Hedge Fund Interest in Personal Injury Litigation Financing Grows

July 2, 2018 | Attorney, Matthew Dolman
Hedge Fund Interest in Personal Injury Litigation Financing Grows

Billionaire George Soros Backs Litigation Finance Company

In recent news, the billionaire George Soros has made a business maneuver that could affect plaintiffs with personal injury lawsuits for years to come. George Soros' hedge fund company, Soros Fund Management, has begun backing investment firm, Mighty Group, which creates investment portfolios out of personal injury lawsuits. The Mighty Firm has leapt into the personal injury funding market by giving cash advances to plaintiffs in personal injury lawsuits in exchange for a cut of future settlements. This new foray by Soros' into the litigation market has some people concerned over possible negative implications this move would have for the personal injury law landscape. But before getting into that, let's take a look at what exactly litigation financing is and how it could possibly affect you and your personal injury case.

What is Litigation Financing?

Litigation financing can exist under the guise of many different names. You may come across it described as legal financing, professional funding, settlement funding, third-party funding, legal funding, or lawsuit loans; however, the base principles of all these terms is pretty much the same. The way it works is a person filing a lawsuit or pursuing litigation attains funding for said litigation through a third party funding company. The person seeking financing could be a plaintiff in a car accident case, a multi-million dollar company pursuing litigation against an opposing company, or even a law firm. A litigation financing company will invest the money into plaintiff's case usually in the form of a lump sum cash advance to the plaintiff in exchange for a percentage of the settlement they receive from their case.

Litigation Financing Cash Advances are Not Loans

These cash advances from litigation financing companies do not count as loans so the plaintiff is not technically indebted to the financing company. Instead, they are considered to be an investment into asset purchase. Since these cash advances are not considered debt, they are not reported to the credit bureau and will not affect the receiver's credit score. Because of this, if someone loses their personal injury case after having taken a cash advance from a litigation financing company, they do not have to pay back the amount of the advance. A plaintiff only has to pay back the litigation financing company if they win their settlement. The interest percentage taken out of the settlement will depend on the agreement between the litigation financier and the plaintiff. This percentage amount is then added to the advance amount in order for the financier to make a profit. The bottom line with litigation financing is that you, and the financier, are expecting a lump sum payout in the future– from this expectation, the financier agrees to give some of that money to plaintiff ahead of the settlement in exchange for a fee. Whether or not this situation is ideal depends on the person, the situation they're in, how bad they need the money, and the amount of their expected payout.

Litigation Financing Versus Legal Defense Funds

There are some superficial similarities between litigation financing and legal defense funds, but the two actually have several important factors that set them apart in what they can and cannot do. For example, cash advances from litigation financing can be used for whatever the personal injury plaintiff wants or needs. The plaintiff often needs the financing to pay off various living expenses and/or medical bills while they focus on healing from their injuries and winning their personal injury case. Compare this to a legal defense fund, in which the money can only be used for litigation and legal fees. Another difference involves who uses litigation financing versus legal defense funds. As was previously mentioned, plaintiffs will often use cash advances from litigation funding for a variety of expenses ranging from legal fees to that week's groceries. Legal defense funds are usually only used by defendants that don't have to worry about needing cash for living expenses.

Can my lawyer finance my lawsuit?

Each state has its own set of rules for professional conduct for lawyers to maintain good ethics standards for law practices. These rules make it so that reputable lawyers cannot finance a lawsuit the same way that litigation finance companies do since it would be considered an ethics violation to do so. Lawyers will typically advise utilization of a litigation finance company in only the direst of situations.

Litigation Financing Qualification

Since litigation finance companies will be taking on a certain amount of risk when they invest cash into a plaintiff, they reserve the right to determine who exactly they offer these cash advancements to. In order to minimize the level of risk that they will be taking on, litigation finance companies do extensive research into any prospective plaintiffs and their case. In order to determine if a plaintiff who is in need of a cash advance is worth the risk, they will check on the chances of the case resulting in a win and the expected size settlement of the plaintiff's settlement. After all, these companies are looking to make a profit. Things that a litigation financing company will check out to determine case integrity are:
  • The plaintiff's lawyer.
What is their level of experience in terms of case success and types of cases?
  • The defendant in the case.
What level of defense they can mount and whether or not they will be able to pay the settlement.
  • The type of case.
The type of case determines how difficult the level of success and the projected settlement amount. For example, a truck accident injury case would look more favorable over a minor fender bender case due to the differing levels of expected settlement. Most litigation financing companies go for personal injury type cases.
  • The plaintiff's background.
A plaintiff with a suspicious looking background or that has a history of bad finances is not likely to be eligible for litigation funding
  • The amount of damages sought.
The amount of damages sought must be sufficient to justify investment so that the litigation finance firm can make a profit.
  • The state laws for which the case is being filed.
The laws unique to the state the plaintiff's case is it can have an effect on how big a settlement can be and how the case is decided.

Benefits of Litigation Financing

Desperate Plaintiffs Have a Source of Money

When someone is involved in a serious accident that causes them to suffer a debilitating injury, their life can get turned upside down. Not only do they have to contend with the physical fallout of whatever happened to them, but they will likely take on a great deal of financial burdens as well. Things like medical bills, property repair and replacement, living expenses, lack of income, and other assorted costs can crop up when someone is pursuing a personal injury claim. Most people would have trouble paying all these costs without an extenuating circumstance; however, an injury or taking care of someone who is injured can make these costs that much tougher. This exactly why cash advancements from litigation financing companies exist, so they can help disadvantaged plaintiffs that are unable to cover expenses during the legal process. But all is not perfect in this world. Beware, that sometimes the fees from cash advancements can be more burdensome than the plaintiff anticipates.

Litigation Financing Allows for Better Settlements for Plaintiffs

Many insurance companies will take note of a plaintiff's injuries and their hefty financial burdens in the form of medical bills and living expenses. Oftentimes, the insurance companies will attempt to draw out the legal process as long as possible in order to force the plaintiff to tap out of the legal battle and accept whatever settlement they are offered.

Criticisms of Litigation Financing

Litigation Financing Clogs the Legal System

On the other side of the aisle, many have come to criticize how litigation financing has the potential to flood courts with frivolous lawsuits that can exploit loopholes. The ability to not have to worry as much about short-term costs while pursuing litigation and the settlement it may bring will supposedly entice lawsuits out in droves that have the potential to clog up the legal system.

Litigation Financing Takes Away Needed Money from Settlements

One chief concern is how litigation finance affects settlement amounts for the consumer. Settlements will not be made to compensate for the legal financing a plaintiff may have received so it will eat into the settlement. After litigation financiers take their share of a plaintiff's settlement, there often times is much less leftover. The whole point of settlements, after all, is compensation for whatever legal issue was resolved, whether it be for the effects of a car accident injury or some other personal injury. That compensation can be in danger of drastic reduction when litigation financing is involved.

There is no Regulation of Litigation Financing

Another criticism is how the financing of lawsuits does not come under the same kind of regulation as other forms of investment. Because of this, information on rates of interest and other charges are not as readily available to cross reference, which can make it easier to exploit consumers. Attention has been drawn to how litigation financiers can seek to exploit via hidden fees, absurdly high-interest rates, and champerty. While a litigation financier cannot collect on a lost case and only gets a pre-agreed cut of a settlement, they can still impose interest rates on additional advances. The added amount of these rates can borderline on usury, but are not regulated because they are technically not loans. These exploitative practices are typically used with certain plaintiffs as targets. Litigation finance companies have the resources to evaluate their clients in heavy detail. Like with determining risk in a case, litigation financiers can determine who will be an easier consumer to exploit. This would typically include the uneducated, minorities, the unhealthy, and the desperate, all of which may be more likely to agree to unfavorable terms.

Hedge Fund Interest in Litigation Financing

The alternative investment market of litigation financing presents an alluring opportunity for hedge funds like George Soros' company, Soros Fund Management. Litigation financing is completely separate from the stock market and therefore is new ground, ripe for hedge funds that are eager for areas with good rates of return. The main allures of the litigation financing market are the relatively low levels of risk and the good rates of return. Since litigation financiers can screen their possible consumers in order to choose the ones with the greatest chance of receiving profitable settlements, their level of risk in their investments is astonishingly low. The returns in this market have proven to be steady with a high level of predictability and return rates of up to 20 percent. While wall street and hedge funds have been eyeing the multi-million dollar corporate lawsuit litigation financing market for some time, Soros Fund Management has been more interested in the smaller scale personal injury sort of cases that require advancements of only a couple thousand dollars for living costs and minor medical expenses.

What Does More Litigation Finance Mean for Personal Injury Law?

With such interest in the litigation funding companies increasing, the number of lawsuits being funded can only go up. All the invested capital into these litigation finance companies means that they will have better resources to determine case investment risk and more money to invest in bigger cases. All this growth will mean a heavier strain on the legal system as well as a general increase in interest in the legal world by more investors hoping to get a piece of the pie. This new interest in litigation finance may not be the best since wherever there is money to be made, there are those that wish to use unethical and exploitative practices to get rich while those less fortunate are left with the bill. If you or a loved one have sustained a personal injury due to the negligence of a liable party, do not hesitate to contact Dolman Law Group Accident Injury Lawyers, PA about a free consultation for your claim. Our skilled lawyer has the expertise that you need to secure the settlement that you deserve. Please feel free to contact us with any questions. You can reach us in one of these 3 ways:
  • Call Dolman Law Group Accident Injury Lawyers, PA at (727) 451-6900
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Matthew Dolman

Personal Injury Lawyer

This article was written and reviewed by Matthew Dolman. Matt has been a practicing civil trial, personal injury, products liability, and mass tort lawyer since 2004. He has successfully fought for more than 11,000 injured clients and acted as lead counsel in more than 1,000 lawsuits. Always on the cutting edge of personal injury law, Matt is actively engaged in complex legal matters, including Suboxone, AFFF, and Ozempic lawsuits.  Matt is a lifetime member of the Million Dollar Advocates Forum and Multi-Million Dollar Advocates Forum for resolving individual cases in excess of $1 million and $2 million, respectively. He has also been selected by his colleagues as a Florida Superlawyer and as a member of Florida’s Legal Elite on multiple occasions. Further, Matt has been quoted in the media numerous times and is a sought-after speaker on a variety of legal issues and topics.

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