Guest Blog Alert! Topic: How Does Legal Funding Work From the Lender's Perspective?

A few weeks back, we published an article about legal funding, and the view that North Carolina courts have taken of it in recent years. Today's article takes the opposite approach; what does legal funding look like to a lender? To answer this important question, we turn to Mr. Reid Zeising, a friend of Felton Banks who owns and operates Cherokee Funding in Atlanta, Georgia. We're very appreciative of Mr. Zeising's willingness to share his expertise!

Legal funding in North Carolina, as it is in most states, is legal.

But, precedence is being set by the courts every day about exactly what they will and will not allow when it comes to litigation funding.

To read up on the specifics surrounding litigation funding and the law in North Carolina, I recommend reading Legal Bucks: Pre-Settlement Funding, From A Lawyer’s Perspective. And for Georgia state law and precedence being set there on the matter, read: Ethical Issue: What the Georgia Bar Says about Pre-Settlement Funding.

What Litigation Funding Is and Is Not

The most fundamental fact about legal funding that most people forget about, or fail to mention, is that it is a contingent arrangement. When plaintiffs do not win their cases, they do not have to pay their legal funding advances back.

In a lot of ways, legal funding companies in that regard are like investors. There is no guarantee for repayment, which is why it is not a loan and why legal funding companies are not regulated in the same way financial institutions are.

As a plaintiff, your case is the investment decision.

The Definition of Legal Funding:

Pre-settlement funding is not a loan, it is not a structured settlement, and it is not a replacement for your settlement. To better understand those terms in more detail, read: What A Cash Advance Is and Is Not.

Georgia law (where I live) prohibits plaintiffs from selling portions of their personal injury claim. It also does not allow for third-party funding for a claimant’s litigation. 

And in North Carolina, while legal funding is technically legal, the precedents that are being set here do not always set a favorable landscape for the industry.

For these reasons (and more), we describe our business using these terms:

  1. Litigation Funding
  2. Litigation Financing
  3. Pre-Settlement Funding
  4. Cash Advance
  5. Third-Party Funding
  6. Non-Recourse Legal Funding
  7. Plaintiff Financing
  8. Medical Funding
  9. Legal Funding
  10. Legal Aid

Critics and other commentators on the industry sometimes, and inaccurately so, refer to legal funding as:

  1. Payday Loans
  2. Lawsuit Loans
  3. Lending

It is a misunderstood industry, but one that protects people’s most basic right, to a fair and just trial by jury.

Here’s How Legal Funding Works:

Without legal funding, plaintiffs have two options: They can either settle the claim at the amount set by the defendant (usually the insurance company), or they can fight it.

“Fighting it,” which mainly involves waiting out the insurance company for a fair settlement offer, takes time and money – two things plaintiffs who have recently been injured in an accident rarely have enough of.

Enter: Legal Funding.

Legal funding companies, like my company Cherokee Funding, provide plaintiffs with the ability and opportunity to endure extended litigation battles with powerful insurance companies. Absent this service, the majority of legal funding clients would be financially unable to wait out the defense and ultimately be forced to settle for less than the fair compensation they are due.

The funds plaintiffs receive from legal funding companies allow them to afford the necessary medical treatments they have, while also paying for reoccurring monthly bills like rent and the cost of living for things like food.

Here’s Why Legal Funding is Important:

A settlement amount set by the defendant is rarely fair compensation. Quite honestly, it’s usually pennies on the dollar when compared to what is owed.  

Do you remember the hot coffee case involving McDonald’s in the ‘90s? Stella Liebeck, who was 79 at the time, spilled some of the hot coffee she was served at McDonald’s onto her lap, resulting in multiple layers of skin missing and thousands of dollars in medical bills. When she initially reached out to McDonald’s for compensation, she just wanted those medical bills covered, which at the time amounted to about $10,000. McDonald’s came back offering her $800.00.

If you haven’t already, I highly encourage you to check out the documentary, Hot Coffee, to familiarize yourself with the facts of the case. They are incredible, and it still amazes me how much everything was distorted when shared with the public.

Again, enter: Legal Funding.

Big businesses have proven they are incapable of self-regulating. Without the access and ability to fight for justice, where would we be?

The Face of Defense

On average, it takes years for a case to resolve. In the instance of personal injury, there are second- and third-order effects to an accident. Not only emotionally recovering from the trauma of an accident, but the physical injuries that typically prevent someone from being able to work. All of which can cause some serious strain – especially financially.

Defendants, which oftentimes are the big insurance companies we have all become very familiar with – read The Human Side of Big Data in Insurance Claims and Legal Funding You Haven’t Thought About to understand how insurance companies use information against you to offer you less during a claim – often cite legal funding for encouraging frivolous lawsuits.

This is a defense mechanism, and it is a tactic defendants – especially big defendants – like to use in order to minimize how much they have to pay out in lawsuits. This movement also attempts to discourage legitimate claims from ever surfacing.

What should really alarm people is that these defense teams hold all of the power. They are under no amount of time pressure to settle, they hold the purse strings, and not to mention, they are the only authorized purchaser of the claim in the first place. Quite literally, the hold all of the cards.

It’s the perfect storm. Plaintiffs are under extreme duress because they need to settle so they can afford the most basic of bills, and they are at the mercy of big defense teams and what they determine to be a fair settlement.

For the third and final time, enter: Legal Funding.

This is a guest authored blog written by Reid Zeising.

About Reid M. Zeising

Reid is the Founder and CEO of Cherokee Funding, headquartered in Atlanta, GA. He is a member of YPO and holds his BA in International Economics – Far East from The University of Michigan. He is currently attending Harvard Business School’s – YPO President’s Program.

Fun Fact: Reid was raised in Tokyo, Japan and Adelaide, Australia. To share his love of Japanese cuisine, he founded and owns Genki – Noodles & Sushi, a noodle and sushi bar in Atlanta, GA.