Litigation Loan

Written by Patricia Tunstall
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Third-Party Advance Is Not a Litigation Loan

A litigation loan is an acceptable term in everyday language, but it is not a legal description of the litigation capital that is provided by third-party companies. A loan must be paid back, but the lawsuit advance from these companies is not repaid if the plaintiff loses the case. Everything is riding on a successful outcome to the lawsuit, both for the plaintiff and for the funding company.

These companies have two main criteria for making a litigation loan to a particular plaintiff. First, is the claim a deserving one, in that an injured plaintiff is taking on a defendant person, insurance company, or corporation that has more financial resources? Second, is the claim a good investment, in that it is a legally strong case that the experts in the group judge to be a winner in court?

Mixing Business and Law

Since the ancient origins of common law rules, there has been an overriding concern about the necessity of professional conduct for lawyers. The perspective on this issue has changed over the centuries, but even today, certain common law rules pop up--sometimes unexpectedly--as a foundation for some argument for or against specific lawyer actions and behavior. Modern ethics rules have long since been codified by the American Bar Association.

A specific concern has focused on mixing the business side of lawyering with the legal obligations to the client. The common law rule against champerty--selling an interest in a plaintiff's lawsuit--is largely superseded by modern concepts, but it has a lingering influence. The Ohio Supreme Court decided in 2003 that a third-party funding contract was illegal because it violated Ohio's rules against champerty. On the other hand, a litigation loan is fast becoming the last resort for sinking plaintiffs.


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