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.