Judge Eileen Bransten issued a recent decision in New York County Supreme court, weighing in on the long-standing and, as yet, unsettled question of how alternative litigation financing (ALF) should be treated in NY state. In Litigation Funding LLC v. Jeffrey Lessoff, No. 650757/2012. The defendants in the case argued that a cash advance secured by interests in contingent fees in specific cases would be an ethical violation of 5.4(a). In her decision, Judge Bransten speaks favorably of the ALF industry, stating that, “There is a proliferation of alternative litigation financing in the United States, partly due to the recognition that litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.”
Judge Bransten’s statement is a promising exploration of the oft-cited and rarely addressed Rule of Professional Conduct 5.4(a), which prohibits attorneys from sharing fees with non-attorneys, except in the case of a few limited exceptions. Under her decision, Judge Bransten conveys that there is a difference between a lawyer wanting to sell a portion of their fee (as prohibited in Rule 5.4(a)), as opposed to pledging a security interest in their future fees for an advance from a lender. Citing a Delaware Chancery Court decision (PNC Bank, Delaware v. Berg, No. 94C-09-208-WTQ, 1997 WL 529978), the recent NY decision reiterates that pledging security interest in receivables is a common and longstanding practice in other industries that have not created legal loopholes such as the ethics rule protecting predatory borrowers from creditors.
The Supreme Court cited a number of decisions from other courts to support its ruling on this issue. However, many of those decisions upheld lender interests in contingent fees without directly considering the ethical issue raised here. The highest court cited that addressed the Rule 5.4(a) problem was the Ohio Court of Appeals in Core Funding Group, LLC v. McDonald, No. L-05-1291, 2006 WL 832833, at *11 (Mar. 31, 2006), which characterized this kind of arrangement as more like an investment than a loan.
This case is another in a growing body of case law and commentary supporting the practice of lenders taking a security interest in contingent fees as repayment for funding that allows attorneys and firms to effectively represent their clients. Hopefully, state high courts, or the ABA, will clearly address this issue to allow attorneys peace of mind.