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Bank Lending Vs. Alternative Litigation Finance: A Mass Tort Attorney’s Strategic Opportunity

By Jeff Manley |
May 20, 2024

Bank Lending Vs. Alternative Litigation Finance: A Mass Tort Attorney’s Strategic Opportunity

The following post was contributed by Jeff Manley, Chief Operating Officer of Armadillo Litigation Funding. 

Mass tort litigation is a high-stakes world, one where the pursuit of justice is inextricably linked with financial resources and risk management. In this complex ecosystem, two financial pillars stand out: bank lending and alternative litigation finance. For attorneys and their financial partners in mass torts, choosing the right financial strategy can mean the difference between success and stagnation.

The Evolving Financial Landscape for Mass Tort Attorneys

Gone are the days when a powerful legal argument alone could secure the means to wage a war against industrial giants. Today, financial acumen is as critical to a law firm’s success as legal prowess. For mass tort attorneys, funding large-scale litigations is akin to orchestrating a multifaceted campaign with the potential for astronomical payouts, but also the very real costs that come with such undertakings.

Under the lens of the courtroom, the financing of mass tort cases presents a unique set of challenges. These cases often require substantial upfront capital and can extend over years, if not decades. In such an environment, agility, sustainability, and risk management emerge as strategic imperatives.

Navigating these waters demands a deep understanding of two pivotal financing models: traditional bank lending and the more contemporary paradigm of third-party litigation finance.

The Need for Specialized Financial Solutions in Mass Tort Litigation

The financial demands of mass tort litigation are unique. They necessitate solutions that are as flexible as they are formidable, capable of weathering the uncertainty of litigation outcomes. Portfolio risk management, a concept well-established in the investment world, has found its parallel in the legal arena, where it plays a pivotal role in driving growth and longevity for law firms.

The overarching goal for mass tort practices is to structure their financial arrangements in such a way that enables not just the funding of current cases but the foresight to invest in future opportunities. In this context, the question of bank lending versus alternative asset class litigation finance is more than transactional—it’s transformational.

Understanding Bank Lending

Banks have long been the bedrock of corporate financing, offering stability and a familiar process. While bank lending presents several advantages, such as the potential for lower interest rates in favorable economic environments, it also comes with significant caveats. The traditional model often involves stringent loan structures, personal guarantees, and an inflexibility that can constrain the scalability of funding when litigation timelines shift or case resolutions become protracted.

For attorneys seeking immediate capital, interest-only lines of credit can be appealing, providing a temporary reprieve on principal payments. However, the long-term financial impact and personal liability underpinning these loans cannot be overlooked.

Exploring Third-Party Litigation Finance

On the flip side, third-party litigation finance has emerged as a beacon of adaptability within the legal financing landscape. By eschewing traditional collateral requirements and personal guarantees, this model reduces the personal financial risk for attorneys. More significantly, it does so while tailoring financing terms to individual cases and firm needs, thus improving the alignment between funding structures and litigation timelines.

Litigation financiers also bring a wealth of experience and industry-specific knowledge to the table. They are partners in the truest sense, offering strategic foresight, risk management tools, and a shared goal in the litigation’s success.

Interest Rates and Financial Terms

The choice between bank lending and third-party litigation finance often hinges on the amount of attainable capital, interest rates, and the terms, conditions, and covenants of the loans. These differences can significantly influence the overall cost of financing and the strategic financial planning for mass tort litigation.

Bank Lending: Traditional bank loans typically offer lower initial interest rates, which can be attractive for short-term financing needs. However, these rates are almost always variable and linked to broader economic indicators, such as the prime rate. Banks are very conservative in every aspect of underwriting and the commitments they offer.

Third-Party Litigation Finance: In contrast, third-party litigation lenders often require a multiple payback, such as 2x or 3x the original amount borrowed. Some third-party lenders also offer floating rate loans tied to SOFR, but the interest costs are meaningfully higher than those of banks. The trade-off is greater access to capital. Third-party lenders, deeply entrenched in industry nuances, are generally willing to lend substantially larger amounts of capital. For attorneys managing long-duration cases, this variability introduces a layer of financial uncertainty. If a loan has a floating rate and the duration of the underlying torts is materially extended, the actual borrowing cost can skyrocket, negatively impacting the overall returns of a final settlement. This is an incredibly important factor to understand both at the outset of a transaction and during the initial stages of capital deployment.

Similarly, the maturity, terms, and conditions can differ drastically between bank-sourced loans and those from third-party lenders, with no standard list of boilerplate terms for comparison—making a knowledgeable financial partner key to facilitating the best fit for the law firm. Two standard features of a bank credit facility are that the entire portfolio of all law firm assets is usually required to secure the loan, regardless of size, and an unbreakable personal guarantee further secures the entire credit facility. Both of these points are potentially negotiable with a third-party lender. Bank loans are almost always one-year facilities with the bank having an explicit right to reassess their interest in maintaining a credit facility with the law firm every 12 months. In contrast, third-party lenders typically enter into a credit facility with a commitment for 4-5 years, with terms becoming bespoke beyond these basics.

Loan Structures Under Scrutiny

The rigidity of bank loan structures, particularly notice provisions and speed of access, contrasts with the fluidity of third-party financiers’ offerings. The ability to negotiate terms based on case outcomes, as afforded by the alternative financing model, represents a paradigm shift in financial planning that has redefined the playbook for mass tort investors.

Risk at Its Core

The linchpin of this comparison is risk management. Banks often require a traditional, property-based collateral, which serves as a blunt instrument for risk reduction in the context of litigation. Third-party financiers, conversely, indulge in sophisticated evaluations and often adopt models of shared risk, where their fortunes are inversely tied to those of the litigants.

Support Beyond Capital

A crucial divergence between bank loans and alternative finance is the depth of support provided. The former confines its assistance to financial matters, while the latter, through its specialized knowledge, contributes significantly to strategic case management, risk assessment, and valuation, essentially elevating itself to the level of a silent partner in the legal endeavor. Furthermore, litigation funders (unlike banks), are often prepared to extend multiple installments of capital, reflecting a level of risk tolerance and industry insight that banks typically do not offer.

Case Studies and Success Stories

The case for alternative litigation finance is perhaps best illustrated through the experiences of attorneys who have successfully navigated the inextricable link between finance and litigation. The Litigation Finance Survey Report highlights the resounding recommendation from attorneys who have used third-party financing, with nearly all expressing a willingness to repeat the process and recommend it to peers.

This empirical evidence underscores the viability and efficacy of alternative financing models, showcasing how they can bolster the financial position of a firm and, consequently, its ability to take on new cases and grow its portfolio.

The Role of Litigation Finance Partners

When considering third-party litigation finance, the choice of partner is just as important as the decision to explore this path. Seasoned financiers offer more than just capital; they become an extension of the firm’s strategic muscle, sharing in risks and rewards to galvanize a litigation (and practice) forward.

Cultivating these partnerships is an investment in expertise and a recognition of the unique challenges presented by mass tort litigation. It is an integral part of modernizing the approach to case management, one that ultimately leads to a sustainable and robust financial framework.

For mass tort attorneys, the strategic use of finance can unlock the latent potential in their caseloads, transforming high-risk ventures into opportunities for growth and success. By carefully weighing the merits of traditional bank lending against the agility of third-party litigation financing, attorneys can carve out a strategic path that not only secures the necessary capital but also empowers them to manage risks and drive profitability.

One truth remains immutable: those who recognize the need for financial innovation and risk management will be the torchbearers for the future of mass tort litigators, where the scales of justice are balanced by a firm and strategic hand anchored in the principles of modern finance.

About the author

Jeff Manley

Jeff Manley

Commercial

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Commercial Regulatory Issues

Congress Debates Litigation Funding Bill

By John Freund |

Republican lawmakers have renewed their push to rein in third-party litigation funding, with a House Judiciary Committee debate highlighting how politically charged the issue has become.

An article in The Daily Signal reports that members of the House Judiciary Committee clashed this week over legislation that would require disclosure of third-party litigation funding arrangements in federal courts. Supporters of the bill framed it as a transparency measure aimed at exposing the financial interests behind major lawsuits, while opponents warned that the proposal risks limiting access to justice and unfairly targeting a growing segment of the legal finance market.

During the committee debate, Republican lawmakers argued that outside investors are increasingly influencing litigation in ways that can distort outcomes and inflate settlement values. Several speakers characterized litigation funders as profit-driven actors operating in the shadows, asserting that judges and defendants deserve to know who stands to benefit financially from a case. Proponents also linked litigation funding to broader concerns about rising legal costs and what they describe as abusive litigation practices.

Democratic members pushed back, questioning whether the bill was designed to solve an actual problem or simply to deter plaintiffs from bringing legitimate claims. Critics of the proposal argued that disclosure requirements could chill funding for complex and expensive cases, particularly those involving individual plaintiffs or smaller businesses facing well-capitalized defendants. They also raised concerns about confidentiality and whether revealing funding arrangements could give defendants a tactical advantage.

The debate reflects a broader national conversation about the role of litigation finance in the civil justice system. While disclosure requirements have already been adopted in certain courts and jurisdictions, the proposed legislation would impose a uniform federal standard. Supporters say this consistency is overdue, while opponents argue it could undermine carefully negotiated funding structures that allow cases to proceed at all.

Commercial

APCIA Supports Federal Litigation Funding Disclosure Bill

By John Freund |

The insurance industry has intensified its campaign for greater scrutiny of third-party litigation funding, with one of its most influential trade groups backing new federal legislation aimed squarely at disclosure.

An article in Insurance Journal reports that the American Property Casualty Insurance Association has thrown its support behind a proposed federal bill that would require parties in civil litigation to disclose the existence of litigation funding agreements. The legislation, which is currently being considered by the House Judiciary Committee, would mandate that courts be informed when a third party has a financial stake in the outcome of a lawsuit. Proponents argue that this information is essential for judges to understand who stands behind a claim and whether outside financial interests may be influencing litigation strategy.

APCIA framed its endorsement around long-standing concerns about rising litigation costs and what insurers describe as “social inflation.” According to the group, undisclosed litigation funding arrangements can drive up claim severity, prolong disputes, and ultimately increase costs for insurers and policyholders alike. By requiring transparency, APCIA believes courts would be better positioned to manage conflicts of interest, assess discovery disputes, and evaluate settlement dynamics.

The association has been an active voice in the national debate over litigation finance for several years, often aligning with other insurance and business groups calling for disclosure regimes at both the state and federal level. APCIA leadership emphasized that the proposed legislation is not intended to ban or restrict litigation funding outright, but rather to ensure that judges and opposing parties have visibility into financial relationships that could bear on a case.

The bill would apply broadly in federal courts and could have significant implications for how funded cases are litigated, particularly in complex commercial disputes and class actions where third-party capital is more common. Insurers view federal action as a way to establish consistency across jurisdictions, rather than relying on a patchwork of state rules and local practices.

Commercial Regulatory Issues

Why Big Law Is Walking Away From Suits Against Governments

Elite global law firms are increasingly declining to pursue massive claims against sovereign states, even when potential recoveries run into the billions. The trend reflects a reassessment inside Big Law of the risk, cost, and strategic value of investor state and public law disputes that can take years to resolve and often carry significant political and reputational complications.

An article in Law.com International reports that top-tier firms which once dominated investor state arbitration and other government facing disputes are now far more selective about taking on such matters. Lawyers interviewed for the piece point to a combination of commercial pressure, client demands, and internal firm dynamics that make these cases less attractive than they once were. Although headline damages can be enormous, the cases typically require years of work, large multidisciplinary teams, and significant upfront investment with no guarantee of recovery.

Another key factor is reputational risk. Firms are increasingly cautious about being seen as adversaries of governments, particularly in sensitive jurisdictions or disputes involving public policy, natural resources, or infrastructure. Partners noted that political backlash, enforcement uncertainty, and the potential impact on other client relationships all weigh heavily when firms decide whether to proceed.

The article also highlights that many corporate clients are less willing to bankroll these disputes directly. Budget scrutiny has intensified, and companies facing disputes with states are often reluctant to commit tens of millions in legal fees over a long time horizon. This dynamic has contributed to a rise in alternative fee arrangements and third party litigation funding, though even those tools do not fully offset the burden for law firms carrying significant work in progress.

As a result, specialist boutiques and arbitration focused firms are increasingly stepping into the space once dominated by global giants. These smaller players often have lower overhead, deeper niche expertise, and a greater tolerance for the long timelines associated with sovereign disputes.