Originally Published March 16, 2017
We recently brought you 7 Best Practices for Legal Funding Contract and laid the groundwork for setting up your contracts. By popular demand, we are now sharing a dissection of the most important provisions of every legal funding agreement, in addition to some sample language, which will help you evaluate your existing contracts, or get your new funding company off the ground.
By creating quality contracts that you can rely on to protect your business, that are clear and easy to read for your plaintiff and attorney clients, and can be easily understood and generated by your internal team, you will be able to dedicate your time and energy to the fun part of running a funding company: driving deal flow and generating cash flow.
The Skeleton of a Funding Contract
Before we consider details, it may be helpful to take a step back and think about the overall purpose of a funding agreement.
The following are four basic requirements of a funding agreement, which you should keep in mind as you go through the process:
- A cash advance is being provided;
- made by a non-party to the claim;
- in exchange for a share of the contingent proceeds, whether in settlement or judgment or award; and
- payable at the time of recovery if, and only if, such recovery takes place.
Note the significance of items three and four, which ensure that the transaction's contingent nature is non-recourse financing and not a potentially usurious loan.
Now that you have the general concept in mind, the following list contains five of the most important sections of your contract. Each should be present in your contract in order to generally comply with the law and present a tight-knit, transparent agreement.
Look at your agreement and see if everything below is covered!
- Disclosure of the "total amount of funds to be paid to the plaintiff" as well as the amount to be repaid by the plaintiff over time;
- Acknowledgment that the funder/investor will have no rights to, and will not make any decisions relating to, the underlying claim;
- Agreement that the plaintiff's advance may not be used to pay for attorneys' fees or any other litigation expenses;
- Clearly-delineated right to cancel the contract "without penalty or further obligation" within five days of funding; and
- Requirement that the plaintiff's attorney provide "a written acknowledgment" that he/she has read the contract and advised the consumer in signing it.
OK, now we're ready to dive in!
The Nitty Gritty: 12 Important Provisions with Examples
Well, how did you do? If your contract doesn't incorporate all five elements listed above, you should strongly consider amending your agreement. Lucky for you, that's what I'm here for.
Here is a sample, comprehensive breakdown of a funding contract with headers, a brief description of the content and some sample language to which you can compare your current agreement.
For any non-lawyer readers, this is a fancy legal term for "introduction" which appears in nearly every legal agreement.
Upon examining this intro, the reader should understand the purpose, aims, and justification of the rest of the contract. It's also a great time to flex your "defined terms" muscles built up during the last article in this series!
This Plaintiff Non-Recourse Financing Agreement ("Financing Agreement"), dated as of January 10, 2017, is between JOE PLAINTIFF ("Plaintiff," "I," "me," "my," or variations thereof) and FUNDING COMPANY LLC, a Delaware limited liability company ("Company") with a mailing address of 1 Main Street, New York, NY 10001,
I have a pending personal injury claim ("Claim") that arises from incidents occurring or arising on or about January 1, 2017, with respect to which I am represented by LAW FIRM/LAWYER ("Counsel"), as further described herein in Section X, which Claim may be, but is not necessarily, subject to a pending lawsuit. I ask that Company pay me money today in return for an assignment to Mighty of certain money that may be recovered if I win or settle my Claim.
This brief section after your preamble will present a general outline of the transaction.
It's important here that the plaintiff agrees to pay back the funding company from any potential recovery before they receive any money and after superior liens.
You may also want to point out here that, if the plaintiff loses her claim, she will not owe your company anything. That is obviously attractive to plaintiffs and something every plaintiff wants to know in advance.
Funding Disclosure Statement
This should be a simple, easy-to-read chart that shows the total amount to be advanced to the plaintiff, any associated fees, and the total amount to be repaid (including fees) by the plaintiff in six-month intervals for thirty-six months.*
*Be careful! Different states may require different disclosure intervals. For example, the language above complies with Ohio funding contract regulations, but Indiana is more open-ended. Indiana requires a payment schedule listing all dates and the amount due at the end of each 180-day period from the funding date until the date on which the maximum amount due to the funder by the plaintiff occurs. Additionally, many states require that such information must be on the first page of the contract, so that is what we highly recommend.
This is actually one of the most important sections for legal funders to get right, especially because the software many funders use today is not equipped to automatically produce this section, which renders employees more likely to make mistakes.
You should also have a more detailed Disclosure Statement elsewhere in the contract, which will break down payments month by month.
Every contract contains the representations of the relevant parties(often called "Representations and Warranties"), which are basically the underlying matters or facts as they are being presented in terms of the contract.
Here, you will have the plaintiff represent a number of items, including:
- Plaintiff's name
- Social Security Number
- Address, phone number, email address
- Literacy in language of contract
- Information about their claim, such as case type, law firm/attorney, etc.
- Prior and additional lien information
You should also have the plaintiff represented that he/she is currently uninvolved in any other claims (like a divorce proceeding) and whether they have been convicted of any claims of dishonesty. The more you know.
In this section, the plaintiff grants the funding company a security interest and lien against, and assigns the company a right to receive any potential money recovery.
Assignment. Until Company is paid in full, Plaintiff hereby irrevocably grants Company a security interest and lien against, and assigns to Company any right Plaintiff may have to receive, any money recovery. Company's lien shall have priority over all others except only (i) Plaintiff's counsel's lien for expenses and previously agreed attorneys fees not to exceed % with respect to my Claim, (ii) prior liens that I disclosed at Section [X], above, or (iii) liens arising, and having superiority over Company's lien, by operation of law.
Irrevocable Instructions to Plaintiff's Counsel
In this segment, the plaintiff agrees he/she has instructed his/her counsel to cooperate with the funding company and set aside proper funds as appropriate.
This section could also include an instruction for the attorney to notify the funding company reporting that the settlement has been received. As every funder knows, attorneys can really cause a lot of hiccups, so it's important for the plaintiff's representation to be fully on board.
Irrevocable Instructions to my Counsel. By signing this Financing Agreement, I hereby irrevocably instruct my Counsel, my Counsel's successors and/or assigns, and any attorney or escrow agent representing me with respect to my Claim, to fully cooperate with Company, including provide any information Company may reasonably request, and promptly notify Company in writing of receipt of any Money Recovery, to promptly upon receipt of a Money Recovery pay or set aside funds sufficient to pay Superior Liens and then, before paying me or anyone else, pay Company the amount it is due, and to otherwise comply with the any instructions agreed to by counsel herein.
Purchase of an Interest in Money Recovery
Here, you should clarify that the money provided is not a loan or a contingent obligation. You are laying out the contours of the funding itself, as well as your company's role. To protect yourself if the unlikely event that a court would considers fundings a loan, consider adding the following:
Not a Loan. Should a court of competent jurisdiction construe the payment by Company to be a loan, Plaintiff agrees that interest shall be deemed due at the maximum rate permitted by law. Should all or any portion of the money recovery not be assignable by me to Company, then Plaintiff hereby grants to Company an equivalent participation interest in any money recovery or such distributions, in accordance with applicable law. In the event that a competent authority disallows any of the foregoing, then Plaintiff agree to immediately pay Company all funds due as an independent obligation.
You can also use this section to explain the following:
- That your company will have no active role in the litigation and all decisions belong to the plaintiff and their counsel,
- payment timing,
- subordination of the plaintiff's recovery to your company and
- addressing "future funding" issues.
Future Funding. I understand that if I later request additional funding with respect to my Claim, Company may in its sole discretion, but shall not be obligated to, purchase additional interests in any money recovery, which will be documented in an amendment or separate agreement. I agree not to accept funding with respect to my Claim from any other source unless Company is first paid in full. Except in favor of Company or Superior Liens, I agree that I will not assign or grant to any party any interest in or to the Claim or money recovery, nor permit or allow the attachment of any lien or encumbrance against same, and any attempt to do so shall be void and of no effect
Subordination. I agree that Company will be paid in full before I am entitled to receive any money recovery, and hereby subordinate my interest in any money recovery to the interest of Company. If I am entitled to receive a money recovery in periodic payments and/or installments over time, then before I receive any money recovery, I will pay or cause to be paid to Company all of such installments until Company has been paid in full.
Additional Terms & Conditions
This classic contract segment includes points that may not warrant their own sections. It's basically your chance to add any residual clauses that didn't seem to fit elsewhere. Common provisions include:
- Plaintiff's obligations to cooperate with your company to facilitate the transaction;
- How the plaintiff should handle hiring substitute counsel should the need arise, etc.
Standard contract clauses such as:
- Notice provisions—how and when the parties should contact each other
- Allow signature "counterparts"—allow the parties to sign separately, and then combine the various signature pages into one final document
- "Entire agreement"—explain that this agreement is the only binding agreement between the parties, regardless of prior discussions, etc., and that it cannot be modified, except in writing signed by both parties.
Arbitration Provision; Applicable Law
Arbitration is an out-of-court proceeding during which a neutral third party (the arbitrator) hears evidence and makes a binding decision. An arbitration provision states that controversies or claims arising outside of the conditions of the contract must be settled by binding arbitration (as opposed to a lawsuit).
As we discussed in our previous post, this is your "home court advantage." The applicable law provision fixes which state laws govern the contract and which courts will settle disputes (if arbitration is not held enforceable). You can also have the plaintiff waive the right to a trial by jury in this section.
STATE LAW NOTE: Some states, including, most notably, New York, actually prohibit mandatory arbitration clauses from consumer contracts altogether. Nevertheless, you will want to include it, but specify that the provision does not apply to NY residents.
Consumer's Right to Cancel
Required by law in some states, but best-practice for all states, this provision gives plaintiffs the right to cancel a contract scot-free within a certain number of days from funding (Ohio, for example, requires a five-day period).
I UNDERSTAND THAT I MAY CANCEL THIS CONTRACT, WITHOUT PENALTY OR FURTHER OBLIGATION, WITHIN FIVE (5) BUSINESS DAYS FROM THE DATE I RECEIVE FUNDING. To cancel, I must either: (1) return to Company the full amount I received by delivering Company's un-cashed check to Company's offices in person, within five (5) business days from the disbursement of funds, or (2) mail a notice stating that I elect to cancel and enclose a return of the full amount of disbursed funds (in the form of the un-cashed check, or a registered or certified check or money order), by insured, registered or certified U.S. mail, postmarked within five (5) business days of receiving funds from Company.
Another legal staple, this section asks the plaintiff to acknowledge he/she has had the chance to read, consider and obtain legal advice with respect to the contract, and that their representations are true, correct and complete.
Plaintiff's Counsel's Agreement
Best placed on a separate page, this section includes a short agreement to be signed by plaintiff's counsel. Some state laws specify the information that must appear here. The most important acknowledgments are that:
- The attorney will provide notice of any money recovery on the claim, and
- pay the necessary amount to the company in full prior to disbursing any money to the plaintiff.
Hopefully, this article has helped you evaluate your contracts and your business. As always, if you found this helpful, have any questions or disagree with anything we've written, please reach out. We love talking to funders about this stuff!
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