It's boom times for betting on lawsuit winnings.
That means growth for a small, specialized industry of lenders that provide lawyers with lines of credit based on projected verdicts or the future settlement value of their ongoing cases.
The industry was born in the mid-'90s but its growth was restrained because traditional banks and financial companies were active in the market. However, full-service financial institutions have begun to shy away from the field because of the credit crunch and tightening lending standards, which leaves a bigger opening for these specialized lenders.
One of them is Amicus Capital Services LLC, an 18-month-old Valencia-based private lender that extends loans to trial lawyers to fund contingency-fee litigation and pay for general business expenses.
"Our business has increased tremendously," said Bill Tilley, Amicus' chief executive. "We are seeing firms that were serviced by larger banks struggling to keep their lines of credit."
Tilley said the company has seen a 10 to 20 percent increase in the number of lawyers seeking his services.
Amicus Capital is not alone. Such specialty lenders as California Attorney Lending and San Francisco-based LawFinance Group Inc. say they are experiencing an uptick in business.
"The banks are starting to feel the squeeze on liquidity," said Michael Callahan, chief financial officer of California Attorney Lending, which is based in New York. "Banks are indicating that as loans are due they want the firm to pay back the loan, so the firms are looking toward us."
Loans from the law-firm lenders don't come cheap. Rates and terms vary, of course, but several described the specialty lenders' rates as similar to credit-card rates which are often well above what a commercial bank might charge for a similar loan.
One the other hand, loans can be easier to get and have less onerous terms.
For example, Amicus Capital lets lawyers borrow money without using their personal assets as collateral. It's not uncommon for traditional banks to ask lawyers to put up their homes as collateral.
And traditional banks value a firm's portfolio of cases at zero. But Amicus Capital assigns value to them. As a result, Tilley said he can provide lawyers with at least double the amount of money they could obtain from a bank.
To qualify for a loan, the specialized lenders request a detailed case list. Lawyers are asked to assess the likelihood of winning, losing or settling each case they are litigating. Companies lend against a law firm's entire portfolio of cases and not to individual cases. Individual cases can be lost but the odds of a law firm losing all cases in its portfolio are slim.
The company sets up pre-approved loan limits at negotiated interest rates to fund cases and the law firms' general office expenses. Since plaintiff attorneys work on a contingency-fee basis, money from the specialty lenders helps them maintain a consistent cash flow.
"The vast majority of the money is used for case development expenses," Tilley said. "But lawyers are free to use it for working capital and general overhead."
Amicus provides loans from $100,000 to $10 million, and the typical loan is $2 million to $3 million. Tilley declined to specify the amount Amicus Capital lent in 2007, but said it was in the millions. Amicus Capital gets its capital from private investors. The company serves law firms nationwide, but about 60 percent of the company's clients are based in Los Angeles.
The typical borrower is a small law firm, perhaps a sole practitioner. In order for them to litigate big cases, they must have adequate capital because it can be a long time with expenses going out and little or no revenue coming in.
Encino-based sole practitioner Gregory Yates, who uses New York-based Counsel Financial Services LLC, said he wouldn't be able to withstand the rising costs of trying cases without the line of credit he has with Counsel.
"You can finance expensive cases to get the larger recoveries or settlements," Yates said. "You used to be able to finance a case to its conclusion for $40,000 or $50,000, but now that same case will cost $100,000 or $150,000."
A complex case, such as one with a group of plaintiffs claiming harm from toxic substances, can cost millions to litigate.
Yates maintains a line of credit with a commercial bank to pay for some business expenses, but he said the bank is not as generous in terms of the amount they are willing to advance to him.
"With Counsel Financial, you get 20 times more," than from the bank, he said.
Not all plaintiffs' lawyers are keen on the idea of borrowing money from a specialty lender.
"I have researched financial services for my firm; it is sort of the final option," said Antony Stuart, a plaintiff's lawyer based in West L.A who has been practicing for 30 years. "It's very expensive and somewhat risky because it can become extremely expensive if the case you are financing gets continued."
At Amicus Capital, lawyers pay the monthly interest charge and make principle payments on their loan. The principle payments are a negotiated percentage of the total money borrowed, and are tied to when a lawyer receives income from a case.
A small number of litigation lending companies offer nonrecourse loans, meaning the lawyers don't have to pay back the money they borrowed if they lose their cases. Nonrecourse loans are riskier for the lender, so if the case does win and the money is paid back, the interest rates increase, sometimes higher than 30 percent.
It is becoming more common for lawyers to have their client pay the monthly interest charge, but that charge must be included in the attorney's retainer agreement with the client.
"We track the interest on a case-by-case basis, which allows lawyers to pass it though to their client," Tilley said.
Although the interest rates charged by these specialized lending companies exceed the rates some lawyers would pay for small business loans, Yates said the private institutions understand the ebb and flow of contingency litigation, which is an advantage for trial lawyers.
"They understand that you are going to have a downturn, and they are able to package the loan accordingly," Yates said.
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