Arbitration and Secured Transactions two of your favorite things?
No? Well as a lawyer, you might want to understand them, anyhow.
Litigation finance for plaintiffs' lawyers sometimes involves the lawyer granting the financier a security interest in the lawyer's cut of judgments and settlements the lawyer's cases win. The contracts can be tricky, though. For instance, a report for Bloomberg Law examined contracts with high interest rates, usually around 18% to 22%, that might be illegal (usurious) if the financier had recourse against the debtor/lawyer, but the contracts are non-recourse, which means the financer can only seek repayment from its collateral--the lawyer's cut of judgments and settlements.
However, in some of these contracts "a default converts the deal to a recourse loan—triggering repayment whether the underlying cases win or lose."
Moreover, some of these agreements may define the collateral very broadly. As Bloomberg writes, "Many of these contracts include a list of specific cases that it says are subject to the terms of the agreement. Yet many of the same contracts elsewhere appear to contradict that concept, saying the firm will provide 'all cases as collateral' including all fees the firm 'now is or may hereafter become entitled to receive.'”
Secured Transactions students will recognize this as an after-acquired property clause--routine in financing inventory and accounts.
And many of these contracts have arbitration clauses. Why would financiers want to bring these breach of contract (or "debt collection") actions in arbitration rather than litigation? After winning a judgment, they'll still have to go to court to confirm and enforce the judgment.
