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Five Predictions for Litigation Finance in 2019 (The American Lawyer)

The American Lawyer, November 27, 2018

Five Predictions for Litigation Finance in 2019

“Expect a robust debate on the ethics of fee-splitting between lawyers and nonlawyers, such as major banks and litigation finance firms. Rule 5.4(a) of the Model Rules of Professional Conduct currently forbids the sharing of legal fees with a nonlawyer. As litigation funders and law firms enter financing arrangements for baskets of commercial cases, a healthy debate will pit anachronistic and formal readings of the rule with more functional approaches. Such functional approaches look to the purpose of the rule: to protect clients by ensuring a lawyer’s judgment isn’t compromised by a third party. (The rule, by the way, is a muddle. Formally construed, law firms routinely violate it by paying for copier paper or electric utilities with fee proceeds.) The debate began last August, when the New York City Bar Association, following the formalistic approach, found bank lines of credit did not violate Rule 5.4(a), but that portfolio transactions with funders did. The association’s nonbinding interpretation of the rule did not distinguish between pressure lawyers may feel to make recourse payments to a bank (where all partners have pledged their personal assets), and completely nonrecourse obligations to funders if any cases in a portfolio generate fees. That’s just the beginning of the problems raised by the association’s opinion, which professional responsibility scholars have already critiqued in detail. It is rumored that the New York City Bar is re-examining its opinion and may retract or restate it. Counter-interpretations can be expected soon.”

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