Scott M. Kuboff, Esq.
Northeast Ohio Trial Attorney

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Lawsuit Funding: A Horrible Idea

Personal injury and medical malpractice claims are advanced to help an individual who has been wronged or injured by the negligence or carelessness of another person to be compensated for their injuries.   That being said, personal injury and medical malpractice claims do not come with a blank check.   Liability is often disputed and can be difficult for a plaintiff to establish.   In fact, according to the most recent report from the Ohio Department of Insurance, roughly 75% of medical malpractice claims are resolved in favor of the doctors and hospitals.    

With statistics like this in mind, it easy to understand the allure of lawsuit funding: guaranteed money up-front and a promise that you can still recover money from pursing a lawsuit without any risk or obligation to repay the money back if you lose.   I guess that – not having to repay the advance if you lose – is what differentiates lawsuit funding from a loan from Bobby Baccalieri of The Sopranos.   However, make no bones about it: lawsuit funding is a horrible idea. 

In 2003, the Ohio Supreme Court in Rancman v. Interim Settlement Funding Corp., 99 Ohio St.3d 121, 2003-Ohio-2721 stopped short of calling lawsuit funding predatory but, nonetheless, made lawsuit funding illegal in the State of Ohio as it violated the doctrines of “Champerty” and “Maintenance.”   As the Rancman court explained maintenance “is assistance to a litigant in pursuing or defending a lawsuit provided by someone who does not have a bona fide interest in the case” and champerty “is a form of maintenance in which a nonparty undertakes to further another’s interest in a suit in exchange for a part of the litigated matter if a favorable result ensues.”   The Rancman court recognized that “the law of Ohio will tolerate no lien in or out of the [legal] profession, as a general rule, which will prevent litigants from compromising, or settling their controversies, or which, in its tendencies, encourages, promotes, or extends litigation.”  In finding lawsuit funding illegal, the Rancman court noted that it creates a disincentive for litigants to settle their case.    More on that in a little bit.

In response to Rancman and apparently a national clamoring for lawsuit funding – although I’m not sure who was calling for action outside the lawsuit funding industry – in 2008 the Ohio General Assembly enacted R.C. § 1349.55 thereby making lawsuit funding legal in Ohio.  As it stands, Rancman has been effectively overturned by the legislature but the Rancman facts and reasoning are still of some value as it illustrates how lawsuit funding agreements work.

In Rancman, the lawsuit funding company advanced $6,000.00.    The terms of the agreement provided that if the case settled within 12 months, the company was entitled to the first $16,800 due to plaintiff.    If it settled within 18 months: $22,200.  If it resolved within 24 months: $27,600.    Although the Rancman facts do not state what the amount would be if it settled after 24 months, it is reasonable to assume it would increase by a sum of $5,400 every 6 months.  While every agreement is unique, the numbers in Rancman are par for the course.    Let’s look at it this way:

Time Period                   Amount            Advance       Profit             % Return

1 to 365 days:                 $16,800              $6,000       $10,800          180%

12 to 18 months:             $22,200              $6,000       $16,200          270%

18 to 24 months             $27,600              $6,000       $21,600          360%

No one would think that a $6,000 loan which would be repaid at 180% interest, let alone 360%, is a wise or sound decision.   Yet lawsuit funding companies tell plaintiffs that it’s not a loan as nothing needs to be repaid if they do not recover.    Despite this, accepting lawsuit funding is not a wise decision.

Cases take time to investigate, litigate, and resolve.   Some cases require 1 to 2 years of work before they are even filed with a court.    Once in court, it can be another 2 years before the case settles or goes to trial.   Even if you are fortunate and your case is resolved shortly after you receive lawsuit funding, it still has a significant impact on your net recovery.  And the longer the case takes to resolve, the less likely settlement becomes.    Here is an illustration:   

First, let’s assume the attorney’s fee is 33.33% which is typical for pre-suit representation.    Next, let’s assume there is $250 in case costs which is typical for obtaining medical records.   Then, let’s assume your medical insurance paid $5,000 for your treatment which you are required to repay if you receive compensation.    Now, let’s assume you accept a $6,000 advance from a lawsuit funding company.   Finally, let’s assume that the maximum that the insurance company is willing to pay (or a jury will award) is $50,000.   Here’s a comparison:

                                With Advance       Without Advance

Settlement              $50,000.00          $50,000.00

Attorney Fees         $16,665.00            $16,665.00

Case Costs              $250.00                $250.00

Insurance Lien        $5,000.00             $5,000.00

Advance Lien          $16,800.00                    

CLIENT                    $11,285.00              $28,085.00

 

This would be true if the case settled 1 day after you received funding up to 1 year after.    However, what happens if the case has to be filed?   Now the attorney’s fee may increase to 40% and the case expenses (filing fee, deposition costs, experts, etc.) will naturally go up.    

Here is a look at what the breakdown is assuming the case resolves within 18 months: 

                                With Advance       Without Advance

Settlement              $50,000.00          $50,000.00

Attorney Fees         $20,000.00          $20,000.00

Case Costs              $2,500.00             $2,500.00

Insurance Lien        $5,000.00             $5,000.00

Advance Lien          $22,200.00                    

CLIENT                    $300.00               $22,500.00

As you can see, the advance from a lawsuit funding company creates a disincentive for settlement; a concern raised by the Rancman court.    As you can imagine, this disincentive only grows stronger the longer litigation takes.    To further illustrate my point, and using the number above, for a plaintiff with an advance to net the same amount as the plaintiff without the advance, the settlement would have to be $87,500; which the insurance company isn’t’ willing to pay.   So it goes to trial, which takes time and time increases the repayment of the advance.  Of course, if the insurance company is willing to pay $87,500, the plaintiff who did not accept lawsuit funding receives $45,000; not $22,500.

In fairness to lawsuit funding companies, they will tell you that accepting funding is and should be a “last resort.”   If you’re considering accepting an advance, seriously consider and weigh the long-term consequences of your short-term need and discuss it more fully with your attorney.    Certainly, I counsel my clients against accepting such funding.  

If you have been injured by the negligence of another, contact Scott for a no cost, no obligation consultation and case evaluation.