© 2018 The Texas Lawbook.
By Eric Chenoweth of Bentham IMF
(Feb. 28) – In Texas and elsewhere, law firms and commercial litigants gain access to the justice system by obtaining funding to pursue cases that would be cost prohibitive without financial assistance.
Though funding has become a more common tool for commercial litigants and their lawyers in recent years, many lawyers and litigants still have questions about basic ethical issues. One of the most fundamental is whether funding is even allowed under their state’s legal ethics rules.
The answer is an unequivocal yes. Texas, in particular, has a long history of alternative funding arrangements – Texas firms helped pioneer and popularize the use of contingency fees. Funding is a logical extension of that tradition. It is designed to help firms and litigants reduce the risks associated with a full-contingency arrangement. By providing fees in advance, a funder allows lawyers to focus squarely on their cases, rather than on how they will finance them. For litigants, funding ensures that they can afford to hire the most qualified counsel for their cases.
Texas, additionally, has no lingering impediments to funding from maintenance or champerty. As Cornell Law School Professor W. Bradley Wendel wrote in the Fall 2017 issue of The Advocate, lawyers are prohibited under the Texas Disciplinary Rules of Professional Conduct from obtaining a proprietary interest in the underlying subject of a litigation. Yet, “this does not mean that third parties are similarly prohibited from doing so,” Wendel wrote. “And in many states, including Texas, providing financial assistance to a litigant in exchange for a financial interest in the outcome is permitted.”
The courts have also weighed in. In his article, Wendel noted that in the leading Texas case on funding – Anglo Dutch Petroleum International Inc. v. Haskell, a 2006 case involving the use of funding in an oil-and-gas industry lawsuit – the First Court of Appeals showed that Texas “is not one of the states that continues the ancient common-law prohibition on champerty and maintenance.”
Wendel also remarked that the court found funders “purchase a contingent right to a portion of the plaintiff’s recovery. The funding agreement does not create an absolute obligation on the part of the plaintiff to repay the advance. As a result … these transactions are investments, not loans, and therefore not subject to state usury limitations.”
Litigation investments often lead to another common ethical question among attorneys and litigants: Does litigation financing entitle the funder to an element of control in the case? The answer is no.
Funders essentially act as silent partners, providing financial assistance and sharing in the proceeds from a successful recovery. They may receive updates about the progress of the case, but they neither dictate legal strategy nor control the terms of settlement.
While the ways in which third-party funders invest in commercial claims continue to grow and evolve, the ethical issues those investments may raise are well-settled in Texas. Duties of loyalty, competence and independence will continue to guide the lawyer’s conduct, and financial assistance from a funder can help both the claimant and its lawyers pursue meritorious claims and maximize recoveries.
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