Introduction

Many lawsuit funding deals involve the plaintiff assigning a portion of his or her future recovery to a funder in exchange for an upfront investment. Investors who bet on the outcome of litigation make money by collecting from the proceeds of any settlement or judgment. This seems simple in concept, but ensuring that those proceeds will be available for collection can be a challenge. With the majority of transactions occurring when all parties are strangers to one another, the practicalities of administering settlement payments are central considerations for lawsuit investors, requiring constant vigilance.

In a typical scenario, payments made by defendants to settle their claims are deposited into attorneys’ escrow accounts and disbursed to all the lien holders according to their priority. Quite often, however, plaintiffs, attorneys, and funders will have divergent views about how the settlement proceeds should be divided. Clients may be eager to receive funding but reluctant to pay investors all or part of their contractual obligation once the underlying claim is resolved. Moreover, investments in lawsuits can span a number of years without any interim payments, hazarding the risk that proceeds become encumbered over time. Attorneys who are responsible for distributing the settlement funds may have a number of competing stakeholders vying for a share of the settlement. How does an investor prove that he or she should receive a portion of the proceeds? What if the plaintiff sells another participation right in the lawsuit to someone else? How will the other party’s rights affect the original funder’s investment? Who should be paid first?

In these situations, litigation to resolve the rights of the parties may ensue and courts will be asked to determine the legality of legal finance transactions and the priority of payments to the claims’ stakeholders. As of now, legal finance has been allowed to proceed by the majority of states. However, despite significant progress in the past decade, the United States still lacks a transparent and comprehensive regulatory regime for legal finance. There is currently no federal law regulating this industry. Rather, the states themselves regulate the industry through a diverse patchwork of case precedent, common law doctrines, state bar ethics opinions, state statutes, and agreements with regulatory bodies.

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