Lawsuit Loans

Written by Patricia Tunstall
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Lawsuit Money is Not Lawsuit Loans

Lawsuit loans would raise legal issues that the Ohio Supreme Court raised about champerty, the English common law rule against the sale of any interest in a lawsuit to the plaintiff's attorney or to a third party. A loan, by definition, must be repaid to the lender. In legal funding, on the other hand, the risk is totally assumed by the lawsuit financing company.

Should the plaintiff be successful in the case, the lending group would be paid according to the prior financial agreement. If the plaintiff loses, so does the group. This gamble would have been judged sound before the adverse judgment, but even experts can be mistaken or can misjudge the strength of a case. No one is a prophet, and a lawsuit is never a sure thing one way or the other.

Champerty Issue Today

Lawsuit loans are prohibited by the plaintiff's attorney in order to prevent conflicts of interest and any other entanglements that might adversely affect the course of the lawsuit. The attorney's focus should be on the client's best interests, and anything that detracts from this is often explicitly barred by the rules of professional conduct. So, if a plaintiff runs out of money, and the attorney is prohibited from extending any money, the lawsuit is dropped unless a third party can intervene financially.

Since the concept of champerty is of ancient origin, it has been modified in modern times, and dropped entirely by several states, including Massachusetts and New Jersey. Nevertheless, it is illegal in many states to sell an interest in a lawsuit; whether or not particular lawsuit loans, so called, violate any of these rules has yet to be decided by the courts. The Ohio Supreme Court is the only high court that has made a ruling on these issues.


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