Vann agreed, and he ultimately did win.

Pillsbury said he was never concerned with the cost of the advance. "To have that kind of staying power" was worth it, he said. "There was a lot of pressure on us to resolve the matter for far less than its value. After the trial, the lawyer for the other side comes over and says, `Phil, I'll give you $10 million in 10 days, no appeal.' That's a pretty serious offer. But the client was pretty serious too. He wanted what the jury had awarded him."

Cases like Vann's are the strongest argument in favor of funding companies, according to ethics professor Gillers. "Experience supports the conclusion that deep-pocket defendants use the fact of the plaintiff's inability to fund the cost of litigation to wear the plaintiff down and encourage the settlement of claims well below their true value," he said.

Gillers would like to see the industry regulated to protect both clients and lawyers. For example, he believes that regulatory agencies should limit the interest rates or fees the companies charge and issue rules or opinions about what lawyers can divulge to them. But he doesn't think lawyers and their clients should be prohibited from using them.

No doubt, many cash-strapped plaintiffs and their lawyers would agree. When offered a choice between a lowball settlement and the opportunity to see a worthy claim through to a fair verdict or settlement, those plaintiffs are likely to say, "Show me the money."