Engstrom on Lawyer Lending

Nora Freeman Engstrom (Stanford) has posted to SSRN Lawyer Lending:  Costs and Consequences.  The abstract provides:

The “lawyer lending” industry — comprised of lenders who extend capital to plaintiffs’ lawyers to finance personal injury litigation — has blossomed. This industry has taken off, at least in part, because attorneys are permitted to deduct interest on these loans from client recoveries as an additional “expense” of litigation. The cost of the burgeoning lawyer lending industry is, thus, in large measure, borne by clients. This Article asks whether personal injury attorneys who choose to take out loans to cover case costs and litigation expenses ought to be allowed to offload associated interest charges. The Article shows this question is important in its own right — with profound implications for the quantity and intensity of tort litigation. And the question is also an ideal point of entrée to identify, and begin to remedy, broader deficiencies in three strands of current legal analysis. Examining the propriety of interest pass-throughs first highlights the importance of litigation costs — and the inter-connectivity of costs and contingency fees — a topic that has suffered from too little investment in research. Second, by separately considering just lawyer lending, (rather than all third-party funding mechanisms simultaneously), and by studying a mechanism’s on-the-ground operation, (rather than just its birds-eye-view impact), the Article attempts to lead by example to reorient future Alternative Litigation Finance scholarship. Third, the Article underscores the need to push past bare formalism, and it sketches an alternative theoretical framework that can be employed when confronting certain ethical issues going forward.

 --CJR