NEW YORK (Legal Newsline) - The New York City Bar Association won’t be disclosing comments it solicited as it decides whether to modify ethics rules around third-party litigation finance.
The New York City Bar, one of the nation’s most influential legal associations, is studying how ethics rules and the law treat the fast-growing legal funding industry, which includes loans to plaintiffs and lawyers. Last year, the New York City Bar issued an ethics opinion prohibiting lawyers from borrowing money under contracts in which the return to the lender was a percentage of fees collected in the underlying litigation.
The bar association said it “will not be revisiting” Ethics Opinion 2018-5 banning fee-splitting with outside firms, but it is “open to exploring potential revisions to the ethics rules and/or legislation.” The comment period for its Litigation Funding Working Group has been extended to July 31. Eric Friedman, a spokesman for the bar association, said it won’t make comments public.
Litigation funders have been vocal about the issue, saying last year’s opinion was misguided and overbroad. In a letter he made public, Ralph Sutton, chief executive of Validity Finance, said litigation funding is important to allow clients access to the legal system. Not only do loans to clients allow them to pursue cases “they otherwise might have to abandon,” he wrote, but loans to lawyers enable them “to finance firm operations and smooth cash flows without subjecting them to personal recourse – removing major stressors from a profession facing chronic struggles with mental health and substance abuse.”
Derek Ho, a partner with Kellogg Hansen Todd Figel & Frederick, authored a letter reported by Reuters that attacks another proposal likely to be discussed by the Working Group, which is requiring lawyers to disclose litigation funding contracts to the court and opposing parties.
Ho said that would be tantamount to imposing a tax on funding recipients, and is "likely to impede the proper functioning of the civil justice system, rather than facilitate it," the report says.
Disclosure "merely increases the costs of litigation (and litigation funding) to the funder and the plaintiff.” He wrote. “Such a 'tax' is inconsistent with the objectives of the civil justice system... Impeding the free flow of communication between funder and funded party is also antithetical to the objectives of our civil justice system."
The New York City Bar based its prohibition on fee-splitting on longstanding ethics rules requiring lawyers to maintain their professional independence. The fee-sharing rule dates back at least to 1928, when the American Bar Association banned the division of fees with anyone but another lawyer. The ABA reiterated the rule in its Model Code for bar associations in 1969.
The New York State Bar Association opined in 2012 that non-lawyer marketing consultants cannot be paid based on fees from clients they helped obtain and in 2015 prohibited lawyers from raising money on crowdfunding sites with the promise of a percentage of firm revenues.
It might seem a slight distinction between lending money with the return based on a percentage of fees and lending under a set interest rate, since in both cases the lender is repaid with firm revenue. But “rightly or wrongly,” the bar association said, “the rule presupposes that when nonlawyers have a stake in legal fees from particular matters, they have an incentive or ability to improperly influence the lawyer.”
Defendants have long been required to disclose insurance contracts to plaintiff lawyers at the outset of litigation so the other side can determine their opponent’s financial resources and ability to settle. Some say similar rules should be enacted for litigation funders, as the industry has grown into a multibillion-dollar source of finance for plaintiff litigation.
The New York City Bar’s Working Group on litigation finance plans to issue its final report by the end of the year.