Advancing Litigation Costs

Advancing Litigation Costs

In many contingent-fee cases the lawyer pays the bills as they arrive: the filing fee, the expert’s charge, the specialist’s examination. Each payment is financial assistance in connection with pending or contemplated litigation, and the general ban would forbid every one of them.¹ The first exception removes that obstacle. It permits a lawyer to advance court costs and expenses of litigation, and it allows repayment of the advance to be contingent on the outcome of the matter.²

The exception answers two questions that are easy to run together. The first asks what kind of payment qualifies; the second asks how repayment of a qualifying payment may be structured. A payment of the wrong kind cannot be saved by a generous repayment term, so the subsections below take the kind of payment first and the repayment term second.

Court Costs and Expenses

Court costs are the charges the court system itself imposes, and the filing fee is the familiar example. Expenses of litigation reach whatever it takes to build and present the case. The rationale offered for the exception names two examples: the expenses of diagnostic medical examinations used for litigation purposes, and the reasonable costs of obtaining and presenting evidence.³ A physician’s fee for examining an injured client, so that the findings can be put before the factfinder, fits comfortably within that description.

The exception rests on how little these advances change. A lawyer who works on a contingent fee collects only if the case succeeds, and the rules tolerate that stake. A lawyer who also fronts the costs and recovers them only from the proceeds adds little to it. The rationale accordingly calls such advances “virtually indistinguishable from contingent fees” and says they “help ensure access to the courts.”⁴ The access point is practical. A client who can retain a lawyer with no money down still needs cash for the filing fee, the examiner, and the expert, and without the exception the case would sit unfunded at the moment it must be filed and proved.

The exception reaches every client, rich or poor. The Rules write indigence into the next exception, which provides that a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.⁵ The cost-advance exception says nothing about the client’s finances. A filing fee goes to the court and an examiner’s fee goes to the examiner, so neither puts spending money in the client’s hands. Anyone who writes that cost advances are available only to indigent clients has confused the two exceptions.

Living expenses fall on the other side of the line. Two checks written in the same month show the difference.

The first check is a cost of litigation. The plaintiff must prove the injury, and the fee goes to the examiner. The second is financial assistance barred by the general ban. The rent would be owed whether or not a lawsuit existed, and it goes into the client’s household. Repaying it only from a recovery does not turn it into a litigation expense.

The two checks look alike on a ledger, so the test must be functional: does the money buy something the case itself requires? The amount, the lawyer’s sympathy, and the repayment terms do not change the answer. Payments toward living expenses sit on the barred side because they carry both dangers the ban addresses. They encourage clients to pursue lawsuits that might not otherwise be brought, and they give the lawyer too great a financial stake in the litigation. The rationale lists loans to clients for living expenses, whether made or guaranteed by the lawyer, among the forbidden subsidies.⁶

Contingent Repayment

Rule 1.8(e)(1) also settles who bears the risk that a case fails. It permits the lawyer to advance costs “the repayment of which may be contingent on the outcome of the matter.”⁹ Repayment is contingent when it is owed only if the client wins or settles. A recovery repays the advance; a lost case leaves the lawyer unreimbursed and the client owing nothing.

Many plaintiffs’ contingent-fee agreements show the mechanics. The lawyer bears the costs if there is no recovery, and any recovery goes first to reimburse the lawyer’s expenses, with the rest divided by a formula such as three-fourths to the client and one-fourth to the lawyer.¹⁰ Because the recovery is the only source of repayment, the lawyer’s chance of getting the money back rises and falls with the result.

A variation shows where the exception ends.

The line falls at the recovery. A lawyer who declines to collect after a lost case is simply applying the contingency, since no recovery means no repayment. A promise to forgo collection after a win turns the advance into an outright payment of the client’s costs, which the Rules allow only for an indigent client.¹¹ For the client of ordinary means in the second example, the arrangement is financial assistance that fits no exception, and the general ban applies.¹²

The reason to permit contingent repayment starts with the client who has a sound claim and no cash. If that client had to supply the money for each advance, or had to answer for it after a loss, many good claims would never be filed. Contingent repayment shifts that risk to the lawyer, who can spread it across many cases. The structure also fits the Rules’ treatment of fees. Another provision of Rule 1.8 allows a lawyer to acquire a lien authorized by law to secure the lawyer’s fee or expenses and to contract with a client for a reasonable contingent fee in a civil case.¹³ A lawyer who may be paid only if the client recovers gains no new kind of interest by being repaid for costs only if the client recovers, which is why the rationale treats the advances as virtually indistinguishable from contingent fees.¹⁴ A lien is available only when some law authorizes it.

The older Model Code of Professional Responsibility took a stricter view. DR 5-103(B) allowed a lawyer to advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and the costs of obtaining and presenting evidence, “provided the client remains ultimately liable for such expenses.”¹⁵ Under that rule a client who lost the case still owed the costs, so the lawyer’s repayment never turned on the result. The Model Rules drop the condition. Rule 1.8(e)(1) says nothing of ultimate liability and lets repayment depend on the outcome.¹⁶

State rules vary, and a footnote in Oklahoma Bar Ass'n v. Smolen collects some of the variations. It reports that Oregon leaves the client liable “to the extent of the client’s ability to pay,” that Washington makes repayment contingent on the outcome in class actions only, and that Maine follows the Model Code but deletes the requirement that the client remain ultimately liable.¹⁷ A particular jurisdiction’s current rule must be checked. Unless a question names a jurisdiction, apply the Model Rules.

Contingent repayment leaves one cost behind. A lawyer who is repaid only from a recovery, and whose fee comes from the same recovery, may have an incentive to settle at a lower price than serves the client. The divergence is less pronounced than when a lawyer pays an indigent plaintiff’s expenses even if the plaintiff recovers.¹⁸

The fee structure can narrow the gap. An agreement can give the lawyer a higher percentage of a trial recovery than of a settlement, and many agreements do, for example forty percent of trial proceeds against thirty-three percent of settlement proceeds.¹⁹ If the lawyer in the example above took one-fourth of a settlement but one-third of a trial recovery, the lawyer’s average at trial would rise to $40,000 and the client’s would fall to $120,000. Each figure would then match the settlement, and neither side would gain by pressing for or against settlement on financial grounds alone. The client’s own choice remains the final check, since the lawyer must abide by the client’s decision whether to settle.²⁰ The residual incentive calls for care in drafting the fee agreement; it does not make the advance impermissible.