Every trial lawyer knows their livelihood depends on their ability to attract clients and generate fees. For a contingency fee based lawyer, that means signing up new clients and winning cases. So why would an attorney who works so hard to obtain new clients refer out cases? Lack of working capital is the main reason lawyers refer out cases when they could otherwise provide excellent service and retain the entire legal fee. While there are certain scenarios where an attorney is professionally compelled to refer (see our infographic below), an attorney loan can enable capable attorneys and law firms to retain their cases when cost is the issue at hand.
To Retain or to Refer?
Top Reasons to Retain
Standards of service and trust are good reasons to retain a case. Attorneys who charge themselves with offering exceptional service to their clients or possess the greatest expertise cannot guarantee that another law firm will provide the same level service.
Keeping a steady flow of incoming cases is critical to the success of a contingency fee based firm, where cash flow can be more unpredictable than for other law firms.
The law firm may have expended considerable resources just to acquire the case, including marketing expenditures, record retrieval, travel and staff. The law firm also risks losing the relationship of the client and their future need for legal services as well as referrals.
The rules regarding fee-splitting in an attorney’s local jurisdiction may include share of responsibility, client permission, and fee restrictions. Drafting a compliant contract that will please all parities may become a more difficult task than expected.
When to Refer
If the client has a matter in an unfamiliar jurisdiction it might be better to refer to a local lawyer who is familiar with the law, procedure, and courts in that jurisdiction.
A legal need in a specialized area of law might also prompt a lawyer to consider referral to a specialized attorney with knowledge of that legal area.
Securing co-counsel may be more expensive to the client than referring them out.
How to Retain the Case
Banks: The Non-Solution
It would seem natural for a lawyer to turn to his or her bank for a working capital loan or line of credit. Unfortunately, your typical bank really doesn’t understand the up and down nature of contingency based law firms’ cash flow or profits, and they certainly don’t know how to place a value on contingency fees. Furthermore, even if banks understood the business, contingency loans are not an asset class they want on their books these days. Except for few exceptions, banks are just not a viable option.
ALF: Alternative Litigation Finance
Over the past few years a handful of specialty finance companies dedicated to the legal profession have emerged to fill the banking void and cater exclusively to contingency fee firms. Case Funding Inc. makes it easy for law firms to borrow so they can retain their cases rather than refer them out. At virtually any cost, it can make great economic sense for any attorney that can borrow, to borrow rather than refer out a case.
Here is a typical scenario as illustrated in the chart below: An attorney considers referring out or retaining a case with a $2,750,000 anticipated settlement. The attorney estimates the reimbursable case expenses will be about $250,000, leaving a net recovery of $2,500,000 which at 40%, will earn a $1,000,000 fee.
If the attorney chooses to refer out the case, they would be able to keep only $333,000 at a typical 1/3 Fee Split.
However, if that attorney borrowed to cover the case costs, and after passing on interest in case expenses and taking advantage of tax deductions, they would be able to earn $970,000 – that’s a $635,000 difference! Plus, even if the attorney doesn’t necessarily need to borrow, by financing the case costs, they can free up their own money for other uses.
Click Here if you missed our first installment, ‘the A,B,C’s of Law Firm Financing‘.