Understanding the different types of Legal Finance
What is Legal Finance?
You’ve probably heard of a lawsuit in which one party was clearly in the right, but had to fold because they couldn’t match the financial power of their opponent. Too often, lawsuits are won by those who can afford to fight for a long period of time. Legal finance (also called “litigation funding,” “lawsuit funding,” and “lawsuit loans”) levels the playing field for plaintiffs and defendants. Litigation funding also unlocks the value of legal claims by advancing funds to plaintiffs or defendants before their cases are resolved.
An example of how legal finance might work
Let’s say a driver is injured in a car accident and the insurance company refuses to pay the claim, or offers a sum far lower than what the driver needs for long-term costs and care associated with the accident. If the driver can’t afford to wait to pursue her claim, the insurance company may skate away without paying anything at all, or they may pay far less than the plaintiff would receive if she had the financial staying power to remain in the lawsuit. By turning to a legal finance provider for pre-settlement financing, the driver can recover the appropriate and needed amount from the other party without being bankrupted by the expense of a protracted lawsuit.
Knowing the plaintiff doesn’t have to accept a low-ball offer may and often does force defendants and insurers to settle cases for higher amounts. It also helps facilitate just compensation for plaintiffs. The plaintiff must repay the litigation funding company only if she wins or settles her case. If she doesn’t win or settle the case, the litigation funding company receives and is owed nothing in return. It is important to note that litigation funding is not a loan, although many people call the service “lawsuit loans.” Rather, litigation funding is actually an advance, as there is no obligation to repay unless the plaintiff wins at trial.
The rise in litigation funding since the 1990s in the U.S., U.K., and Australia is because the field began–and continues to operate– as a low-correlated asset class with potentially higher yields. Investors looking for a way to reduce exposure to the stock market have found litigation funding to be an increasingly viable option to generate the returns they expect from the stock market without the frustrating ups and downs. Groups like Bentham IMF and Lake Whillans thrived in the field by allowing investors to access lawsuit funding and law firm funding with the potential for significant returns. As word and profits spread, the field began to grow, with investors internationally looking to generate similar yields.
Yieldstreet connects Legal Finance investors with lawsuit plaintiffs
Yieldstreet provides an investment marketplace that connects investors in legal finance with plaintiffs and law firms who have strong cases and need capital to win those cases.
Yieldstreet offers investors opportunities in the following areas of legal finance:
- Pre-settlement funding
- Law firm financing
- Financing for leveraged buyouts of law firms or case portfolios
- Strategic capital for legal advertising
- Post-settlement funding
Pre-settlement funding is essentially a cash advance against the anticipated settlement of a personal injury lawsuit. While many call these advances “lawsuit loans,” lawsuit funding advances are in fact provided on a non-recourse basis, which means that if the plaintiff loses the lawsuit, the plaintiff does not have to repay the legal finance company. While legal finance companies accept the risk that the case may not succeed, they carefully vet all lawsuit funding requests in order to be confident that the plaintiff will win before extending pre-settlement financing.
In the United States, specialty finance companies have been providing consumers with non-recourse advances secured by the future proceeds of personal injury claims since the early 1990s. This growing business has a proven track record. Specialty finance companies often sell off portions of their pre-settlement advance portfolios to raise capital to grow their businesses.
At Yieldstreet, our investors can participate in and invest in pre-settlement portfolios secured by these mature and well-diversified portfolios, or in pre-settlement advances for single cases. Previously, potentially lucrative opportunities such as these were available only to institutional investors and hedge funds.
Law firm financing helps plaintiffs’ counsel, or trial attorneys who offer contingency fee representation to manage their cash flow. Trial attorneys often represent worthy class action, mass tort, and patent or complex litigation plaintiffs for years without any payment. Contingency-fee attorneys do not get paid until suits are settled or won. As a result, many trial attorneys and contingency fee law firms turn to law firm financing to cover their expenses, including expert witness fees, case costs, and any other expenses that are necessary to prosecute a lawsuit.
Yieldstreet makes loans to law firms who have large diversified inventories of contingency lawsuits. Yieldstreet investors in legal finance have the potential to earn high targeted yields while providing the financing these firms need to negotiate the largest possible settlements for their clients.
Financing for leveraged buyouts of law firms or portfolios of cases comes into play when law firms are for sale. A law firm sale might occur due to the death of a senior partner, a partnership breakup, insufficient capital or for other reasons.
Yieldstreet originators make leveraged buyout loans to law firms looking to acquire another firm with strong assets. For example, the firm may be a valuable earner based on a portfolio of settled or pre-settled cases. The revenue stream from the acquired firm in such situations is used to pay principal and interest to Yieldstreet investors on the loan.
Strategic capital for legal advertising helps law firms finance major advertising campaigns. You’ve probably seen legal ads on television informing consumers of a bad drug or a malfunctioning car and encouraging them to contact the law firm if they’ve been harmed and want to participate in a class action lawsuit. Such advertising can cost millions of dollars, however, it can be worth the expense as it gathers together consumers for a significant class action suit.
Experienced law firms can estimate how many cases they will generate per advertising campaign and can define their cost per case. A best-in-class law firm seeking to finance a mass advertising campaign brings this information to a Yieldstreet originator, who vets the investment and, if approved, provides a loan the firm can use to execute a national campaign.
Originators of legal advertising loans specifically target late-stage cases already in the settlement phase, or where plaintiff trials have already succeeded. In these cases, the goal of advertising is simply to make more potential plaintiffs aware of the suit. The security that comes with a strong likelihood of mass settlements can potentially reduce the risk to the originator and to Yieldstreet investors.
Post-settlement financing helps plaintiffs who have seen their case settle but–often for a variety of reasons–are awaiting settlement funds. Like pre-settlement finance, funding is distributed to the plaintiff in order to cover their cost of living expenses while they await the money due to them in their settlement. There can be potentially less risk associated with post-settlement finance opportunities since the settlement has usually been finalized but has failed to start distributing. Investors must still deal with inconvenience risk and face uncertainty as to when they will receive repayments, but they can take solace in knowing the case has already settled.
An example of how Yieldstreet Legal Finance works
- ABC Developers is a multi-million-dollar real-estate partnership that develops old factories into expensive condo lofts in a rapidly gentrifying neighborhood of Newark, New Jersey. The two partners have an agreement on file with their bank requiring two signatories on any payments made from the business’ bank account.
- Unfortunately, the bank is lax about enforcing the two-signatory rule and one of the partners, who has a secret gambling problem, embezzles millions from the business.
- The other partner appeals to the bank to take responsibility for its mistake. The bank refuses, confident that the financial losses have left him too insolvent to sue the bank for breaching the two-signatory mandate.
- The same partner turns to a Yieldstreet originator for legal finance and, based on the merit of the claim and the originator’s underwriting criteria, is approved by the originator for the loan.
- Armed with legal financing, the partner sues the bank. Realizing that it faces a strong, well-capitalized plaintiff, the bank offers to settle and pay for its mistake.
- The partner is able to restore the missing funds and save his business. It is now the bank’s responsibility to go after the dishonest partner for embezzlement.
- The partner’s lawyers are paid. The Yieldstreet originator and Yieldstreet investors in this legal finance deal receive a return from their portion of the settlement.
For additional questions regarding Yieldstreet or our legal finance offerings, please email us at [email protected].
Previously, investments in carefully-vetted legal finance opportunities were not available to the public. Instead, only the likes of institutional investors were able to experience the returns available through this unique asset class. Yieldstreet has worked diligently with its originators to change this.
This communication and the information contained in this article are provided for general informational purposes only and should neither be construed nor intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice. Any link to a third-party website (or article contained therein) is not an endorsement, authorization or representation of our affiliation with that third party (or article). We do not exercise control over third-party websites, and we are not responsible or liable for the accuracy, legality, appropriateness or any other aspect of such website (or article contained therein).
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