The Pros and Cons of Self Funding Case Costs with Partners’ Cash

Explore:  Litigation Funding

weighing-out-the-optionsWhile funding for case and trial costs is available from a range of sources, one of the most common is a partner’s own savings, as partners of law firms often use their own cash to fund  case costs.

Pro: Investing in Your Own Case without the Costs of Borrowing

The greatest benefit to a partner self-funding their own cases is that they eliminate the costs and constraints, such as repayment terms, of borrowing from a bank or specialty finance company. The partner also saves in opportunity costs, as the time expended during the process of shopping around for compatible loan terms, and the credit implications of multiple FICO inquiries while trying to find a lender willing to finance the partner’s firm are also eliminated and the partner can commit these assets of time and credit fidelity to other endeavors.

Con: Partners’ Cash Is Perpetually Tied Up in the Firm

When attorneys use their own money to fund a case, they expect that they will later be paid back when (or if) a settlement or judgment is awarded in the case. In practice, however, each case has its own lifecycle, and as one case that was funded with a partner’s personal finances may come to a close, another case requiring funding is seemingly always in need of funding.  So instead of partners getting paid back when settlement funds are received, that taxable recovery ends up getting reinvested in new cases.  In many cases, in fact, partners never fully recover the loans they have made to the firm until they retire or close their practices.

Con: Partners Rarely Execute a Formal Note for the Loan

Because partners’ personal finances can so easily be drawn upon to fund cases – and because this litigation funding source is largely used for its convenience, attorneys who are opening up their pockets to their law firms rarely take the time to draw up a formal loan agreement that specifies the terms, including rate and fees. In effect, this ends up causing the lending lawyer to later get hit with a personal loss, as he has essentially given the firm an interest-free loan from his own after-tax cash.  The attorney is concentrating his portfolio risk by putting all is investments in the firm’s contingency cases at a zero interest rate return.  Aside from the risk, when inflation rates are accounted for, such an investment can actually result in the attorney losing money, as the value of the initial investment will be worth less years later once the inflation rate is factored in.

The Bottom Line

Given such significant drawbacks that are associated with the use of partners’ cash to fund litigation, Case Funding is here to provide lawyers with affordable, convenient litigation funding options that won’t take a toll on their personal finances. Further, many attorney have provisions in their retainer agreements, which pass through the cost of borrowing for case costs to the client.  Many attorneys have found this method to be an effective and preferable alternative to self funding.

Topics:  Litigation Funding

Published In: Professional Practice Updates, Personal Injury Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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