“Lawyer-Directed” litigation finance, whereby a funder forms a partnership with contingency counsel, provides an opportunity to work around some of the issues that exist in client-directed funding – most notably issues that arise when creditors or lienholders are awaiting recoupment from the client, pending successful litigation. Many funders are averse to partnering with a client that is encumbered by senior lienholders, hence many such claims go unfunded, despite the merits of the underlying case. Lawyer-directed funding provides an attractive solution.
An LFJ Conversation with Michael Kelley, Partner, Parker Poe
“Lawyer-Directed” litigation finance, whereby a funder forms a partnership with contingency counsel, provides an opportunity to work around some of the issues that exist in client-directed funding – most notably issues that arise when creditors or lienholders are awaiting recoupment from the client, pending successful litigation. Many funders are averse to partnering with a client that is encumbered by senior lienholders, hence many such claims go unfunded, despite the merits of the underlying case. Lawyer-directed funding provides an attractive solution.
Big Law Business reports that layer-directed funding involves the direct financing of a law firm’s contingency fee cases, where the collateral lies in the successful recovery of claim settlements or awards. This is in contrast to client-directed funding, in which the funder partners with a client and receives a portion of the case proceeds.
Client-directed funding remains quite popular both in the US and abroad, however there are several roadblocks in place. The aforementioned creditor situation being one such example. With lienholders in place, it can be difficult for clients to secure single-case funding.
However, there is a neat workaround. Attorneys can assert charging liens on litigation proceeds; liens that are typically prioritized in first position over other secured credit. The specifics of a charging lien vary from state to state, but many jurisdictions recognize them as enforceable, and in some cases even comparable to an equity stake in the proceeds of a claim (that according to the New York Court of Appeals).
Given that no such statutes exist for litigation funders, funders are often wary about partnering with lien-encumbered clients. However, lawyer-directed funding allows the funder to partner with an attorney who may assert the charging lien and secure top priority in the claim proceeds, thus guaranteeing the funder’s participation in those proceeds.
Lawyer-directed funding assures the funder that their proceeds will be collectable, and provides lien-encumbered clients ample opportunity to finance their claims.
