Law firms avail themselves of a secure source of funds that provides not only for future case development costs, but also for the recovery of monies already advanced on behalf of their clients. In the typical credit facility agreement, participating firms will be able to recover up to 100% of the amount of their case development costs in immediately available cash. The typical program produces many benefits for participating firms, including:
- No principal payment until the underlying case is resolved. The firm is not required to make any principal payments until a case is resolved. Traditional banks require periodic repayment of principal balances.
- Payments can be tied to a firm’s cash flow. Most facilities require only interest payments each month, principal payments are only required when the firm receives income.
- No interest expense to the firm on cases that are won or settled successfully. Most states provide a mechanism by which attorneys are permitted to recover the costs of litigation when a case is brought to its conclusion. In addition to the costs of depositions, expert witnesses, demonstrative evidence, and the like, interest expense paid to third parties can generally be treated as a cost of litigation. Each state has its own ethics rules and opinions, with which participating law firms must comply.
- Larger lines of credit are available. Banks are typically reluctant to lend large sums of money to firms engaged in contingent litigation. As a result, bank lines are generally insufficient to cover the majority of a firm’s inventory of case development costs.
- Reduced risk. Traditional banks are often indifferent to the cash flow requirements of a trial lawyer when a line of credit expires. Most providers have designed their programs to insure that attorneys have sufficient time to bring cases to a successful conclusion.
- Eliminate Phantom Tax. Since advances on case expenditures are generally not deductible the capital that is invested in case development can show up as income to the firm resulting in a tax payment on funds that are not realized or available to either the firm or its partners until the underlying cases are successfully resolved which may be years later.