Let’s say you are currently carrying $300,000 in client disbursements. At 6.25%, that would equal $18,750 a year in interest. You are, in essence, making an interest-free loan to your clients every year that amounts to $18,750.
This interest-free loan to your clients is akin to stashing $ under your bed without any interest or return on investment. You could be using that $ for the long-overdue vacation to Hawaii or adding radio/TV ads to your marketing campaigns.
A Solution that Might Work for You
In almost all states, a lawyer in a contingent fee matter who actually borrows funds from a bank/lender in order to advance litigation expenses for the client can charge the client interest on the funds advanced to pay these litigation expenses at the rate charged by the bank/lender, as long as:
(a) The interest charge does not exceed the interest charges actually incurred by the lawyer,
(b) The arrangement is clearly explained to the client in advance and agreed to by the client.
The bank/lenders have programs that take each disbursement, establish the date that the interest rate starts to run for that disbursement and insert varying rates of interest as the Prime Rate changes, so the total amount of interest applicable to each disbursement can be calculated and broken out. The bank/lenders provide you with account statements showing the interest charged separately for each case.
Questions You Must Ask
Some of the questions are:
#1: Will the inclusion of interest in the retainer agreement make it more difficult to get some potential clients to sign the agreement?
#2: Will the addition of interest to the closing statement create ill-will or a sense of being nickeled and dimed by the clients when the closing statement is presented?
#3: In those instances in which your fees must be approved by a court, will some judges look on this practice as being “greedy” and reduce your fees as a way of sending a message?
Answers that Might Surprise You
In 3 years of working with a lender, I have never had a client refuse to sign a retainer agreement due to third-party funding of client expenses. I explain to clients that they will only be responsible for the borrowing costs if they recover $ in their lawsuit and I agree to pay half of the borrowing costs. I have only had 2 clients who initially opted out of third-party funding of client expenses, but in both cases, they later agreed with gentle encouragement.
As long as they are educated as to the reasons that third-party funding of client expenses benefits their case, clients seem to appreciate the necessity for this arrangement and there is no ill-will at the end of the case. I have not had any clients complain about borrowing costs.
Knock on wood, but to date, no judges have been critical of third-party lending for client expenses. If pressed on the issue, I would explain to a judge that:
- Funding of client expenses is a substantial cost of running a personal injury law firm,
- Ethical rules permit this practice and
- Our law firm absorbs half of the borrowing cost and we don’t charge anything unless there is a monetary recovery.
Judges who have been in private practice seem to understand that the funding of client expenses with a lender is just good business.
Full Disclosure from a Happy Client
For 3 years, I have used Advocate Capital for the funding of client expenses and I am a happy client. I receive a $1k check whenever I refer a new client to Advocate Capital (I never ask for the check, it’s just something they do).
The team at Advocate Capital seems to understand the peaks and valleys of the cash flow needs of a plaintiff’s personal injury practice much better than a traditional lender/bank. If you are interested in third-party funding of client expenses, I recommend that you speak with Mike Swanson and his team at Advocate Capital—they have been an indispensable partner for our law firm.
Disclosing the Borrowing Cost to Your Clients
The borrowing costs must be disclosed to your clients in a written agreement. Below is the written agreement that our law firm uses to disclose the borrowing costs:
Dear Mr. Jones:
Thank you for the opportunity to represent you. We take this responsibility seriously and appreciate the trust you’ve placed in us.
While prosecuting your lawsuit, we incur, and continue to incur, out-of-pocket expenses that are necessary for your case. We are very careful how we spend your money, but we are also aware that investing money in the best expert witnesses and court-room exhibits can make all of the difference in determining whether you win your case and get the best monetary compensation for you. We have enclosed a copy of the costs expended to date.
Before this time, we have not added any interest or administrative charges to these out-of-pocket expenses. In order to reduce this substantial expense, we have chosen to get a commercial line of credit for the costs of our clients’ cases.
With your permission and consent, the out-of-pocket expenses in your lawsuit will now be paid by an independent finance company, Advocate Capital, Inc. based in Nashville, Tennessee. Listed below are the actual expenses we will incur in order to finance your case by borrowing funds from the independent finance company. We have not marked these charges up and we do not receive any of the interest or administrative charges.
Annual Interest: Prime rate (presently: 3.25%) plus 3.00%
Origination Fee (per draw): 2.00%
Administrative Fee: 0.6% per month
In order to limit the borrowing costs for you, our law firm will pay for one–half (50%) of the borrowing costs in order to reduce your total cost (interest, origination fee and administrative fee). This will limit your borrowing costs at what we consider a reasonable percentage of the total borrowing cost.
As stated in your Retainer Agreement with us, if you do not recover any money in your lawsuit, you will not be responsible for any of the out-of-pocket expenses or the borrowing costs. Furthermore, you will not be charged any borrowing costs on any of the out-of-pocket costs incurred to the present date. The borrowing costs will only be applied toward future out-of-pocket costs.
In most cases, the highest out-of-pocket costs are incurred in the 2-3 months before trial (consisting primarily of the high cost of expert witness fees) and thus, the borrowing cost for those funds will be limited to a short time frame. We expect that this will limit the borrowing cost to you and us and keep the borrowing cost within a reasonable amount.
Additionally, the financing of the case expenses by an independent finance company will help us to match dollar-for-dollar the highly financed doctors and hospitals, and their insurance companies, in your case. With these financial resources from the independent finance company, you will never be at a disadvantage against the highly financed defendants in your lawsuit.
We will continue to keep costs at a minimum, but we will continue to be sure that your case is professionally and thoroughly prepared. The cost of financing and related administrative expenses related incurred by us will be added to those costs approved under the Retainer Agreement that we have enclosed with this letter.
If you have another method to pay for your costs as they are incurred, that is your option. However, we have never had a client advance the costs for their case and this is not financially possible for many of our clients.
If you’d like us to pay for the out-of-pocket costs, please sign and return the enclosed copy of this letter in the envelope provided for your convenience. This will indicate your approval of the costs of financing to be an addendum to the Retainer Agreement that you sign.
If you do not wish to sign this letter, we will respect your decision. In that case, we will continue to represent you and we will be solely responsible for the borrowing costs of the out-of-pocket costs that we incur in your lawsuit. We will continue to represent you with the same commitment and dedication regardless of your decision to sign this letter.
Enclosed are three originals of the retainer agreement. Please sign all three originals of the retainer agreements, keep one for your records and return the other originals to us along with a signed copy of this letter. We have enclosed a pre-addressed stamped envelope for your convenience.
Please do not hesitate to call us if you have any questions.
Thank you for the continuing opportunity to represent you.
JOHN H. FISHER, P.C.
John H. Fisher
I agree to reimburse John H. Fisher, P.C.
one-half of the borrowing costs incurred for
future out-of-pocket expenses incurred during my case.
___________________________ Dated: July ___, 2016