Frequently Asked Questions
We anticipate you having additional questions. If the following doesn’t answer them for you, contact LitCap and we’ll be happy to answer them for you.
Loans funded through the LitCap Marketplace are used for case related expenses only (not legal fees or other expenses) and cover virtually all aspects of civil litigation, including business litigation, employment disputes, wrongful death claims, and even large case related expenses such as intellectual property or class action litigation.
At LitCap we believe that case cost financing for attorneys should function like your contingent fee cases in that the expenses are only paid when the case is resolved successfully.
The majority of the attorneys that we talk to understand that funding their clients’ case costs is the least effective use of their funds, but until now lawyers have not had a product that is as flexible and well suited for their practice as LitCap. Lawyers can now use their revenue much more efficiently and effectively without worrying if they can afford to finance the next case that comes through the door. When Lawyers take the time to learn about what we [LitCap] are doing, a light bulb goes off and they instantly get it. It was designed for trial lawyers around the way they practice law, so having contingent financing that mirrors a lawyer’s contingent contract with their client is very appealing. Having the option to have multiple investors bid against each other for the lawyer’s business is equally appealing. We have been told numerous times, ‘I just can’t believe no one has thought of this before.”
From the beginning people would ask us, ‘Why would big name firms use LitCap?’ Ironically, the fact was the bigger and better the law firm, the more they needed our product to efficiently manage and maintain a large, growing and profitable practice. The more successful the firm, the more money they need to finance their case-related expenses. A firm’s success can often times outpace its cash flow. Because of this, we have seen the greatest response for our product from some of the largest firms in the nation.
Many people at first did not realize that with LitCap you can fund cases on an individual basis and not have to tie up other parts of your docket. Attorneys can now fund just one case or all of their cases on a case by case basis as well as ethically pass some or all of the related costs to the client.
Lawyers have been financing their contingent cases the same way for decades, just as it was done when Abraham Lincoln was trying cases, before the telegram, before the car, and before electricity or the internet. Having a marketplace that mitigates the ability for the big guy to outspend the little guy in litigation, truly brings balance to the civil justice system in the United States. It circumvents the inherent conflict between a lawyer and his contingent client and directly benefits the State Bar IOLTA program in every state where LitCap is used. We believe that LitCap is to case cost financing what Westlaw and Lexis Nexus were to legal research.
I’ve been practicing as a Civil Trial Lawyer for 10 years. During that time, it became obvious to me that the way contingent fee lawyers finance their client’s case related expenses was out dated. It was an honor to help build something that will, in my view, have a tremendous impact on the way contingent lawyers are able to finance cases, or provide options to clients who the money to cover case expenses. With LitCap, each client you add does not put a strain on your line of credit or personal money. Your success as a Lawyer brings clients to your door. Having to turn the refer clients or traffic away, the same traffic your success generated, because your current docket has exhausted your line of credit or resources, is a very tough position to be in. Likewise, having to go back to the bank, and ask someone who doesn’t understand your business, to extend your line of credit because you just had a monster case walk through the door, is equally frustrating. I believe that LitCap will enhance the way attorneys practice law, improve attorney client relationships, and provide “good” attorneys with access to potentially unlimited capital to use for the benefit of their clients. Financing terms found on LitCap are often better than anything you could get from a bank or commercial loan and come with many added benefits. Civil litigation has some level of case related costs or expenses and often these costs can become quite large. LitCap makes it possible to fund all of your cases, no matter how large or how small, with the click of a button.
LitCap membership is offered to preeminent or exceptional attorneys. LitCap attorneys consist of arguably the best trial lawyers in the United States. Here is what you will need to qualify to become a LitCap member. Each Attorney seeking membership must have the following:
- A minimum of 5 years of continued legal practice;
- Must be in good standing with your State Bar Association;
- Must have independent references that will or may verify the attorney’s professional reputation, such as other attorneys or Judges;
- Must have been honored and accepted by “Super Lawyer Magazine™” as either a “Super Lawyer™” or “Rising Star™,” ranked as “Rated,” “BV Distinguished®”“AV Preeminent®” by Martindale Hubble or have achieved board certification by the attorney’s board of legal specialization or have achieved acceptance into other nationally recognized (such as ABOTA) or local or regionally recognized legal organizations where the attorney practices;
- Must maintain a current and verified IOLTA account, and the lawyer must accept funds into his or her IOLTA account and be compliant with IOLTA account rules and regulations;
Once you meet the threshold requirements listed above, you will fill out a membership application. After your background has been checked, your application has been verified, and approved, you will become a LitCap member. You will then receive your username and password.
While rigid, these strict requirements are necessary to protect the integrity of our system, and to ensure that our lawyers are able to obtain case financing at interest rates that are superior to any other comparable existing financial system or institution available. With low default rates, LitCap can offer attorneys funding at rates and with features superior to any financing system currently available.
After completing a detailed attorney evaluation form, and after being approved to participate in LitCap, an attorney will then be allowed to list his cases for financing on the LitCap Marketplace.
In keeping with the strict ethical guidelines outlined by the American Bar Association, and the State Bar Associations where LitCap is available, lawyers will complete a detailed “case information” form that contains “non-privileged” information about the case listed for funding. These questions will help the investors evaluate the case, along with the attorney’s performance record (LitCap score), and assign an interest rate to the case for funding. Likewise, the attorney will list the amount the attorney wishes to borrow, fill out a form indicating what the attorney anticipates the funds will be used for, supply other case-related information, as well as the interest rate the lawyer desires for funding.
To list a case, the attorney will be required to upload a PDF file-stamped copy of the lawsuit on file. The attorney will be required to make quarterly case updates, which will consist of filling out a short case update form online.
After obtaining a recovery, the attorney will upload the case closing details, and return the investment principal with accrued interest.
As an investor, this may be one of your primary concerns. What if the Lawyer makes a recovery, but refuses to honor his/her obligations under the note? Or, put another way, what type of security does the investment have? For a variety of reasons, the answer to this question is equally important to the lawyer borrowing the money on behalf of his client, and the investor financing the case.
The attorneys selected and who meet the minimum qualifications required to use the LitCap system, are among the top lawyers in the profession. We thoroughly screen and select only the attorneys that are recognized in their community as holding the highest ethical standards in their respective fields or areas of practice. That being said, from the perspective of the investor, what guarantees (other than reputation) do I have that the funds will be returned?
The note is a binding contract, governed by the laws of the State of Nevada. The rights and remedies available to the parties to this agreement are well defined within the contract, and are severe enough to deter an intentional breach of contract. LitCap has structured additional safeguards for an investor in the event of attorney misconduct.
Funds borrowed through a LitCap note are to be used solely for case costs. Although the note is between the investor and the attorney, the attorney is obtaining the case financing on behalf of his client. Any funds obtained through a LitCap note are to be kept in the lawyer’s or law firm’s IOLTA Trust account to be used only for the benefit of particular case-related expenses. The IOLTA Trust account is verified by LitCap before the attorney is accepted as a member. Because the funds are tied to the case, and are exclusively to be used for the attorney’s client and case-related expenses, the penalties for misappropriation or misuse of the funds are severe. If the attorney misappropriates the case or client funds, the attorney is jeopardizing his license to practice law.
Misappropriating or misusing a client’s money (such as LitCap money set aside specifically to be used for the client’s case) or using a client’s money for any reason, other than advancing the client’s case, is a severe ethical violation in every LitCap jurisdiction. Such a grievance is usually grounds for disbarment in all of the jurisdictions where LitCap operates. Violating the LitCap Note and User Agreement would amount to the lawyer risking his law license for a fraction of the actual case value he is funding. While LitCap can never insure against criminal behavior, we believe the unique qualities of our note should act as a significant deterrent to prevent attorneys from attempting to misuse or abuse the client funds they are entrusted with.
The amount an attorney requests to finance a client’s case costs is a small portion (most often 5%-10% of the expected recovery) of the fee that the attorney will charge. Typically the case costs are pass-through expenses, and are reimbursed by the client to the attorney at the end of a successful case, on top of the contingent fee the attorney generates. While attorneys are mindful of costs, their eye is focused towards earning their fee or “income” by making a recovery in the case.
The professional reputation and certification of the attorney; the structure of the note; IOLTA Compliance standards; and the relatively small amount being financed related to the expected return/recovery, will all act as a natural deterrents to fraud that do not exist in other debt instruments. Other than criminal conduct, no viable or legitimate benefit exists that would create an incentive for an attorney to commit fraud.
Capitalism weeds out good investments from bad ones. LitCap is a platform based on the principals of Capitalism. Any lawsuits listed on the system face the scrutiny of qualified and educated investors. Thus, because of the scrutiny placed on each case listed, by very intelligent and qualified investors, it is highly unlikely that fraudulent and baseless claims will actually be funded.
A non-recourse debt or a non-recourse loan is typically a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. LitCap notes are not typical “loans” but are “investments” and are governed by the regulations set forth by the United States Securities Exchange Commission. The investments are secured by the Attorney’s user agreement, and the lawyer’s ability to recover case costs on behalf of his client. The LitCap notes are for case expenses only, and are unrelated to the fees the attorney will charge his clients. The funds borrowed are to be used by the attorney for the benefit of his client, and only for expenses related to the client’s case.
If the attorney fails to make a recovery in the case (for example loses at trial, on summary judgment, or on appeal), the repayment obligations will be terminated. The attorney will have to show that he received an adverse verdict, lost on summary judgment, terminated on other grounds, or some other excusable resolution that precludes a recovery from occurring. An attorney that allows a case to expire, to be dismissed for want of prosecution, or to intentionally fail, will not have his repayment obligations forgiven.
Attorneys are incentivized to maintain a high level of performance. Funding rates are heavily influenced by successful attorney performance. The attorney’s LitCap score is a visible measure of the attorney’s performance.The case financing request represents only a fraction of the expected recovery which incentivizes the attorney to win or settle the case instead of focus on a relatively small loan. Even the best lawyers lose on occasion, and we believe that as long as the attorneys are working diligently to protect their clients’ interests, an occasional loss will not drastically affect their ability to obtain competitive interest rates for themselves or for their clients.
LitCap is free to use, to attorneys that obtain membership and access to the platform. If a case is funded, LitCap charges a processing fee to the borrower which covers the movement of the funds, record keeping, interest calculation, case status management, and fixed costs related to due diligence, operations, website management and support. These costs will be scaled in a tier system related to the amount of underwriting required and related to the amount borrowed. The costs are competitive, small, cover the expenses for the LitCap system, and can be passed through to the client as a case-related expense as well as rolled into the capital request.
An investor must be a Qualified Eligible Participant (“QEP”). A QEP is an individual who meets requirements to trade in different investment funds, such as futures and hedge funds. The rules for defining a QEP are outlined under Rule 4.7 of the Commodity and Exchange Act. See Investopedia at www.investopedia.com. Some of the conditions that a person must meet in order to be classified as a QEP are: 1) Must own securities and other investments with a market value of at least $2,000,000; and/or 2) Has or has had an account open with a futures commission merchant at any time during the preceding six month period (along with $200,000 or more initial margin and option premiums for commodity interest transactions).
An investor is obligated, while using the platform, to maintain their account and abide by the rules and regulations set forth in the LitCap user agreement. Insurance companies, and related entities that may have or create a conflict of interest, will not have direct access to the system. LitCap has the ability to restrict investor membership. Any investor violating the terms of the user agreement will be reprimanded or suspended. A list of the investors participating on the system will be made available to attorneys transacting on the system. Because our members desire privacy, their names and identity will not be made available to the public (it will, however, be available to other members), unless a member consents to having its information made available to the public.
Initially it is anticipated that the average investment will last approximately eighteen (18) months. Investments will run for the life of each case, thus the rate of return will vary. The interest rates will be calculated annually. While some cases can be resolved within one month of filing, some may take years.
Attorneys, after becoming a LitCap member, will receive an introductory (probationary) LitCap Score. As the attorney returns cases, or has “success” the attorney’s LitCap score will increase. If the attorney loses a case, the attorney’s LitCap score will drop. The LitCap score is used for evaluation of the attorney and is related to the funding rates. This score is a reflection of the lawyer’s performance within the system. The better the lawyer’s performance the higher the lawyer’s LitCap score. The higher the score, the lower interest rates the lawyer can command.
In the past, lawyers were typically only measured by peer reviews, and reputation. While those methods are helpful, they can sometimes be skewed. The LitCap score focuses on empirical data, not opinion, when evaluating a Lawyer’s professional record. Like professional athletes, lawyers can now be effectively statistically evaluated based on performance.
Example Matrix Here
The LitCap “Reference Rate” is directly related to the attorney’s score and will assist the lawyer in anticipating the types of interest rates he/she may be able to command. The LitCap Reference Rate is the interest rate based only on the lawyer’s performance and is not based on the type of case the lawyer is listing. Attorneys should understand that although the Reference Rate is based on the lawyer’s performance, each case will be evaluated by investors on a case by case basis. Naturally, if the attorney lists a very good case, and the attorney has a good LitCap score, the attorney should be able to command lower interest rates, and rates below the LitCap Reference Rate. In the alternative, if an attorney lists a difficult or challenging case, but has a good LitCap score, the attorney can expect the interest rates offered to the attorney on that case to be higher than the LitCap Reference Rate given.
LitCap investors have access to the non-privileged case related information, which was provided by the attorney through the case listing. Before the case is funded, the investor will have the opportunity to question the attorney about the case, through our message system. After the case is funded, the Investor will be prohibited, and barred from contacting the attorney. Investors are bound by the guidelines set forth in their user agreements, but otherwise can use whatever diligence and care they would normally rely upon when evaluating cases.
When measuring cases and the inherent risks associated with certain case types, LitCap designed and developed the CVAL score. The LitCap CVAL score is the LitCap proprietary case evaluation formula and is a score based on econometric model evaluation of the case using commonly accepted processes. Currently the CVAL score is in development, and will not be completed until a suitable sample size is available. Investors may create and use their own econometric models to assist them when financing cases. Once the CVAL score has been developed, we would continue to encourage all investors to use it only as a statistical guide.
When you look at the numbers, and consider financing your case costs, nothing compares with the flexibility offered by the LitCap Marketplace. Running the numbers you will see that no other platform or financing option is as attractive as LitCap. Lawyers using LitCap may marginally or nominally pay a little more on case financing on a case-by-case basis, however, if a case loss occurs, the case does not have painful financial implications, or a financial impact on the lawyer. In almost every case financed, the lawyers have the ability (or option) to pass along some or all of the incremental costs or interest payments associated with a LitCap note to referring attorneys or clients. A lawyer will only need to make small modifications to the contingent fee agreement to compensate for use of the LitCap systems, and in most instances will significantly reduce costs. The ability to pass all or some the interest on to your client, or to your referral source, gives the attorney the ability to have interest costs well below even the current market. No other litigation financing system offers attorneys the ability to ethically and fairly pass the costs of financing your client’s case on to your client.
Virtually no known banks let you off the hook if you lose a case. At LitCap, if you lose the case, you do not have to repay the note. Most of our lawyers do not lose, and if they do lose, it happens rarely. Having the repayment obligation tied to success, frees up an attorney’s ability to focus not on his or her personal stake in a case, but in putting on the best possible case for your client. Many attorneys believe this benefit worth the added interest they may have to pay on a case-by-case basis. Banks and other credit or financing sources do not offer this type of debt forgiveness.
LitCap funding also has many advantages over the traditional line of credit with a bank. The lawyer does not have to post any personal collateral with the lender or defer income for the firm and will have no credit rating exposure because of the funding. There are no periodic repayments of capital and they only owe the money back if they make a recovery. These rates are insignificant when compared to some types of lending arrangements where the lawyer will give up multiples of case costs or large percentage portions of cases to other attorneys.
The LitCap funding method essentially removes working capital constraints for a growing firm as well as an established firm. An attorney will no longer have to refer out a case because of capital restrictions. Larger firms will be better able to make important budgeting, capital allocation, and income distribution decisions. Attorneys will no longer need to risk personal or company funds, or tie all of their personal wealth up into their client’s cases. Firm capital or income may be used for purposes such as marketing, growing the business, or hiring additional attorneys or staff. A lawyer has more freedom with case costs and is free to make unrestrained financial decisions so he/she can more effectively litigate a case. Attorneys maintain total autonomy in trying a case. There is no interaction allowed between attorney and investor after the case is funded. Loans will never convert to permanent loans as is often the case with many lines of credit and may be paid in full, or partially repaid, at any time. As lawyer performance improves so will funding rates.
A case is funded at the interest rate negotiated between an attorney and investor. It is impossible to predict the interest rates, as they are negotiated on a case-by-case basis. Factors that significantly contribute to the interest rate negotiated are the merits of the case. Equally as important are facts about the attorney, such as the attorney’s ratio of successful outcomes to total cases funded, the number of cases processed through the system, amount of funding, and average duration of loans. Probably the single most important factor that affects the negotiated interest rate, is how often an attorney makes a successful recovery on the system. Attorneys who return funding 98 out of 100 times will be able to command much lower rates than an attorney who returns funding 8 out of 10 times. The more cases that an attorney has funded and closed through the system is another factor that is considered as it gives an investor a better sample size when evaluating the performance of an attorney, hence a better confidence level that the success ratio is accurate. The amount of funding is important as it determines the level of due diligence that the investor has to apply to a certain case. As with smaller cases the investor must review more cases to allocate a given amount of capital, therefore increasing costs. The average duration of a case is important to an investor because it affects how much interest he or she receives as well as how often the capital must be redeployed.