I’ve been looking deeper into the idea of investing in lawsuits. In my last post on the subject I said this only works for me ethically when the investments are used for plaintiff’s medical and living expenses. I wrote “I’ll not be lending money to lawyers.” Since then I’ve learned more about the subject from litigation investment firms, and now my opinion is a bit more nuanced.

Before, I mentioned a “slip and fall” case that was brought against my architectural firm. It was a classic example of the kind of ambulance chasing lawsuit which has given the legal profession a bad name in America. The plaintiff didn’t even actually fall, for crying out loud. But it still cost me a $10,000 insurance deductible, and five days of my life. So I was robbed, and there’s still no way I would invest in anything that enables other attorneys to do the same. But I’ve learned this is usually a non-issue when it comes to investing in lawsuits, for several reasons.

Most predatory cases are personal injury lawsuits, and it turns out personal injury cases are very seldom funded by investment sponsors. One firm I contacted indicated that this kind of case accounts for only one quarter of one percent of the total cases in their portfolio. This may be because most of their investors agree with me about the ethics. It’s even possible a high percentage of investors have been victimized by predatory attorneys, just as I was. Investors obviously have money, and targeting people simply because they have money is what predatory attorneys do.

Also, investors want to allocate their money into assets where they will achieve the best returns. Naturally, that means the vast majority of litigation funding investments are made in lawsuits where big money is at stake. The potential settlement or judgment amounts in most personal injury lawsuits are small potatoes compared to class action or mass tort suits, in which multiple plaintiffs were allegedly harmed by a defendant which is usually a major corporation with very deep pockets.

I’m much more comfortable funding law firms which are representing plaintiffs in class action and mass tort suits because it’s far less likely that their lawsuits are frivolous.

I’m much more comfortable funding law firms which are representing plaintiffs in class action and mass tort suits because it’s far less likely that their lawsuits are frivolous. In our society, it’s easy for one unethical attorney to convince one greedy client to participate in a predatory lawsuit. But usually mass tort or class action suits involve dozens, hundreds, or even thousands of attorneys and plaintiffs, all of whom are independently convinced it’s worth the effort to sue. Whatever the facts of the case may be, when that many people are willing to go to court it’s unlikely their case is frivolous.

Next, there’s the issue of timing. It seems most law firms receive investment funding only after the “discovery” period of the lawsuit it complete. All the facts are in at that point, which does two things: 1) it reduces risk, because it’s possible to evaluate the likelihood of winning the case on its merits, and; 2) it reduces the possibility that the plaintiff has lied, exaggerated, or otherwise brought suit irresponsibly or unethically, because if that were true it would probably have been found out.

Because I know what it’s like to be on the receiving end of predatory lawsuits, at first I was not inclined to provide investment funds directly to law firms. But if I can provide funds to firms that are, for example, representing crowds of “little people” who were the victims of corporate fraud (such as the Enron scandal), or whose homes and neighborhoods were environmentally polluted by a company’s negligence, or who suffered health problems because of a drug known by the manufacturer to be defective, that seems like a good use of investment money in more ways than one.

Today I’m considering an investment in an asset class most people know nothing about: loans secured by lawsuits. It seems there are companies which specialize in lending money in return for a carried interest in civil lawsuit settlements or judgments. If the borrower wins their case or gets a settlement, they pay back the loan with interest. Lots and lots of interest.

I only just began researching the idea, but so far it looks like there are at least two versions. Some lenders offer their funds directly to law firms. Others offer money to plaintiffs. The law firms use the money to pay their bills while they wait for big payoffs on cases they’ve taken on a contingency basis. The plaintiffs use the money to pay their personal medical bills and living expenses while they wait on the outcome of their lawsuit. I’m interesting in the second version, offering funds to plaintiffs. The first version, lending cash to lawyers, has no appeal at all.

Most people agree our society is much too litigious. Anyone can sue anyone for almost anything, and if there’s serious money involved many lawyers are all too happy to take the case on contingency. This often forces innocent companies and individuals to choose between settling with malicious plaintiffs, or paying big bucks for a legal defense. Even those with insurance against lawsuits still suffer, because the proliferation of frivolous lawsuits has driven premiums and deductibles sky high. I know this from painful firsthand experience.

I was sued by a woman who slipped and almost fell in a building designed by my firm. Allegedly, the poor dear pulled a muscle. She thought her “pain and suffering” was worth several hundred thousand dollars…

In the early years of my architectural career, I was sued by a woman who slipped and almost fell in a building designed by my firm. Allegedly, the poor dear pulled a muscle. She thought her “pain and suffering” was worth several hundred thousand dollars and she claimed we were negligent for specifying a wooden floor. The judge issued a summary judgment in my favor (meaning he threw out the case because he recognized her claim was ridiculous) but I still had to waste five days in court and working with my attorney to prepare a defense, plus cough up $10,000 to pay my professional insurance deductible. There were other similar legal attacks through the years. By the time I retired from practicing architecture, my firm was paying over $48,000 per year in errors and omissions insurance premiums, just to protect ourselves from lawyers.

America’s civil “justice” system promotes legalized extortion as far as I’m concerned, and pretty much the only thing stopping it from completely destroying the economy is the fact that the process can be as time consuming and expensive for the parasites who sue maliciously as it is for their victims. So no; I’ll not be lending money to lawyers.

But there’s another angle I like better. Sometimes a plaintiff might be someone who was injured due to the actual negligence of an insurance company’s client. For example, consider a person seriously injured by a woman who runs a red light while applying mascara, or a man who drives drunk. This person has huge medical bills, along with injuries that make it impossible to earn a living. In short, the fool who ran them over has devastated their finances. Meanwhile, the defendant’s insurance company, knowing this, might use its considerable resources to delay and draw out the legal process in order to coerce the dead broke plaintiff into accepting a lower settlement now, rather than holding out for a larger amount they really deserve. That’s where the other kind of lawsuit funding comes in. There are companies that specialize in providing funds to plaintiffs in this situation. The money allows the injured person to avoid foreclosure on their home, for example, while their attorney continues fighting for a fair outcome to their lawsuit. That’s something I can get behind.

These loans are very expensive from the plaintiff’s point of view. So far I’ve seen interest rates comparable to what someone would pay for a pawn shop loan. But unlike a pawn loan, the funds are offered on a non-recourse basis. That means if the plaintiff loses their lawsuit, they keep the funds and have no obligation to repay the money. So it’s a very high risk for the funding company, which explains the high interest rate. Also, at least two of the funding companies I’ve found so far have a policy of limiting the funding amount to 10% of the expected total judgment or settlement for the case. They specifically state that they do that so the plaintiff will still receive a substantial portion of the payment from the defendant.

I’m not sold on funding lawsuits as a legitimate alternative asset class quite yet, but it’s definitely worth more investigation. A quick search at Amazon shows they have only one book on the subject, so it may take some digging to find out if this is a worthwhile opportunity, but I’ll post more here as I learn.