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August 16, 2018

A Big Win for Integrity: New York City Bar Association Rules Out Splitting Fees With Investors

One of the most influential bar associations in the country has voiced a full-throated condemnation of a core element of the litigation funding business model: promising a percentage of anticipated fees in exchange for cash. In their July 30 opinion, the New York City Bar Association’s (NYCBA) Professional Ethics Committee found that this practice violates the ethics ban on sharing fees with non-lawyers, regardless of the specific structure of any given fee-splitting arrangement.

With this opinion, the NYCBA expanded its previous interpretation of Rule 5.4 of the New York Rules of Professional Conduct. It previously held that promising cuts of fees in exchange for goods and services was out of bounds. The NYCBA now sees no meaningful difference between that kind of exchange and fee-contingent loans to lawyers.

This development raises the pressure on litigation funders already scrambling to respond to criticisms from legal reform advocates. These have included Institute for Legal Reform Chair Brackett Denniston, who argued in a recent op-ed that without mandatory disclosure of funding arrangements to defendants and judges, funders are in a position to exercise undue influence on the course of litigation.

Legal news publication Law360 reported that Burford Capital, one of the largest litigation funding firms in the world, holds over 39 percent of its total commitments in the type of portfolio financing deals covered by the NYCBA opinion. The U.S. division of another major funder, Bentham IMF, relies on such deals for over 12 percent of its commitments.

Now that these commitments have run into headwinds in New York City, a hub for many litigation funding clients, the funders are on the defensive. They will either need to convince existing and future clients to hold their noses and engage in unethical and potentially damaging business practices, or change the way they do things. Only time will tell which they choose.

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