Law Practice Finance

How do you finance a growing practice? It is impossible to have a successful practice without good cases and managing good cases to a successful conclusion requires money for working capital. So, how does a growing practice secure the working capital it needs?

Historically, growing practices in need of working capital have had limited financing alternatives. A law practice's largest and most valuable asset, their case inventory, has been of little value for financial transactions. Most firms find that banks will only lend them rather small amounts, if they will lend at all. Banks simply do not view potential fees from cases as adequate collateral for a loan. They are simply not set up to evaluate this type of collateral. This makes it all but impossible for the smaller firm to finance large cases.

Previously, the only alternative has been to give up a large portion of the fee to a financially stronger co-counsel willing to finance the case.

Attorney Financing With a Non-Lawyer Third Party This paradigm has changed with the introduction of asset-based lending to the legal profession. The development of highly specialized litigation finance companies knowledgeable in case and attorney evaluation now make loans available to many practices for which no financing has previously been available. Moreover, their loan-to-value ratios are double or triple those of traditional financial institutions.

Non-traditional lenders are starting to provide loans that more properly reflect the value of a practice's contingent assets - case inventory. While financial condition of the parties always matters in a capital transaction, even more important are the attorneys' skill, track record and case inventory.

Ethics Issues

Financial transactions with attorneys are shaped by ethics issues. The intrinsic problem is that the non-lawyer entity has an incentive to attempt to "maximize its earnings to the detriment of the representation of clients." The attorney must maintain control and independent professional judgment: the non-lawyer entity must have no power or authority to direct or control the activities of the lawyer (RPC Rule 1.7(a); RPC Rule 5.4(c)). (It goes without saying that lawyers may not split legal fees with a non-lawyer entity. RPC Rule 5.4(a))

Various Rules of Professional Conduct require that:

(1) there must no interference with the lawyer's independence or professional judgment or with the client-lawyer relationship, and

(2) information relating to representation of a client is protected as required by RPC Rule 1.6.

(3) revealing to a third party any information acquired during the professional relationship with a client ("Confidential Material") unless the client gives informed consent.

If these conditions are met, a financial arrangement with a non-lawyer entity is permissible if:

o Repayment is not tied to the results obtained by the lawyer

o The rate of interest charged is absolute and not contingent on the outcome of the litigation.

Since there is no way to achieve this with a non-recourse transaction, the attorney must be responsible for the loan.

Beware of Sham Transactions

There are private lenders that have attempted to avoid the restrictions imposed by the Rules of Professional Conduct by using a law firm as a conduit for its transactions. If the law firm is offering nothing but financing, this transaction is likely to be considered a sham and required to comply with all of the appropriate rules.

Factoring Fees on Settled Cases

It is important to point out that there is a great distinction between a contingent fee on an unresolved case and an account receivable on a settled case. Since the issues have been resolved, the latter presents no conflict (assuming the transaction does not run afoul of 2) above); the receivable can be sold, factored or otherwise financed like any other receivable. Fees can be factored on a recourse or non-recourse basis at very reasonable costs.

The Structure of Today's Market

Every credit market has a hierarchy and this one is no different. Rates vary from about 5% for the most creditworthy to 60% for the least.

Since case expenses including working capital represent only a small fraction of the value of a case, even the highest rate loans, which are primarily asset based, represent very favorable economics for the growing firm. Consider the following alternatives for a firm that needs $50,000 in financing in order to handle a $500,000 case with a contingency fee of 33% (potential fee of $165,000):

(1) Co-counsel Financing: 50% of the fee equals $82,500;

(2) Working Capital Loan at 60% equals $30,000 per annum. Depending on the case duration (break-even is 33 months)

Prime Borrowers

The largest and most creditworthy firms have always been able to get bank financing at reasonable terms; these have always been credit transactions rather than asset financing. Generally, the bank will take a blanket security interest on all assets of the firm, including case inventory and will usually require the personal guarantees of the principals, as well.

These prime borrowers can use their financial strength to borrow and then turn around and invest the capital in cases brought to them by smaller firms unable to get the financing themselves. The cost of these transactions can be huge since they are based on the results of the case rather than on the amount that is financed.

Non-Prime Borrowers

Just below these prime borrowers is a group of firms that are creditworthy enough to secure a bank line but not at the best terms. The amount of the line is usually insufficient and the rate is well above prime.

These firms can usually obtain significant funds from a non-bank lender at rate of 16% - %20%. A security interest and personal guarantees will be required.

All Others

The vast majority of firms have been limited to the amount of capital they can borrow on their own personal credit.

Footnote 1

RPC Rule 1.7(a), a conflict of interest exists if the representation of one or more of a lawyer's clients is materially limited by the lawyer's responsibilities to a third party or by a personal interest of the lawyer. This conflict can be waived by the client. However, regardless whether there is no conflict, or there is a conflict that is waived by the client, the lawyer must still insure that (1) there is no interference with the lawyer's independence or professional judgment or with the client-lawyer relationship, and (2) that information relating to representation of a client is protected as required by RPC Rule 1.6.

RPC Rule 5.4(a) prohibits a lawyer from sharing legal fees with a non-lawyer entity. RPC Rule 5.4(c) prohibits a lawyer from entering into certain arrangements with a third party that would give the third party the power to direct or regulate the lawyer's professional judgment in rendering legal services to a client.

RPC Rule 1.6(a) generally prohibits a lawyer from revealing to a third party any information acquired during the professional relationship with a client ("Confidential Material") unless the client gives informed consent.

Copyright 2003-2005, a JurisMark LLC website

Wayne Walker is the Presdent of CapTran, the leader in litigation financial serives.

Free Quran in All Languages

Free Tafsir Books

Benefits of an Unsecured Loan

Listed below are some of the benefits of an unsecured... Read More

Become A Smarter Borrower

With a nation that has in the region of a... Read More

Online Car Loans - Getting a Good Quote Online

Online car loans enable you to get a good quote... Read More

A Guide to Debt Consolidation Loans

Should you find yourself overcome by debt, you might want... Read More

Secured Loans House the Most Positivistic Consequences of Loan Borrowing

One of the most enduring myths of loan industry is... Read More

Loans Guide

Many people are confused by the different types of loans... Read More

How To Apply For a Business Loan

Worried about how to apply for a business loan? Although... Read More

Guide to Bad Credit Loans

Here is a useful guide to Bad Credit loans. Bad... Read More

Financial Aid Options

Before entering college, you may find yourself pondering exactly how... Read More

Quickest Payday Loans - Things To Look For in a Cash Advance Company For The Fastest Loan Processing

To find the quickest payday loans, you need to look... Read More

Short Term Solutions to Cash Flow Problems

If you're in a crunch for money, either because of... Read More

What is Bad Credit UK?

Bad credit UK is a term that many people don't... Read More

What is a Bad Credit Loan?

A Bad Credit loan is a personal loan for people... Read More

A Guide to the Bad Credit Personal Loan

Here is a useful guide to the bad credit personal... Read More

How to Get a Business Loan in Five Steps

Need funds to startup or expand your business? Follow these... Read More

UK Student Loans Explained

Student loans seem to be the only feasible way out... Read More

What are Home Improvement Loans?

Home improvement loans are loans specifically designed by loans companies... Read More

A Guide to Finding an Adverse Credit Homeowner Loan

If you're searching for an adverse credit homeowner loan, you... Read More

Can A Pay Day Loan Truly Be Easy?

If you're looking to find an easy payday loan it's... Read More

Business Loans from Family - A Good Idea?

Can I Ask my Family for a Loan to Pay... Read More

What is a Secured Personal Loan?

A secured personal loan is the generic term for a... Read More

What?s All the Hype about Omni Military Loans?

The average person some time in their adult lives will... Read More

What are Personal Loans?

As the term implies, Personal loans are simply loans for... Read More

Instant Cash Advance Loans - Take Advantage of The Convenience of The Payday Loans Available Online

Cash advance loans not only provide you with instant cash,... Read More

The Average Profile of Customers Opting for a Payday Loan Cash Advance

Payday loans are loans of a small amount, taken for... Read More