With the growth of litigation funding, one phenomenon has become more and more visible to those who see these transactions up close: A number of trial lawyers representing litigants seeking funding appear to be serving as both litigator and banker to their clients. That’s a slippery slope — one that lawyers must really think through before putting on both hats.
Of course, in the moment, wearing both hats can seem a natural fit. When the possibility of (or need for) funding arises for a client, their trial lawyer is often their hero and new best friend — a knight with armor unsullied by battle. And the nonrecourse nature of the funding deal often looks really attractive. Of course, the trial lawyer should help the client get funding.
There are concerns, however, that any trial lawyer considering wearing both hats — counseling the client on obtaining funding and funding terms, while also bringing the claim — might consider. Your authors, an adviser to funded parties and an ethics lawyer, both of whom grew up in litigation, come to this question with different perspectives, but share these same concerns.
One real area of concern is the conflict of interest that may be inherent in the trial lawyer playing these two roles. Of course, clients routinely rely on their litigators to hire litigation support professionals and other vendors. However, from a conflicts perspective, securing litigation funding is fundamentally different from dealing with these other types of vendors because a portion of the funding proceeds is usually used to pay the litigator’s fees. This creates a unique set of conflicts that a prudent lawyer should consider.
The client seeking litigation funding wants to solve a financial problem. Their concerns mainly involve ensuring the availability of adequate financing while minimizing the cost of funds.
The litigator’s interest is usually quite different. Great trial lawyers want to try cases and win them — and generate a nice fee in the process. Typically, trial lawyers are just not wired for deep concerns about their client’s overall financial position or business goals.
At the very least, these divergent interests create the possibility of a conflict when the same lawyer wants to litigate the funded claim and negotiate the deal terms and funding agreement.
American Bar Association Model Rule of Professional Conduct 1.7(a)(2), one of the core conflict of interest rules, says that a lawyer has a conflict of interest if “there is a significant risk that the representation of [the client seeking funding] will be materially limited by the lawyer's responsibilities to” anyone else “or by a personal interest of the lawyer.”
Do the lawyer’s and client’s interests diverge enough in the typical situation that a conflict arises? They might. And, where funding for the client is to be used to pay some portion of the lawyer’s fee, a conflict probably does arise.
This view is not unique. Indeed, the recent report drafted by the New York City Bar Association’s working group on litigation funding emphasized that there is a potential for conflicts of interest when a litigator advises a client who is seeking litigation financing.
On the other hand, that type of conflict may well be one to which the client could consent. Still, as with any other possible conflict, there remains a question of prudence: should the lawyer move forward and ask for consent or should the lawyer recommend that the client seek independent advice?
Given the conflict issues in play here, it is prudent for firms to refrain from negotiating the deal terms or funding documents when one of their lawyers will be handling the litigation.
There can also be other complications, for example, where a trial lawyer refers the client to a funder.
As with referrals to any other professionals or service providers, there are risks. If the lawyer refers the client to a funder and a dispute arises with that funder, any ill will from a failed relationship can affect the lawyer-client relationship.
More importantly, if the lawyer and funder have any sort of other relationship — if the lawyer or firm represent the funder in other matters, or if the lawyer or firm have their own extensive funding relationship with that funder that is generating substantial fees for the firm — the lawyer must think carefully about whether those facts should be disclosed to the client and whether a referral is prudent in any event.
ABA Formal Op. 484 (Nov. 27, 2018) walks through some of these issues where the referral is to a (full recourse) lender who will finance the lawyer’s own fee. Again, conflicts may lurk here, for example, to the extent certain funding methods may be more preferable for the lawyer, rather than the client.
Where the funder is a client of the trial lawyer’s firm, disclosure and consent is probably necessary. What might otherwise be an ordinary business dispute with a firm’s or a client’s vendor can more quickly turn ugly where the lawyer’s ability to advise one client on a dispute is hampered by the dispute being with another firm client. Sometimes such risks are unavoidable; at other times, the better option may be to make a less glowing referral, refer the client to multiple candidates, or get the client advice on their options from someone independent, all with full disclosure of the that second client relationship.
Further, if the lawyer has a financial interest in the funder, serious red flags come up. There are ethics opinions in some jurisdictions that simply prohibit lawyers referring clients to funders in which the lawyer has an interest. Absent a very indirect interest by the lawyer or law firm, and very fulsome disclosure, those red flags should make prudent lawyers steer well clear of referring their own litigation clients to any funder in which they have an interest.
Good lawyers of all types tend to follow Inspector “Dirty Harry” Callahan’s injunction from the 1973 film, "Magnum Force": “A man’s got to know his limitations.” In fact, ABA Model Rule of Professional Conduct 1.1 requires a lawyer to “provide competent representation to a client,” and notes that “[c]ompetent representation requires the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” For example, trial lawyers shouldn’t be offering estate-planning or tax advice, unless they’re competent.
Marketing a client’s litigation funding opportunity to funders, evaluating funders’ proposals, and negotiating terms and agreements with funders all require very specific skills, and there is no substitute for experience. Any trial lawyer considering taking on these assignments should first ask a few key questions: Do I have the skills, experience, and current knowledge of the marketplace to do this? How many funding deals have I actually done? Can someone else do this better, faster, or cheaper? The trial lawyer would be well advised, by legal ethics, prudence, and good loss prevention, to then have a candid conversation with the client about her skills and experience.
Due to the significant differences in pricing among various funders, it is imperative for anyone seeking financing to have a deep understanding of market norms and/or to adequately explore their options in the market. A lawyer who does not know the market extensively (or at least shop the market) places the client (and the lawyer) at the mercy of whatever funder they deal with. Otherwise, how can the lawyer know they are getting their client the best deal possible, or even a reasonable deal? The pricing differences between funders for the same case can (and do) vary greatly and can amount to the client receiving millions of dollars less at the end of the funding relationship. Is this a price the client should pay, or the lawyer should risk?
Other issues arise as a deal progresses toward funding. Did the lawyer avoid troublesome contractual funding agreement language? Do the economics of the litigation adequately support the recommended financing? Does the funding agreement comply with ethical and legal requirements? Lawyers lacking confidence in their knowledge and experience on these issues should not take on marketing the funding transaction, evaluating funding proposals, or negotiating a funding agreement for a client.
When a trial lawyer’s client wants the attorney to help secure funding, the lawyer has three options.
First, despite all the apparent conflict and other ethical issues, a trial lawyer can choose to wear the dual hat of banker and litigator. For lawyers who do choose this path, consider these suggestions at a minimum:
Another solution is for the trial lawyer to disclaim all involvement in the fundraising process, preferably by specifically excluding from the lawyer’s scope of representation any and all advice concerning funding. For loss prevention purposes, that should be done expressly in conversation with, and confirmed clearly in writing to, the client.
Critics of this approach worry that leaving a client to their own devices, unaided by professional advice on these issues, might disserve the client, leaving them either without funding or at the mercy of unscrupulous funders. Under this view, it might even amount to an unreasonable limitation of the scope of representation by the lawyer under ABA Model Rule of Professional Conduct 1.2(c). That legitimate concern could probably be met by coupling an “I’m not your lawyer on funding” discussion with a recommendation that the client hire someone else to counsel them on these issues.
A third option, for those lawyers who choose not to wear the hats of both banker and litigator, is to encourage the client to bring in an independent adviser, which provides the client with an independent voice in the fundraising process and ensures the client is aware of all possible options.
Whatever the trial lawyer’s choice about whether to play banker to their client’s litigation funding needs, it needs to be a thoughtful decision, tailored to the particular client’s needs and the particular lawyer’s skills and limitations.
Article originally published by Law360.
Lucian T. Pera is a partner at Adams and Reese LLP.
Michael Perich is vice president and legal counsel at Westfleet Advisors, where he is an independent adviser to parties seeking litigation finance.
The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.