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Bar association working group report shows broad support for legal finance

March 10, 2020
Andrew Cohen & Danielle Cutrona

Following a year and a half of extensive study, the New York City Bar Association Working Group on Litigation Funding, comprised of a broad cross-section of the legal profession, the federal judiciary, academia, and experts in the legal finance field, concluded in a report released last week that legal finance is an essential tool in today’s legal market that should not be unnecessarily restricted by overly burdensome regulation, such as mandatory disclosure requirements.

Specifically, the report noted that Rule 5.4 of the New York Rules of Professional Conduct, which prohibits fee-sharing between lawyers and nonlawyers, should be revised to ensure greater access to legal finance. In that regard, the report sets forth two alternative proposals by the Subcommittee on Ethics Rules for amending the rule, both of which would make it clear that litigation funding is acceptable and here to stay. The subcommittee, however, did not agree which alternative was preferable and was not unanimous in support of either.

The first and more restrictive of the two proposes that capital be used “specifically . . . with respect to a legal representation of one or more clients,” that the client whose case is being financed must give “informed consent,” and that the provider be prohibited from “participating, directly or indirectly” in decision making.

The second approach, which Burford supports, recognizes the reality that money is fungible and that restricting funds to a particular matter may—in the remarks set forth in the proponents of the proposal—"generate uncertainty and confusion, [as] funding is often sought for work that has already been completed.” Thus, this approach would permit capital to be used “for the lawyer’s or law firm’s practice,” while maintaining that the use of funds for purposes unrelated to client representation is prohibited. This approach also would prohibit funder participation “except for the benefit of the client” and would require written notice to the client of a financing arrangement.

The impetus for the creation of the working group, City Bar Opinion 2018-5, which asserted—incorrectly, in our view—that non-recourse legal finance arrangements violate Rule 5.4(a), has not had the dramatic impact that some predicted. This is not surprising, given its break from substantial caselaw precedent, as well as the overwhelming view of legal scholars and ethicists. As observed by Cardozo Law Professor Anthony Sebok and Clyde & Co of counsel Anthony Davis, the opinion, though targeting non-recourse arrangements, “would, if taken literally, threaten much of the [recourse] financing that many in the profession take for granted today.” Notably, the working group’s report affirmed that the opinion “is neither binding precedent nor a required rule of practice; it is advisory.”

Burford’s David Perla was a member of the working group.