Lawsuit Financing: What You Need to Know Before You Borrow
Mesh News Desk editor, Jane Akre interviewed Mark Bello of Lawsuit Financial Corp of Farmington Hills, Michigan.
Mr. Bello provides MND readers with some solid information they need to understand before reaching out to seek funding to make ends meet in advance of a expected lawsuit settlement. Yes, funding in advance of a settlement is risky business, but with information comes empowerment.
There are many misconceptions about the field of lawsuit funding. Hopefully, this interview will shed some light on the issue.
Mark M. Bello 877-377-SUIT (7848)
Lawsuit Financial Corp. LLC
Farmington Hills, Michigan
Akre Q: Let’s talk about the 800 pound gorilla in the room. Some lawsuit “lending” companies are often accused of being “predatory.” Why is that? What makes you different?
“There are many different ways to define “different”. My first comment is to quarrel with the use of the term “lending” in conjunction with a lawsuit funding transaction. This is a misnomer because lawsuit funding transactions are not “loans”. A “loan” requires an “absolute obligation to repay” in almost every jurisdiction in America. With lawsuit funding, there is no absolute obligation to repay; the funding is excused if the lawsuit is unsuccessful. There is no hard collateral, just a lien on a case that may or may not be successful. Many lawsuit funding companies differ In terms of policies and rates and lawsuit funding can certainly be expensive because of the extraordinary risk being taken. When a funder’s capital is at risk in a pending lawsuit, it should not be a surprise to anyone that these transactions trend on the expensive side.”
Q: When you hear that term ‘predatory lending’ does it make you cringe?
“I confess that I am a little tired hearing it all the time. The use of that term exhibits a lack of understanding of what lawsuit funding companies do. A “predatory lender” charges excessive interest rates even when it receives hard collateral in return for the loan. A person who has spotty credit may apply for a credit card, a car loan or a mortgage. His bank accounts can be subject to lien, his wages garnished; his car or home can be repossessed. So, why charge excessive interest? The lender has solid, proven ways of assuring its principal and profit return.
Lawsuit funding companies must, for repayment, by contract, look only to the cases they have funded. All other assets of the person seeking the funding are irrelevant. A person can have significant assets but be cash poor and the lawsuit funding company can’t touch a single asset. Companies like mine lien cases and only cases. If a case is successful, our principal and profit is paid; if the case is unsuccessful, we lose our money. Not only are we not “predatory”, we are not “lenders”. What we do does not fit the commonly understood, legal definition of a “loan”. That we charge high rates for the risks we take does not make us “predatory”. We must offset losses with the profit we make on wins. And, there is much uncertainty; we get involved in cases that are handled by lawyers we hardly know, and for clients we have never met. If the case fails, we forgive it all. It should shock NO ONE that a transaction with this much risk can be expensive. Lawsuit funding, in general, trends on the expensive side; the client should be made aware of that going into the transaction. I am a full disclosure kind of guy.”
“Absolutely. It’s certainly wise to err on the side of smaller versus larger and, with my company, a plaintiff is not limited to just one advance. If a client needs $10,000 because her lawyer has advised that settlement is 10 months away and the client is short of making ends meet by approximately $1,000 a month, that client is far better off seeking $1,000 a month then $10,000 all at once. There are two very important reasons this is true: 1. Profits in lawsuit funding transaction accumulate over time. Thus, advances occurring closer to settlement time will be cheaper than those provided earlier. 2. Just because the lawyer predicts that the case will take 10 months to resolve doesn’t mean that his prediction will be accurate. If the case settles in six months, the client didn’t need the rest saving the client a lot of money. Some companies don’t tell people that.
I would encourage people to ask the lawsuit funding company whether or not they can apply for more than one funding. Since profits are charged based on amounts advanced and the length of time the money is outstanding, it is common sense to seek multiple advances at smaller levels rather than one large advance. People seeking lawsuit funding should have serious needs, to save their house, save their car, pay tuition, feed their family, keep their lights and heat on. Funding should be used for important reasons; gifts or trips can wait until after the lawsuit is resolved. Lawsuit Financial operates that way; however, my sense is that many companies don’t ask the client why he/she is seeking funding and many companies don’t assess “need” rather than “greed”. I try to provide less rather than more and only fund in situations where the need is serious. My sense is that many lawsuit funding companies don’t operate that way.”
If we had a crystal ball and knew that a case would fail, paying off a credit card utilizing lawsuit funding would be a good thing. However, if the case is successful, the cost of lawsuit funding could (and in most cases will) exceed the cost of credit card debt. Thus, in the usual situation, it makes little sense to pay off a credit card. What DOES make sense is to use lawsuit funding to avoid falling behind on payments due, thus damaging your credit reputation. Bad credit can cause years of financial difficulty. Clients should be advised not to pay off car loans with lawsuit funding proceeds; use funding only to keep payments current.”
Q: Is it possible for the client to owe twice the amount advanced?
“Yes; and sometimes, even more than that. Lawsuit funding is a bet; if we lose the bet, we lose our money. If we win the bet, to stay in business, we must profit to an extent that pays off the bets we lose. Or, a consumer can look at it as an investment. Some investments are successful and some aren’t; if we pool our investments, we hope that the successful ones outpace and offset the unsuccessful ones. Otherwise, we are not profitable. The same is true with the speculative investing in or betting on the outcome of lawsuits. And, don’t forget, between success and failure in lawsuits, there is compromise.”
Q: What do you mean by compromise?
“Compromise should occur when a lawsuit is successful, but not successful enough to pay the client his/her share of the recovery, the lawyer’s fees and advanced costs, and the principal and profit due a lawsuit funding company. Lawsuit Financial has an industry exclusive compromise provision in our contracts with our clients. If principal and profit exhaust plaintiffs’ recovery, we will compromise our returns. For instance, if a client owes $10,000 in principal and profit, and the net recovery to plaintiff is $10,000 after attorney fees and costs, we will provide a discount, so the client will walk away, not only with the money we provided to her earlier in the life of the case, but also with additional case revenue. Many companies will take the client’s entire recovery in situations like this. In their view, a contract is a contract. The client owes $10,000; there is enough money to pay funding and profit in full. We are entitled to the entire net case proceeds. At Lawsuit Financial, we don’t think that’s an appropriate result; the client is the one who has lived with serious injuries and had to fight with insurance companies in court, not us. Thus, we will provide a resolution appropriate compromise. As you can see, we take real risk in funding these transactions. Successes must offset failures and compromises.
Mesh cases and other multi-district, class action type litigation are excellent examples of the risks taken in providing litigation funding. Multi-district litigation has tremendous uncertainty both in time and outcome; thus, these transactions must trend on the expensive side. It could take three to four successes (both in time and money) to offset a single large loss or a protracted litigation length in a Mesh case. Somehow, losses and large time lapses have to be offset by successes. In the consumer money business, only a lawsuit funding portfolio operates that way. Remember, with a car loan or mortgage, the lender can repossess or foreclose if the borrower defaults; the lender, upon repossession, owns the asset and can sell it to satisfy the obligation. Only the plaintiff can own his lawsuit; a stranger cannot appear on his/her behalf or take it over. A lawsuit funding company cannot “own” or “repossess” the plaintiff’s case; we don’t get the kind of collateral a lender does. That’s what distinguishes lawsuit funding from lending. We advance money on speculative lawsuits and forgive the obligation if the case fails; there is no assurance that the obligation will ever be repaid.”
Q: Do you ever walk away with more than the client?
“I can’t speak for other funding companies, however, no; that is a result that can never happen with Lawsuit Financial. Between the amount that we advanced and compromises at the end when necessary, Lawsuit Financial would never participate in a result where our company walked away with more than the client walked away with.”
Q: What does a client need to ask before receiving an advance?
- Is your funding principal and profit contingent upon case outcome (is the advance excused if the case fails?)?
- What is the minimum profit charge and what is the maximum (if any)? (If the company refuses to cap the profits, run-as fast as you can-the other way!)
- Do you charge fees of any kind over and above profit and do you add these fees to the amount of the funding advance and charge interest on them? (If the answer is “yes”, run-as fast as you can-the other way!)
“Many companies ‘fee up’ (or “junk fee”) their contracts. They charge a host of fees: underwriting fees, shipping fees, application fees, wire fees, transaction fees, etc. Then, they roll these fees into your contract and the amount the client “received” in funding includes all of these fees. As profit begins to accumulate on the advance, it is also accumulating on these fees. Many companies won’t tell clients about these fees and how they increase the cost of funding on a monthly basis. A $1,000 contract could have between $500 and $750 in fees added to the funding amount. The effect of this is that the client has contracted for funding in the amount of $1,500 or $1,750 rather than the $1,000 actually paid to the client as “funding”. At Lawsuit Financial, we don’t apologize for the profit we charge, but we disclose it, verbally and in bold print on the front and third page (schedule) of our contract. We charge no junk fees (or fees of any kind). A telephone conversation with a client never terminates without the client understanding exactly what funding costs over the various stages of litigation and without getting our recommendation about funding strategies.
My professional staff is required to ask a client:
- What do you need the money for?
“Many companies don’t care why the client seeks funding. At Lawsuit Financial, we think that does a disservice to the client. If he/she is calling with a valuable case, likely to resolve successfully, seeking funding that trends expensive, a discussion of why the client needs the money (“need”, not “desire”) is an important conversation to have.
The client should also ask:
- If I don’t have the result expected and I owe you a lot of money will you guarantee a compromise?
I would be curious to see how others in this industry answer this question. Lawsuit Financial has a guaranteed compromise provision written in our contract. I believe that we are the only company in North America that offers, in writing, a compromise in a situation that warrants compromise. Lawsuit Financial is attorney-owned and operated. Many lawsuit funding companies are owned and operated by financial gurus. Ask the financial guy: “Does it bother you that your profit is being made but the client is getting nothing”? Many will say “no; the client took the same risk we took and we won.” Lawsuit Financial says that if the result was disappointing and the lawyer and the client are in financial pain at the end of the case, we should share the pain. That is the true definition of shared risk.”
Q: What type of lawsuit funding strategies should apply to Mesh cases?
“Well, Jane, you have indicated that Mesh cases have a potential value of $40,000 on the lower side of the ledger and up to $450,000 or so for the more serious cases, before legal fees are paid. Assuming those figures to be true, a client should look at funding, over time, in an aggregate amount that is less than $5,000.00. Funding should fit comfortably into potential case value so as not to over-burden the case. If funding profits double or even triple the advance provided, the amount due will be no more than 1/3 the settled value of the case. Err on the side of smaller is better. For a case in the $450,000 category, advances should be kept to levels around $25,000 to $30,000 over time. Again, all participants should desire that funding and profits be kept at levels lower than or equal to 1/3 of case value. Seek funding only in “absolute need” situations. By the way, one way to be “predatory” in the lawsuit funding business is to fund too much on the case. Funders should remember who is the seriously injured victim in these cases. Who has pained and suffered? Who has been waiting years for justice? Even though it is easy to put oneself in this position, a funder should not want own more than 1/3 of a client’s case proceeds. “Predatory” in the lawsuit funding business would apply more to over-advancing than it would to amounts of profit companies charge for risks they take in speculative litigation. Why would a company that could have easily avoided doing so want to own an amount of plaintiff’s lawsuit proceeds that exceeds the amount that the plaintiff herself will receive?” #