5 Reasons Not To Use Advance Settlement Funding
Imagine that you've been injured in an auto accident in Florida. You are out of work and bills are piling up, you've hired an attorney to help with your claim but things seem to be moving along so slowly and you need money now or else the electric company is going to shut your power off! You see a commercial for an advanced settlement funding company and call their 1-800 number and it seems like a miracle, they will send you money now!
Lawsuit Advance Loan
Then your lawyer refuses to sign the papers from the advanced settlement funding company! You thought your lawyer was there to help you not hinder you from getting you the money you deserve after an accident. What's the deal with this lawyer who won't help??
Combine these difficult economic times with the ever growing length of the auto claims process and it is a recipe for many auto accident victims to suffer financial hardship while their case is pending. Sure there is PIP coverage available to pay for medical expenses, mileage, prescriptions and 60% of lost wages up to $10,000.00, but the PIP coverage does not pay for things like the electric bill while the injury victim is out of work and waiting for their auto insurance claim to resolve. The late night commercials for the advanced settlement funding companies do seem attractive, like the perfect solution - except remember what your Grandpa always said "If it seems too good to be true, then it probably is (too good to be true)"; this is a wise old warning that absolutely applies to advanced settlement funding loans. The devil is in the details, so they say, so it is extremely important to read the fine print, all 10 plus pages of it.
So why can't your lawyer help you through all this fine print? Because your lawyer probably thinks it's a bad idea and your lawyer has been warned by the Professional Ethics Opinions of the Florida Bar to advise you against these pre-settlement funding companies.
Below is the Florida Bar ethics opinion on pre-settlement funding companies.
PROFESSIONAL ETHICS OF THE FLORIDA BAR
March 15, 2002
"An attorney may provide a client with information about companies that offer non-recourse advance funding and other financial assistance in exchange for an interest in the proceeds of the client's case if it is in the client's interests. The attorney may provide factual information about the case to the funding company with the informed consent of the client. Although the attorney may honor the client's valid written assignment of a portion of the recovery to the funding company, the attorney may not issue a letter of protection to the funding company." Note: This opinion was approved by The Florida Bar Board of Governors on March 15, 2002. (Emphasis added) CASES: The Florida Bar re Amendments to Rules Regulating The Florida Bar -- Rule 4-1.8(e), 635 So.2d 968 (Fla. 1994)
"The Committee has recently received numerous inquiries regarding various proposals to assist personal injury clients in obtaining non-recourse advance funding for the clients' personal expenses unrelated to the costs and attorneys' fees in the litigation pending recovery in their cases. The inquiring attorneys have received communications from funding companies offering to provide funds to personal injury clients in exchange for an assignment of part of the proceeds of the clients' cases. The attorneys specifically would like to know if they are permitted to provide the clients with information about the funding companies, provide information about the clients' cases to the funding companies, and provide the funding companies with letters of protection.
Whether a particular arrangement between the client and a funding company complies with applicable statutes is a legal question, outside the scope of an ethics opinion. The Committee therefore makes no comment on the legality of these transactions. See, e.g., Kraft v. Mason, 668 So.2d 679 (Fla. 1996). But see, Rancman v. Interim Settlement Funding Corp., 2001 WL 1339487 (Ohio 2001). If the transactions are illegal, an attorney must not participate in the transaction in any way. If a client requests information about or assistance with obtaining the funding, the attorney should advise the client about the illegal nature of the transaction and must not participate in or assist the client with the transaction. Rule 4-1.2(d). This opinion discusses appropriate conduct of attorneys regarding advance funding companies assuming that the transactions offered by the companies are legal. Nothing in the opinion should be viewed as endorsing advance funding companies or the use of advance funding companies in any way by The Florida Bar.
This Committee has previously indicated that attorneys cannot personally loan money to clients in connection with pending litigation. Florida Ethics Opinion 65-39. The Committee has also advised that an attorney may not indirectly loan funds to clients in connection with pending litigation through a nonprofit corporation funded by attorney contributions. Florida Ethics Opinion 68-15. Regarding loans from third parties to personal injury clients, this Committee has previously stated that "a lawyer may suggest to a client where the client may try to obtain financial help for individual needs. . ., but the lawyer should not become part of the loan process." Florida Ethics Opinion 75-24. The Committee stated that "[w]here the lawyer initiates the loan by recommending his client to the loan company, it seems to us that he is inherently representing to the loan company that the client's claim is meritorious." Id. The Committee cited to this opinion in Florida Ethics Opinion 92-6, which states that it is impermissible for an attorney to become involved in a financing agreement which required the attorney to become a trustee to benefit the company providing the loan to the attorney's client. The Committee additionally noted that "an attorney who routinely refers clients to a loan company and actively participates in the loan transactions would be providing financial assistance to those clients," albeit indirectly. Florida Ethics Opinion 92-6. When presented with the proposal at issue in opinion 92-6 in the form of a petition for a rule change, the Supreme Court of Florida stated that:
The Bar argues that the proposed amendment will result in inevitable conflicts of interest among lawyer, client, and lending institution, as well as discouraging settlements. We agree. . . . . We find that the rule amendment LRM proposes would violate both subsections of rule 4-1.8, thus creating possible conflicts of interest. This Court has disciplined members of the Bar for advancing funds or assisting others to do so. The Fla Bar v. Hastings, 523 So. 2d 571 (Fla. 1988); The Fla. Bar v. Wooten, 452 So 2d 547 (Fla. 1984); The Fla. Bar v. Dawson, 318 So. 2d 385 (Fla.), cert. denied, 423 U.S. 995, 96 S. Ct. 422, 46 L. Ed. 369 (1975). Lawyers should not be encouraged or allowed to do indirectly what they cannot do directly. The majority of states likewise prohibit this conduct. We therefore reject LRM's proposed rule amendment.
The Florida Bar re Amendments to Rules Regulating The Florida Bar -- Rule 4-1.8(e), 635 So.2d 968 (Fla. 1994). The Committee has not addressed whether an attorney could honor a letter of protection to a funding company, and has not elaborated on our advice in Opinion 75-24 as to the extent to which an attorney may "try to obtain financial help" for clients without becoming involved in the process of obtaining financial assistance. The Committee now undertakes to answer these questions.
The majority of states who have examined these issues have determined that it is permissible for an attorney to provide a client with information about funding companies. See, e.g., Arizona Ethics Opinion 91-22 (attorney may refer personal injury client to funding company, but may not reveal information to the company without the client's consent, may not co-sign or guarantee the transaction, and may not tell the company that the lien is valid and enforceable if in the attorney's opinion it is not); New York State Bar Association Opinion 666 (attorney may refer client to funding company which then takes a lien on the recovery, may provide information to the company only with informed consent of the client, but may not have an ownership interest in the company or receive any compensation from the company for the referral); Philadelphia Bar Association Opinion 91-9 (attorney may refer personal injury client to funding company which takes a lien on the recovery, but may not have an ownership interest in the company or receive any compensation from the company, must maintain independent professional judgment, and must have informed client consent to disclose information to the company); South Carolina Ethics Opinion 94-04 (if the transaction is not illegal, an attorney may tell a personal injury client about funding companies at the client's request or if it is in the client's interest, but should advise the client of the benefits and detriments of the transaction, should inform the client and company in writing that the client controls the litigation; the attorney may also pay the settlement proceeds to the company under a valid assignment); South Carolina Ethics Opinion 92-06 (an attorney may refer personal injury clients to a funding company and may honor the assignment of a portion of the claim to the company); South Carolina Ethics Opinion 91-15 (attorney may refer personal injury clients to a funding company in which the attorney has no interest, and may honor the assignment to the company as long as the client consents); Ohio Ethics Opinion 94-11 (attorney may not refer a client to a funding company which requires the attorney to give a percentage of the legal fee to the company, but may refer a client to a funding company if such an arrangement is not required, it is in the client's best interest, and the arrangement does not cause the attorney to violate the rules of professional conduct; the attorney should advise the client on alternative methods of obtaining assistance such as low interest credit cards, bank loans or personal loans from the client's family or friends); Virginia Ethics Opinion 115 (an attorney may request that a funding company provide a personal injury client with funding when other lending sources have declined to assist the client and may honor the company's lien on the recovery, but the attorney may not guarantee or co-sign the loan). The majority of states have concluded that providing information to a funding company at the client's request is permissible, with the informed consent of the client. They also conclude that an attorney may honor a client's assignment of a portion of the recovery to the funding company.
The Florida Bar discourages the use of non-recourse advance funding companies. The terms of the funding agreements offered to clients may not serve the client's best interests in many instances. The Committee continues to have concerns, as discussed in Opinion 92-6, of the problems that can arise when a client obtains financial assistance from a third party, such as the client's lack of incentive to cooperate. This Committee can conceive of only limited circumstances under which it would be in a client's best interests for an attorney to provide clients with information about funding companies that offer non-recourse advance funding or other financial assistance to clients in exchange for an assignment of an interest in the case. Under these limited circumstances an attorney may advise a client that such companies exist only if the attorney also discusses with the client whether the costs of the transaction outweigh the benefits of receiving the funds immediately and the other potential problems that can arise. Only after this discussion may a lawyer provide the names of advance funding companies to clients.
The attorney shall not recommend the client's matter to the funding company nor initiate contact with the funding company on a client's behalf. Florida Ethics Opinion 75-24. The attorney shall not co-sign or otherwise guarantee the financial transaction. Florida Ethics Opinion 70-8. The attorney also shall not allow the funding company to direct the litigation, interfere with the attorney-client relationship, or otherwise influence the attorney's independent professional judgment. The attorney shall not have any ownership interest in the funding company or receive any compensation or other value from the funding company in exchange for referring clients.
The attorney may provide information to a funding company about the case at the client's request. Before providing the company with such information, the attorney must advise the client about the effects of the disclosure, including whether any privileges such as attorney-client and work product may be waived if the information is disclosed to the funding company, and obtain the client's informed consent. Rule 4-1.6. If the client, after consultation, requests that the attorney provide the funding company with confidential information, the attorney is not obligated to provide work product material, such as the attorney's personal notes. However, the attorney may provide copies of documents such as medical records and accident reports if the client requests. The attorney is not obligated to bear the costs of copying the documents. Additionally, the attorney shall not provide the funding company with an opinion regarding the worth of the client's claim or the likelihood of success. Rule 4-1.7, Florida Ethics Opinion 75-24. Finally, the attorney may, at the client's request, honor a client's valid, written assignment of a portion of the recovery to the funding company. The attorney may not, however, provide a letter of protection to the funding company signed by the attorney.
In conclusion, an attorney may, under the circumstances set forth above, provide a client with information about companies that offer non-recourse advance funding and other financial assistance in exchange for an interest in the proceeds of the client's case. The attorney may provide factual information about the case to the funding company with the informed consent of the client. Although the attorney may honor the client's valid written assignment of a portion of the recovery to the funding company, the attorney may not issue a letter of protection to the funding company."
The Florida Bar Ethics Opinion 00-3 gives you some idea about why an attorney is extra cautious when dealing with advanced settlement funding companies.
If you are faced with financial hardship during your auto accident claim, the best thing to do is to talk to your attorney about your options; understand that your attorney has your best interests at heart but your attorney also has to make sure to follow this Florida Bar Ethics Opinion regarding advanced settlement funding companies. Your attorney will probably outline possible negative aspects of using advanced settlement funding companies to include, (but not limited to) the following possible adverse effects:
- Exceptionally high interest rates or rates of return are often used by advanced settlement funding companies on the money loaned;
- Depending upon the loan, the interest may accrue until the case resolves, some cases take years to resolve which could result in the interest exceeding the principal of the loan;
- That the amount of the repayment of the loan depends upon the length of time it takes to settle or resolve the claim, it may add pressure on the injured victim to settle the case prematurely due to the increasing interest on the loan and the injury victim's desire to pay the loan;
- The advanced settlement funding company may require information to process the loan that would require disclosure of attorney-client communications or attorney work product which could result in the waiver of attorney-client privilege or work product privilege;
- The loan agreement from the advanced settlement funding company may give the funding company a legally enforceable lien or assignment against the recovery so that the attorney would have to honor the lien at the time of the closing of the case.
The bottom line for you? Advanced settlement funding loans are often too good to be true since the high interest rates far outweigh the benefit of the loan.
The bottom line for your attorney? An attorney may honor the client's valid written assignment of a portion of the recovery of a personal injury claim to the advanced settlement funding company; but the attorney may not issue a letter of protection (LOP) to the funding company or sign the agreement because the attorney would then become part of the loan process which is prohibited.
Of course this is just our interpretation of the Ethics Opinion; if you have an attorney, please consult your own attorney for their advice on this topic. This article is not intended to state an opinion regarding any particular advance settlement company, rather only to inform the readers of possible ramifications of using advance settlement funding in general.
I hope that this gives you an idea of why attorneys generally discourage using advanced settlement funding companies.