Banks, hedge funds and private investors are bankrolling lawsuits involving medical malpractice claims, divorce battles, class actions against corporations and other lawsuits with big potential payouts. This lending practice is giving more people a chance in court and helping to ensure that cases are decided on merit rather than money. But it also is fueling abuses – the client’s cost of paying back his investors may exceed the amount of damages awarded, and judges are throwing out cases they say were initiated and controlled by investors.
Is it an ethical practice to allow banks, hedge funds, and private investors to “invest” in the outcome of a lawsuit?
Few would question the ethics (perhaps the wisdom) of businesses borrowing from hedge funds. Nor would we question the result if a business borrowed money with the expectation there would be ample profits to pay the loan, and it turns out there are not. Yet something pulls at us and makes us question a case where a plaintiff’s award ends up consumed by financing necessary to pursue the case. This demonstrates the duality of the practice of law.
There is no question the law is a profession of great tradition. It has yielded heroes real (Abraham Lincoln, Oliver Wendell Holmes) and imagined (Atticus Finch). Their triumphs and wisdom helped shape society and our perception of what it means to be a lawyer. Somehow a hedge fund backing Atticus Finch’s defense of an innocent man from an angry mob robs Finch of his moral authority.
At the same time, law is increasingly perceived and pursued as a business. As with any business there are those willing to invest in hopes of great returns (20 percent returns in some cases) and those willing to pay such rates for financing they cannot get elsewhere.
Does borrowing money to pursue cases implicate the professionalism and ethics of those involved? There is no ethical prohibition on the making or accepting of such loans. In the end, it is the type of business done thousands of times a day.
Does borrowing money to pursue a case rob a lawyer of his or her professionalism? At the end of the day, I think this ties to the conduct of the professional. As professionals, we are responsible for shaping the environment in which we practice. If lawyers use such financing with the full knowledge of the client to bring a case which might not otherwise make it to trial, injustices which might not otherwise be subjected to review are brought to light. If the financing is unscrupulously used to drum up suits, I suspect the lawyer and investor will both get what they deserve.
— Mark C. Hoyt JD ’92, managing partner at Sherman Sherman Johnnie & Hoyt, LLP