There are a lot of misconceptions out there about litigation funding, mainly that many people believe litigation funding to be synonymous with taking out a loan. This couldn’t be further from the truth! Loans call to mind images of seedy salesmen and last-minute payments, but litigation funding is all on the up and up. Read on to learn how litigation funding differs from a traditional loan.
The Basics
Most of the time, litigation funding operates on a nonrecourse investment basis. If that sounds overly complicated, let us simplify it: the funder will only require repayment if the claimant (for example, the victim in a personal injury lawsuit) receives their settlement money.
Additionally, it’s crucial to note that the claimant is still in control of how their case is litigated. The funder doesn’t get to change the claimant’s lawyer or courtroom strategy just because they provided funding.
Traditional Model
There are two main models for plaintiff-side cases (plaintiff-side cases refer to class action, personal injury, and workers’ compensation lawsuits). The first of these is the traditional model. In this setup, the funder is responsible for all litigation costs and some of the attorneys’ fees.
In exchange, the claimant gives the funder a share of the recovery. The good news is that you can enter into this model at any point during your case with catch-up payments. That means the funder will pay the claimant for amounts that have accrued.
Monetization Model
With the monetization model, the funder pays the claimant with one (or multiple) lump-sum payments, anticipating a future recovery. This setup guarantees the claimant revenue that they can immediately use.
Nondisclosure and Confidentiality
Before a funder can decide whether or not to support you, they need to evaluate your case. Since everything is held under confidentiality, the funder needs to sign a written nondisclosure and confidentiality agreement.
Your funder should not require access to privileged information that cannot be disclosed under a protective order.
Diligence
There are several case factors that funders need to evaluate before agreeing to work with you. These include collection risk, time to recovery, liability, and damages.
If you want to help streamline this process, you can do a few things to assist the funder. First, do some diligence of your own. This may look like writing a memo that describes all the evidence, including supporting theories of liability—this can go a long way to securing funding more quickly.
In addition, remember that a well-considered damages theory is as critical as the damages total. You don’t need to worry if detailed calculations aren’t available yet; your funder simply wants to understand the categories of damages as well as the available remedies.
Finally, be honest about the risks associated with your case. If you’re working with a professional litigation finance firm, you can be sure that they’ll perform copious research and find out sooner or later. Transparency and obfuscation will lead to the same result—but transparency will let you know sooner.
2-Way Street
It may feel like diligence is all about convincing the litigation firm to take you on, but you can ask questions, too. It can be helpful to understand the process as well as possible, and knowing your funder’s capital source can give you a better sense of the timeline.
Ideally, the diligence process is an opportunity for your case to get even stronger. Bringing more professionals into the fold can give you new ideas on how to tackle the lawsuit.
Return Structure
Return structure is largely dependent on the case at hand, but there are a few gold standards that most lawsuits follow. For instance, the funder gets at least the amount of their invested capital as “first money out” payments.
After that, most structures involve percentages. A certain percentage goes to the claimant, while another percentage goes to the funder.
Ideals of Litigation Funding
Traditional loans are all about profit, and they tend to lack ideals or morals. Litigation funding is completely different, and it operates with several values in mind.
Access to Justice
Without litigation funding, disadvantaged people would have trouble engaging in any lawsuit. Cases cost money, from court fees to attorney costs—many people in the United States would simply be unable to litigate under any circumstances without funding.
Even if you know you deserve a sizable payout, you’ve probably heard that insurance companies are willing to prolong cases for years to avoid paying a settlement. This means that many plaintiffs can’t get justice without financial backing, even if they have an easily winnable case.
Litigation funding gives you immediate financial help to pay court costs, medical bills, and even basic living expenses.
Risk Management
Taking out a traditional loan is always a huge risk. If your claim doesn’t succeed, you’re left in the lurch. This isn’t the case with litigation funding—you can transfer the risk and costs of your case onto professionals who can collectively manage your funding.
Litigation funding is all about leveling the playing field and getting you on the same tier as large companies that would try to wait you out.
Protection of the General Public
When you open a personal injury case, you may think about it as receiving compensation (and that is important), but we see it as righting a wrong. Someone was negligent and caused you harm, so you deserve justice in a court of law. Otherwise, what’s to stop the company from allowing the same problems to harm another person?
Litigation funding flips the script and allows anyone, even people living paycheck to paycheck, to stand toe to toe with insurance companies and come out on top. The person with the most money is no longer the de facto winner—now, it’s the person who deserves justice.
High Efficiency
Finally, litigation funding offers what other forms of capital cannot: expediency and efficiency. Not only can you get your money more quickly, but defendants often seek to settle shortly after learning that the plaintiff has secured funding. Why? Because insurance companies don’t want to fight a losing battle.
Now that you know how litigation funding differs from a traditional loan, reach out to us at Apogee Capital Partners to talk about your case.
