The general area of the Litigation Funding practice is called Commercial Tort Litigation. There are essentially two types....those cases that are brought forth as class action suits and those that are private or individual commercial tort cases. We're dealing with the second type.
Companies such as Stryker, Johnson & Johnson, De Puy, C.R. Bard, Boston Scientific, Bayer, Pfizer, et al., have found to be liable for injuries sustained as a result of their products being defective in some way--for having caused unintended negative and sometimes catastrophic consequences. Pharmaceuticals can result in injurious side effects, medical devices can have significant unexpected consequences after surgeries, both categories sometimes causing patents to have additional surgeries, manifesting in other health problems, deaths, etc. You’ve heard of these suits vis a vis hip and knee replacement issues, trans-vaginal mesh issues, Zoloft, Risperdal and more on television, no doubt. The defendants, typically medical device and pharmaceutical companies, have lost cases and have been ordered by the courts to put up, in many cases, hundreds of millions of dollars or over a billion dollars in escrow accounts, awaiting plaintiffs (claimants) to file claims and collect a share of the settlement funds already allocated. These claims come forth over months or years as consumers experience associated problems and find recourse through the legal system.
There are law firms who are very active in finding plaintiffs through these tv commercials, radio spots, mail campaigns, etc. The cost to do this is quite high, as one can imagine.
So that the law firms don’t have to put up inordinate amounts of capital to find these plaintiffs and so that they can expand their efforts significantly, offer an opportunity for "funders" to put up money which assists the law firms in funding the processes involved in finding the plaintiffs, including obtaining doctors’ records, scheduling exams with medical specialists, paying for additional medical treatment and occasionally even paying for revisionary surgeries, then packaging the claim for presentation.
Once the plaintiffs come forward the law firm analyzes the claims and does what is necessary to prepare and package the claim. The claims of those clients whose cases fit the parameters--those claims that will result in an extremely high likelihood of settlement success are assembled and handed off to a partner litigating law firm and the cases are ultimately submitted to a review board to rule on, with no appeal process, to a predictable end. The cases do not see the light of a court room. The claims are settled and the settlement proceeds are then paid out to the litigating law firm who, in turn, pays the plaintiffs their share. Part of the settlement funds are also paid to the law firm who acquired and vetted the plaintiffs and packaged the claim. This law firm, in turn, shares the settlement proceeds with the funders who financed the acquisition of the plaintiff, according to the executed pre-paid, forward Funding Contract between the Client/Funder and the law firm.
A Funder is a party to a contract with the law firm that has agreed to pay out, as follows, a tremendous return on the client’s participation. It works like this:
Fund $10,000 of Qualified Money, receive $22,500 within 24 months ---125% return on funding.
Re-up on the $22,500 for another period and the client will have 50,625 at the next 24th month.
Fund $10,000 of Non-Qualified money, receive $22,500 and if the client wishes to "re-up" he/she will receive a distribution of $2,500 and they can 're-up' the $20,000.
Why a distribution on Non-Qual funds? The amounts returned on contracts can be uneven multiples of the original amount. For Non-Qual funds only multiples of $10k can be 're-upped.'
For qualified money, so that no taxable distribution or penalty takes place, the law firm will accommodate 're-ups' of the full amount into new contracts.
One can fund more than $10,000 but regardless of the sum, it will be broken down into blocks of $10,000 each. If one funds $50,000, for example, it will be made up of five $10k contracts.
This strategy, utilizing specific funding contract amounts and a specific return of a funders original funding with a fixed return in the form of a "premium," ensures that there is no aggregation of funds in the law firm’s settlement account and therefore keeps these transactions from being considered a security. Simply stated, a Funder is agreeing to finance a plaintiff acquisition and in turn the law firm is simply sharing it’s settlement proceeds by paying out a pre-determined amount. Simple.
Clients sign a Funding Contract which spells out how much they are funding (in $10,000 increments). The client receives a security agreement and other paperwork which spells out from A to Z the responsibility of the law firm in relation to the Funder.
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