There’s a new trend emerging in investing, and its returns are pretty impressive: borrowers of the invested funds are charged interest rates generally exceeding 15% per year, sometimes as much as 24%, and regardless of the borrowers’ success or failure, those loans have to be repaid. The field? The courtroom. According to a report in Monday’s New York Times, the latest field for investment is financing court battles for everything from malpractice suits to divorce and class actions.
While hedge funds and banks have become courtroom lenders, as have some private investors, companies have sprung into being just to take advantage of these new arenas—and even victors in court battles can end up owing more than they win to those who loaned them the money. The report tells of a woman hurt in an auto accident in 1995. She and her lawyer both borrowed money to proceed with the lawsuit, and her final award in 2003 of $169,125 left her deep in the hole: the bill for the loans was $221,000.
Lawyers don’t have to tell their clients that they’ve borrowed money to bring suit, and in a number of states they’re allowed to charge their clients the interest that must be paid on the loan. This has resulted in some court cases in itself, such as that of a first responder on 9/11 who learned via an attorney’s invoice that money had been borrowed to bring a class action suit on behalf of him and other Ground Zero workers. In the end the judge who oversaw the case ordered the law firm to absorb the cost of the interest.
While some states forbid the practice of lawsuit lending, others have eliminated laws that prohibit it, even as critics say that the ability to finance a lawsuit can lead to all sorts of abuse, including initiation of lawsuits simply to make a profit for the company lending the money.
Proponents of the business say that such loans are the only way a plaintiff can afford to bring a suit or a law firm can afford to proceed, especially against “corporate defendants with deeper pockets,” particularly since the costs for scientific evidence in cases such as medical malpractice can top $100,000.
As to whether such investments are a good idea, the jury’s still out.