Ethics Debate Sparked by Litigation Financing

In a formal opinion, the New York City Bar Association warned yesterday that attorneys representing clients who are receiving third-party litigation financing must proceed with caution. Significant potential ethical issues exist in third-party lending arrangements.

The Association is concerned with client confidentiality and how decisions made during this type of litigation could affect how much third parties profit, said the Association, wrote Law 360. The Association is specifically concerned with nonrecourse litigation financing.

The practice itself, of funding litigation—be it personal or commercial—is not considered unethical; however, attorneys could face ethics situations in which a client’s and a lender’s concerns could be at odds, noted Law 360. For instance, consideration must be paid to proprietary information that could either harm the client or that could essentially be construed as a waiving attorney-client privilege by enabling that information to become part of discovery, said the Bar Association. Sometimes, companies will seek confidential information concerning the case prior to agreeing to finance a case, said the Bar Association.

Lawyers should not disclose this information to financing companies without obtaining informed client consent and lawyers should be aware that this disclosure, even when informed, breaks attorney-client privilege, said the Bar Association.

While, said the Bar Association, lending can help fund legal claims, the attorneys involved must be cognizant of the ethics involved, especially in nonrecourse litigation financing in which the loan is only repaid by the litigant if he/she settles or wins that case. This type of funding is seen most commonly in personal injury cases and typically calls for the litigant to pay the company a percentage of the case’s recovery, explained the Bar Association, which pointed out that critics of the process have described these percentages as “usurious” and that the funding actually promotes lawsuits.

The Association issued some advice: Lawyers should advise clients of the transaction’s nuances and not facilitate transactions with agreements that violate usury or champerty laws; when asked to negotiate such financing or to recommend this sort of financing, attorneys should give honest advice as to whether or not the arrangement is best for the client; lawyers must not accept referral fees from the third-party company if that money impairs their judgment or if the suit cannot be brought about without that funding; and attorneys must be clear about the influence that funding presents to the case.

“While a client may agree to permit a financing company to direct the strategy or other aspects of a lawsuit, absent client consent, a lawyer may not permit the company to influence his or her professional judgment in determining the course or strategy of the litigation, including the decisions of whether to settle or the amount to accept in any settlement,” the opinion says, according to the Association.

Law 360 pointed out, quoting the opinion, that while lenders may say they will stay out of a case, “their financial interest in the outcome of the case may, as a practical matter, make it difficult for them to refrain from seeking to influence how the case will be handled by litigation counsel.”

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