Be Wary of Lawsuit Funding, NYC Bar Opinion Warns

Third-party litigation funding is a valuable option for many clients who cannot afford the cost of filing suit, but the fact is that the presence of a third party raises questions about attorney loyalty and confidentiality.

And sometimes, it might not even be legal.

Recognizing that clients are turning to outside funders in this time of economic crisis, the New York City Bar Association has issued Formal Opinion 2011-2: Third Party Litigation Financing.

It raises some very good points.

Also known as non-recourse litigation financing, these types of lenders offer loans to litigants on the premise that, should a plaintiff settle or be awarded a financial judgment, a lender will recover a hefty percentage of the funds.

But before it hands over the money, a lender requires detailed information so that it can determine the likelihood of success, its potential return, and estimate cost.

As the ethical opinion explains, before an attorney can hand over this information, he is ethically obligated to inform his client about any potential side effects of waiving confidentiality and providing potentially privileged information.

It might also be a good idea to obtain informed written consent.

The presence of a third party also raises concerns about interference. With a stake in the lawsuit, the opinion suggests that lenders may have a difficult time refraining from influencing counsel's actions. It's important to be aware of this potential and focus on the client, not the lender.

Additionally, the opinion discusses what attorneys should do when a client requests help locating third-party litigation funding.

While attorneys should conduct a reasonable investigation, they should be sure to explain how outside funding impacts a client's recovery, including whether or not to settle. They should also make it clear that they are not endorsing any company in particular.

Though this advice is specific to the New York market, with few state laws, and potentially even fewer cases, it's important for attorneys everywhere to consider how ethics rules apply to third-party litigation funding. It's a particularly grey area that requires some caution.

Related Resources:

• Should Third Party Financing Of Lawsuits Be Regulated? (Out of the Storm)
• The Continuing Struggle Over Litigation Funding (FindLaw's Writ)
• The Ohio Legislature Wisely Enacts a Law to Supersede an Ohio Supreme Court Decision that Had Limited How Litigation Could Be Funded (FindLaw's Writ)