By Winograd, Ben
American Banker , Vol. 171, No. 211
To finance the massive environmental suit made famous in the movie "Erin Brockovich," Ed Masry, a California lawyer, spent his savings, took out a second mortgage, and sold property near Palm Springs where he and his wife had planned to retire.
When legal expenses continued to swamp his small practice, he partnered with two larger law firms to help shoulder the cost.
Though his firm eventually received a substantial slice of the $333 million settlement, it nearly went bankrupt.
"People say, 'Oh, God, they made $40 million' -- but they forget what we risked," Mr. Masry, who died last year, said in an interview with the Ventura County Star.
It's a common problem for contingency fee lawyers, who collect fees and expenses only if their clients win. No matter how large the potential verdict, banks generally will not make loans beyond the existing assets of a firm or its attorneys.
To fill the void, a handful of companies specialize in financing small to midsize law firms. Rather than limit loans to current assets, they lend against a firm's expected payoffs from litigation, ranging from one blockbuster suit to an entire portfolio of cases.
Terms, products, and underwriting methods vary widely from company to company, and loan rates exceed those charged by banks. But lawyers can deduct interest payments as a business expense or pass along the cost to clients.
Michael Blum, the chief executive officer and co-founder of LawFinance Group of San Francisco, said the loans help firms "get decisions based on merits of the case rather than settle for pennies on the dollar."
LawFinance dates back to 1994, making it the oldest of the market's main players. It began by financing firms that had already won a case but faced additional costs while defendants appealed. In time, LawFinance began offering more traditional loans, lending in excess of $25 million to law firms, said Mr. Blum, who is also a lawyer.
Under standard contingency fee agreements, lawyers cover litigation-related expenses -- from transcribing depositions to paying expert witnesses. Even if they ultimately win the case, it can take years before the lawyers recoup their costs.
"Law firms are essentially making interest-free loans to their own clients," said Paul B. Myers, the president of Advocate Capital Inc. of Nashville.
Mr. Myers, who spent more than a decade at Bank of America, said his company has no lawyers on staff. …