Commercial Litigation & Commercial Lawsuit Funding
Commercial litigation is a formal term used primarily in U.S. law for civil lawsuits between private parties, usually corporations or other business entities, in situations where large amounts of money are demanded by one party from the other.
Commercial litigation funding is a form of litigation finance, an arrangement in which a third party (the “litigation funder”) provides money to one party to a lawsuit (the “litigant”) so that he may pursue his case, and receives in return a portion of the proceeds if the litigant wins or settles the case.
Other companies, however, are now offering commercial litigation funding as well. Commercial litigation funding companies charge interest rates of around 10 percent or less which is usually less than what borrowers could get from other sources. The companies also charge fees on outstanding balances and monthly “membership” or “subscription” fees to cover administrative costs.
Role of Commercial Lawsuit Funding Company
Commercial litigation funding companies pay for the litigation costs upfront and, in return, they receive a portion of whatever is awarded to the litigant. The size of this share depends on how much money they have invested in the case. Commercial litigation funding companies are very selective when determining who will get their backing because most lawsuits they choose not to invest in will settle before trial, causing the commercial litigation company to lose money.
Commercial litigation funding companies provide either generic, “one-size-fits-all” case funding or pay for a specific type of lawsuit. An example of the above is an investor who provides a fully collateralized loan at a rate lower than what a borrower could get from other sources. The other option is to have investors only finance cases in areas specific to their business, such as financing construction lawsuits only.
Critics point out that this model adds pressure to encourage attorneys and clients to settle cases quickly. Which can lead to settlements that may not be fair. Commercial litigation funding companies operate on the assumption that almost all cases will end with a settlement, even if it is for less than what was sought because the effort of pursuing litigation is more profitable than the cost of funding it.
Many commercial litigation funding companies request an interest rate of around 10 percent, which is usually less than what borrowers could get from other sources like a bank. The companies also charge fees on outstanding balances and monthly “membership” or “subscription” fees to cover administrative costs.
The law varies from state to state as to whether or not commercial litigation funding is legal. Some states, such as California and Texas, allow commercial litigation funding whereas others like New York place tight restrictions on the practice. For example, in Texas, it is legal for a litigant to sell their contingency rights to an outside party whereas in New York it is illegal to participate in a lawsuit that has been assigned to another party.
Competition for this type of funding “is very high”, with banks and hedge funds also occasionally providing litigation financing. Insurance companies may also provide some forms of coverage for commercial litigation if they see the potential payout as worth the risk. The main benefit of commercial litigation funding from ECO over insurance is the speed at which the funding can be accessed. Because each investor receives a certain number of cases to review, the process happens much faster than going through an insurer who has to factor in their entire pool of insureds and determine which claims are worth pursuing.
One-third of commercial disputes are settled before trial, but commercial litigation funding companies want to avoid these settlements and instead pursue the cases that will payout. This extra incentive encourages litigants to pursue stronger cases because they might not be able to find funding otherwise. It also gives commercial litigation funding companies a way to determine which potential litigants are worth their investment.
Companies are unlikely to get commercial litigation financing for cases against small business owners.
Lawsuits that involve business-to-business agreements between two large corporations, however, are more likely to get commercial litigation funding because they have stronger cases and thus a higher chance of being settled out of court. Even if the case is not pursued, however, the original litigant may be able to recoup some of their investment by selling the contract if it becomes relevant in future litigation.
Even though commercial litigation funding is still a relatively new concept, its growth in recent years has been promising. It is expected that this trend will continue into the near future as many sources report that litigation funding is likely to be “the next big thing” in the legal industry.
The growth in commercial litigation funding in recent years has been promising. It is expected that this trend will continue into the near future as many sources report that litigation funding is likely to be “the next big thing” in the legal industry.
Types Of Commercial Litigation Funding
There are two types of commercial litigation funding: plaintiff and defendant.
In plaintiff litigation funding, a company agrees to finance the entire cost of bringing a lawsuit against another party in return for a percentage of any settlement or court award if the case is won.
In defendant litigation funding, a company agrees to pay all the legal costs associated with defending a lawsuit brought against a company in return for a percentage of the settlement or court award if the defendant is victorious.
Best Commercial Litigation Funding Firm
There are several commercial litigation funding companies in the U.S. today, each specializing in different types of cases and offering benefits such as fast cash disbursements and personalized service to their clients.
ECO Pre-settlement Funding Company
ECO is the only national nonprofit association exclusively representing the commercial litigation funding industry. ECO members span across all fifty states and include law firms, legal professionals, and litigation funders.
There are several ways to determine which type of firm is right for you:
- The amount of time your case is likely to take. For lawsuits that are likely to end quickly, you are better off using a traditional lender.
- Your likelihood of winning. If the plaintiff is unlikely to win the case, commercial litigation funding companies are less interested in providing funding.
- The strength of your case – how much money you could win if the case goes to court. Commercial litigation companies are interested in cases that have high potential returns; therefore, they tend to avoid funding lawsuits where the damages are only minor.
- Your previous business relationship with an attorney or commercial litigation funding company – some specialize in certain types of cases while others do not. Make sure you use a firm that has experience with your type of case.
- Your assets – some commercial litigation companies will only finance cases for businesses that have above-average assets they could forfeit if the plaintiff wins or settles out of court.
How to use the money of commercial lawsuit loans?
Instead of giving you a lump sum, commercial litigation funding companies will lend you the money in stages as your case moves forward. Your company can use the funds however they see fit – for legal fees, living expenses, mortgage payments, etc.
The process of applying is also much more flexible than with traditional lenders; there is no credit check or a long list of requirements to fulfill.
The amount you receive from the commercial litigation funding company will be determined on a case-by-case basis. Commercial litigation companies look at many different factors when deciding how much funding to provide, including:
- The merits of your claim – its strength and likelihood for success in court
- How long the case is likely to take
- Your budget and monthly living expenses
- The assets of your company that could be seized if the plaintiff wins or settles out of court
- Any other sources of funding, including insurance and personal assets such as savings and property equity
Commercial litigation funding companies aim to empower business owners with the financial resources and confidence necessary to pursue and win lawsuits against those that may have wronged them.
The commercial litigation financing industry has made an enormous impact on the American legal system, making it more accessible for both plaintiffs and defendants alike.
When you’re fighting a major lawsuit, time is of the essence; you need as much money as possible to fund your legal defense.
Commercial litigation funding is one of many options, which can be used to help repay debts and increase revenue during the lawsuit process.
If you are interested in finding out more information about commercial litigation companies or would like to know if we can fund your case, contact ECO Pre-settlement Funding today at (800) 961-8924 for a free consultation.