The Cost Of Pursuing Justice: Litigation Financing Agreements

• Published date: 17 January 2022
• Subject Matter: Finance and Banking, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Financial Services, Insolvency/Bankruptcy, Trials & Appeals & Compensation, Personal Injury
• Law Firm: Cullen and Dykman
• Author: Mr Michael Traison, Andrew P. Nitkewicz and Amanda A. Tersigni

The pursuit of Justice can be expensive.

Unlike in many countries, litigants in the United States bear their own costs of litigation, including all out-of-pocket expenses and attorneys' fees. Often referred to as the American System, it makes litigation prohibitively expensive for some, and plaintiffs must look at their options beyond merely abandoning their case.

"Modern litigation is expensive, and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case." Hamilton Cap. VII, LLC v. Khorrami, LLP, 48 Misc.3d 1223(A), at *5 (Sup. Ct. New York County 2015). Because costs associated with each case are unique and the potential outcome is uncertain, parties may consider possible ways to afford the lawsuit and will often turn to advisors to assist in navigating the process of securing financings. An especially popular avenue in personal injury matters and collections actions is to place the plaintiff's lawsuit with a law firm operating on a contingency fee basis. Rates may vary from 20% to as high as 40-50% going to the lawyers. But even then, expenses such as filing fees, copying costs, and costs of discovery including depositions can be prohibitive.

Litigation finance is an increasingly popular option for funding lawsuits in the United States. Fast Trak Inv. Co., LLC v. Sax, 962 F.3d 455, 468 (9th Cir. 2020) ("Litigation financing is a rapidly growing industry."). It is the practice of securing third-party funding for a litigation claim in exchange for a stake in the outcome of the pending lawsuit.

There are both commercial and consumer litigation financers. Litigation financing generally involves three parties: the plaintiff, their law firm, and the funder. The plaintiff or law firm seeks funding to pursue a legal claim and through this arrangement, the funds are used to pay for legal fees and/or costs.

Financing can be provided at any point of the proceedings from pre-litigation to appeal, up to recovery. Plaintiffs and law firms are using litigation financing domestically to finance legal claims. They are also deploying this globally to finance enforcement campaigns.

Litigation finance is available to litigants involved in many different types of lawsuits. This includes personal injury matters, commercial disputes, civil rights actions, etc. In some bankruptcy cases, creditors' committees may choose to pursue avoidance actions or other claims and often seek a carve out of secured lenders'...