1. Contingent Case Financing: A Brief History of the Contingent Fee Agreement and Ethical Issues to Consider When Financing a Client’s Case Hugh J. Plummer, Jr.

2. History of Contingent Fee  Greek Origination and Roman Development  English Rejection  American Acceptance

3. 6 th Century B.C. Greeks & Romans Medieval England Colonial America

6. Options When Financing  War Chest Approach – Self Financing  Traditional Banks and Lending – Collateral Based Financing  Alternative Litigation Finance Companies  Company A – Legal Support Line of Credit  Company B – Docket Based Collateral Approach  Company C – Accounts Receivable Based Approach  Marketplace Approach  LitCap – Case Cost and Expense Approach

7. Ethical Considerations When Using ALF Companies Passing Interest Tex. Comm. on Prof’l Ethics, Op. 465 (1990). Tex. Comm. on Prof’l Ethics, Op. 558 (2005). Tex. Comm. on Prof’l Ethics, Op. 576 (2006). Fees Texas Disciplinary Rules of Professional Conduct 1.04 Safekeeping Property Texas Disciplinary Rules of Professional Conduct 1.14 Professional Independence of a Lawyer Texas Disciplinary Rules of Professional Conduct 5.04 (c)

8. Passing Interest Tex. Comm. on Prof’l Ethics, Op. 465 (1990). Q: “May an attorney borrow money from a lending institution for case expenses … and ethically charge, or pass on, to the client, as a part of case expenses, the out-of-pocket interest or finance charges of a lending institution?” A: “ … [A]n attorney may properly borrow money from a lending institution for case expenses … and charge, or pass on, to the client the actual out-of-pocket interest or finance charges of the lending institutions.” How To Ethically Pass Interest: 1. Attorney must obtain client consent 2. Rates must be fair, reasonable, customary, and at a lawful rate 3. Financing and interest rates must be directly related to the client’s case, and must not be related to firm overhead

9. Fees Texas Disciplinary Rules of Professional Conduct 1.04 (d) “A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined… The agreement shall state the litigation and other expenses to be deducted from the recovery…”

10. Main Ethical Considerations  Undue Influence or Any Interference With Attorney’s Professional Judgment Regarding a Client’s Case  Ensuring Confidentiality of Client Information  Protecting the Best Interest of the Client  Ethically and Correctly Passing Interest Fees and Costs to Client

11. War Chest Approach Self Financing Firm CapitalClient Cases

12. Self Financing War Chest Approach Self Financing Cons Ties up firm capital Limits amount of cases an attorney can take Money not earning interest Ethical Implications  Increased likelihood of suboptimal investment  Inherent, albeit acceptable, conflict of interest  Conflict of interest between attorneys funding limit and client needs Pros No interest rates No dealing with financial institutions No repayment obligations No sharing of recovery

13. Traditional Banks Collateral Based Financing

14. Collateral Based Financing Traditional Banks Collateral Based Financing Cons Loaned only up to value of collateral Interest rates – 6-18% Recourse debt Interest rate determined by credit Monthly interest payments due Pros Funds used for any firm related purpose Ethical Implications  Same implication as War Chest Approach, plus paying interest on your money  Material limitation  Passing interest to clients generally not allowed  Attorney still bears risk since repayment is his burden – Misaligning attorney interest with client

15. Alternative Litigation Funding Investor Capital Attorney or Law Firm Case-related expenses Operating Cost of Business Litigation Resolution Returns

16. ALF Companies Counsel Financial Advocate Capital Burford Amicus Capital StoneStreet Capital Pravati Fulbrook Capital Oasis

17. ALF Company A Legal Support Line of Credit Cons Extensive due diligence Borrowing amount determined based on analysis of all assets, including contingent fee cases Collateral: contingent fee cases plus personal or firm assets Solely commercial lending Interest rate “usually mid to high teens” Undue influence Ethical Implications  Waiver of work-product during extensive due diligence (not settled in many jurisdictions)  Cannot get client consent- since funds used for various purposes and cases  Possible interference with attorney professional judgment Pros Case tracking assistance No maximum amount of funding attorney can request

18. ALF Company B Docket Based Collateral Approach Pros Credit line not limited to value of personal assets– based on total value of contingent fee cases Cons Maximum credit line = 5 million Cannot pass interest payment to client Monthly interest rate payment Secured by portfolio of contingent fee cases Ethical Implications  Conflict of Interest if attorney is personally liable  Attorney still bears total cost risk- amount must always be paid back

19. ALF Company C Accounts Receivable Based Approach Pros Expense tracking system Simple interest Cons Maximum line of credit = $3.2 million Monthly interest payments Funds only for case expenses If case abandoned or lost, required to repay principal amount and any outstanding interest Secured by all law firm accounts receivable Ethical Implications  Conflict of Interest: Attorney still bears all risk if case lost or abandoned – may pressure attorney to prematurely settle  Client consent required to pass interest

20. The Market Place Approach

21. Marketplace Approach Attorney Lists Case(s) Investor Views Cases Listed Attorney and Investor Negotiate Interest Rate Marketplace Investor Deposits Funds into Attorney’s IOLTA Case Selected by Investor If Unsuccessful  Loan is Forgiven If Successful  Attorney Must Repay Loan Amount Case Concludes