Is Pre-Settlement Funding Ethical? The Standard of What is Right And Good

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is pre settlement funding ethical

Yes, people who can’t pursue a fair settlement in their lawsuits can potentially get the money they deserve by funding their case with a reputable company.

In 2015, the Delaware Superior Court ruled that litigation funding is acceptable in the courts allowing plaintiffs and their attorneys a fair legal process against high-level opponents. The Wall Street Journal spoke about the subject, saying, “Litigation Funder Doesn’t Violate Ethical Boundaries.”

The court reviewed a case where DuPont (the defendant) tried to dismiss it because they were being sued. Furthermore, while the plaintiff (CIT) was borrowing funds from a legal finance firm to keep their suit going, DuPont kept aggressively insisting that by working with a lawsuit loan company — CIT was involved in “champerty and maintenance.”  

Champerty and maintenance are doctrines in common law jurisdictions that aim to preclude frivolous litigation, as Wikipedia states. In other words, champerty and maintenance are ancient medieval rules in Roman and Roman-Dutch periods that worked back then to give peace to the public, avoid corrupt practices, and only the court justices decide the outcome of the case.

The laws have evolved significantly since, and it is impossible to apply these ancient rules to a modern 2022 timeline of high technology and civilized settlements where parties resolve their legal matters before a trial is brought upon.

Nowadays, certain jurisdictions still demand champerty rules, and since they no longer apply to an ancient world of a complete difference in rules and laws, champerty and maintenance now simply means to illegalize or prohibit financial assistance to plaintiffs in need by funding companies.

Any jurisdiction that makes this unethical rule effective in modern times, in fact, helps corporate defendants with the unreasonable justification that they protect consumers.

We’ll explain more below.

Why do some jurisdictions prohibit legal funding or treat it like a bank loan?

Ironically, states that prohibit legal funding to plaintiffs who are short in cash allege these rules are for the good of the people. However, the prohibition of non-recourse advances in these jurisdictions is not helping financially burdened victims fight giant insurance corporations; thus, it is safe to say that these states are indirectly aligning with, again, insurance corporations.

In this environment, victims who would be able to pursue their claims against corporations are oppressed from doing it because this type of financing for legal claims is banned or regulated as a bank loan by their state laws when in reality, it is not a loan since there is no collateral to rely on and the final payment is due only when a case wins and pays out. In the adverse scenario that the claim does not resolve in favor of the plaintiff, the lender takes on the loss.

Moreover, banks do not do settlement loans because they do not see a future settlement as collateral. So why is legal funding treated as a bank loan when it does not work like one? No excuse.

Banks perform credit checks and income verification before even considering a borrower for a loan. They also base their loan on collateral or assets. Financial institutions that provide traditional loans, such as bank loans, want to ensure they will get paid based on these requisites (and other required information).

People involved in lawsuits already have enough financial problems. Unfortunately, due to these state prohibitions and the only financial support they can get with legal funding being banned, they do not have the opportunity to achieve a fair settlement or award either with their lawsuits or claims or even pursue one because insurance companies are profitable and on top, they use delaying tactics to settle cases for as little as possible since they are in the business of giving as little compensation as possible.

All else equal, victims of accidents or corporate greed also become the victims of injustice of the state under the prohibition of settlement funding or when it is treated as a bank loan which, as a result, pushes away lenders from funding in that state.

As a winning result for the insurance, victims who are already destitute but with valuable claims tend to settle those cases for much less or not sue at all due to the lack of financial resources to survive.

A realistic observation

As an example, the decision of the Delaware court successfully concluded when the court decided that lawsuit loans were not at all whatsoever in any way related to Champerty and Maintenance. In this case, CIT v Dupont is the type of claim that empower litigation funders to take pride in since the allegations brought by small players defending their rights against high-level corporate defendants can bring about justice. 

Now plaintiffs who need to pay their next month’s rent or need food on the table can fund their cases and potentially get the money they deserve by receiving financing from legitimate lenders. 

Pre-settlement lawsuit funding is ethical when the lender provides protection for consumers with rates that are not exorbitant yet high enough to be treated as a non-recourse advance. When state officials get involved in extremely risky financial investments they do not understand by mandating interest rates lower than 42% per year, it only leads lenders to simply stop providing their services in those jurisdictions.

However, these unconscionable actions, which prohibit or unrealistically regulate rates, indirectly award predatory insurance companies and abandon the struggling victims who chose them to provide justice in the first place.

How much in rates is ethical according to the risks?

Although anything charged over 42% a year in interest rates could be considered predatory according to how the industry works (the high risks in the investment and how these advances are structured), some legal funding companies already practice ethical financing.

When all courts and state officials seriously take the side of the little man and finally reaffirm what was already evident; that legal funding has nothing to do with the ‘ancient’ and ‘feudal’ practices of maintenance and champerty, and support the corroborating evidence that advances against potential settlements or jury verdicts do not work like traditional loans, only then, this type of high-risk investment in lawsuits will provide a chance for justice to cash-strapped individuals with strong claims suing multi-billion dollar corporations.

The CIT vs. Dupont case teaches us that the plaintiff is mainly a smaller business receiving financing from a third-party funder (the litigation finance company); thus, they can bring the justice they deserve against a profitable defendant since now they have an equal financial game on them, such as (Dupont). 

It doesn’t have to be too late to get justice on the side of the victim

The Dupont story positively vibrates into the consciences of many on how consumer legal funding can, in fact, help plaintiffs in need of financing to settle their cases for what they are worth or bring about legitimate cases against those who do us harm.

As long as the advance lender is chosen with careful consideration and the charges are not over the number mentioned above, with a capped rate in the second or third year of the loan, consumers can safely tap into legal funding without erasing it from the equation.

From the most funded cases, such as motor vehicle accidents, malpractice, product liability, and even settled cases to civil rights claims, justice can still be served with new leaders who understand that our system favors corporations instead of the little man.

At Baker Street Funding, we give you the inside scoop on pre-settlement funding by covering a variety of ... financing and legal topics to help you made the best financial decision for you and for your case. Our experts break down complex ideas in a way that's easy to understand so you can stay informed on current trends as well as tips and fact checked information by the CEO and founder, Daniel Digiaimo. Furthermore, Despite its name, consumer legal funding is not a loan. If you don't win your case, no payment needs to be made back. To avoid confusion and simplify matters on, we'll use the word "loan" throughout this article.

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