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Best Practices

How to Lower Your Loss Rate by Avoiding Bad Attorneys

July 20, 2016
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5min read

You have most certainly experienced one of the biggest temptations in legal funding. It usually plays out something like this:

You get a new lead. It's an MVA involving a commercial vehicle with unlimited coverage, clear liability and significant injuries to the plaintiff. There is even an offer already on the table that is 20x what the plaintiff is requesting from you.

Everything looks great, this is a slam dunk!

But then you begin doing research on the attorney, and some disconcerting red flags rear up. Maybe the attorney had a disciplinary issue a few years ago, or a bankruptcy or two under their belt, or they just graduated law school. Something doesn't smell right....So, what should you do?

  For a lot of legal funders, the first instinct is to start rationalizing the situation. "My 3 year old can win this case," you think, and "the attorney has probably learned from his past disciplinary matters." It goes on.

No matter what you choose to do in instances like these, we all know that the attorney on the case is one of the major factors you need to consider when funding an investment.

Many funders lose more cases due to bad attorneys than bad underwriting.

In this post, you will learn why attorneys are such an integral part of a legal funding investment decision. Then, I'll give you 4 tips on how to check whether the attorney is a reputable and worthy business partner.  

4 Non-Obvious Reasons To Avoid Bad Attorneys

 

1. Bad attorneys advise their clients badly

This post isn’t focused on identifying what makes some attorneys better than others. Instead, I’m going to help you learn how to pick out the bad apples.

One big risk related to working with bad attorneys is their propensity to put themselves before their clients. The consequence for you is that they may advise or influence their clients to settle early for less. Why would an attorney act against their client’s best interest, even if the case is solid? Because they may be in desperate need of cash flow to keep their practice afloat, or for more even more dubious reasons, without other means to obtain it.

If you’ve been in the funding business long enough, you’ve most certainly seen a case or two that settled for far too little, far too early, and with no reasonable explanation. Oftentimes in these situations, the attorney decided to prioritize outcome over her clients’.

 

2. Bad attorneys make bad escrow agents

One of the blessings, and curses, of plaintiff funding is that you have a licensed attorney to collect the settlement and hold it in escrow on your behalf.

This arrangement carries risks, though. Some attorneys are unconscionably unorganized and simply forget to pay. Others have contempt for legal funders and intentionally try to circumvent their promises. Some even obfuscate funds for their own accounts. For some tactics on how to mitigate this risk, make sure you have an airtight process for how to protect your investments with lien confirmation.

No matter the reason, the fact that funders rely on the attorney to not only successfully resolve the case but also accurately and promptly honor your lien is just another reason why the quality of the attorney is crucial to your investment.

 

3. Bad attorneys are nightmare negotiators

One function that personal injury attorneys have taken on over time is that of lien negotiators. Once a case successfully settles, the work to recoup the investment has just begun.

Some attorneys will hold funders hostage, negotiate in bad faith, or flat-out fabricate numbers and proposed settlement statements in order to meet their personal objectives. You should expect to reduce your lien on some cases, but you shouldn’t expect to have to reduce your lien an unreasonable amount on an unreasonable number of cases without reasonable explanations.

Keep track of how often and how much attorneys you work with ask for reductions. This will be instrumental in helping you prioritize which attorneys you want to work with in the future.

 

4. Bad attorneys are bad at protecting your liens

If you fund an amazing case and it wins just as you expected, you may still end up with nothing if there is a mountain of medical bills or other legal funding liens on the case that you had no idea existed.

Your liens are only as valuable as the other liens on the case.

Even if you are the first lien, some attorneys will allow other funders to fund behind you, muddying the plaintiff’s ultimate incentives and your investment outcome.

3 Way to Verify an Attorney is Reputable

Now that you know how big of an impact avoiding bad attorneys will have on your funding business, it’s time to learn how to do it. Whether you’re working with an attorney who sends you hundreds of cases or if it’s a one-off internet lead, investing in due diligence can pay off.

Here are few tricks you and your team can be use to spit out bad seeds before you swallow.

 

1. Google them!

This is obviously the most simple measure, but that doesn’t mean it’s not incredibly effective!

Make it part of your disciplined, structured funding process for your sales rep or underwriter to google “[Attorney Name] Disciplinary History” and “[Attorney Name] Bar Standing.” This will enable you to catch most issues right off the bat. You may even uncover criminal history if the incident was public or otherwise in the news.

 

2. Check Their Disciplinary History

Attorneys have to live by a standard of conduct of their profession and, if they don’t, will be reported to a governing body. You can easily check the “standing” of an attorney by searching, using their first and last name, on most state bar websites (see the chart below).

The phrase “good standing” generally means that the attorney has been duly admitted to practice, is not currently suspended or disbarred, is currently properly registered and is not in arrears in the payment of their Bar fees.

The problem, though, is that attorneys are also lawmakers and tend to write the rules in their favor in order to drag out the standing determination process. In fact, an attorney may be in serious trouble but still technically in “good standing” because their third appeal hasn’t been heard yet, and no final decisions have been made.

In our experience, checking for good standing alone is a half measure. Breaking Bad fans may already know this, but never choose a half measure when you could go the whole way (video).

If you really want to cover your bases when checking disciplinary history, it’s best to actually talk to someone at the local state bar.

Make sure to not only ask if the attorney is in good standing, but also if there are any pending disciplinary actions against them.

This will provide you with key pieces of information that take less informed funders years to discover while the bar processes play out.

To help aid your search, here is a list of all 50 states their bar contact information: Attorney bar status check by state

 

3. Call Another Funder

This may sound crazy, almost like you’re asking a funder to give away some competitive intel.

But that’s really short term thinking. The legal funding world is small enough and, sooner or later, you will cross paths with most funders – often through payoff letters, which may indicate that that funder is passing on further investment for some reason.

So why not just call the funder, be upfront, and find out if (and why) the funder fired the attorney or stopped using a certain law firm? It’s not unheard of.

Hey [Funder], I understand from Smith & Wesson LLP Law Firm that they used to send you cases and no longer do. From one funder to another, if you don’t mind letting us know, what went wrong?

 

Summary

There is always the temptation to discount the attorney if the case itself seems like a slam dunk, but there are big risks to this strategy. At the very least, use these tips to arm yourself with as much information as possible so you can make an informed decision. Your bottom line will look much better for it!

Post by

Joshua Schwadron

CEO & Founder of Mighty

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