Third Party Litigation Funding - A Signaling Model

Abstract

Elwin Francis settled his personal injury case for $150,000 and walked away with $111 from the settlement. Yes, the lawyers got their one-third, but this is not a story about attorney malpractice. Mr. Francis’s limited recovery stems from his involvement with the new kid in town, third-party litigation funders. Several years before the case settled, Mr. Francis borrowed money from LawCash and Lawbuck$, two litigation funding companies, via non-recourse loans. The nature of the loans meant that he only had to repay them if his case was successful. The catch was the extremely high interest rate, much higher than rates charged by credit card companies. All told Mr. Francis borrowed $27,000, but with the high interest rates by the time the case had settled that amount due had swelled to $96,000. Out of the $150,000 settlement, LawCash and Lawbuck$ received a profit $69,000 in interest that amounted to 46 percent of the settlement, the repayment of the principle of the loans represented another 18 percent, the attorney fees and expenses took a little more than a third, and the plaintiff was left nothing except for the money that had been advanced to him by the funding companies. While this situation sounds like an extreme example, the loan arrangement is not unique, and is part of a larger trend of third party litigation funding that has been sweeping across America in recent years.