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Lawyer Directed Litigation Funding Agreements And Professional Conduct Rule 5.4

Lawyer Directed Litigation Funding Agreements And Professional Conduct Rule 5.4

The following article was contributed by John Hanley, Partner at Rimon Law, and Ryan Schultz, Vice President of Business Development for Woodsford Litigation Funding. Third-party litigation funding (“TPLF”) involves financing of expenses incurred in a lawsuit (for example, expert fees and usually some portion of legal fees incurred) in exchange for a share of the final judgment or settlement. The funding is typically non-recourse (i.e., the amounts funded need not be repaid if the lawsuit is unsuccessful) and is often repaid through a financial interest in the attorneys’ fees realized by the law firm if the case is successful. These arrangements have become common in the marketplace: in 2022, $3.2 billion in capital was committed for new TPLF; 61% of that capital was deployed to law firms as opposed to clients and claimants; and 28% of the funding recipients were members of the Am Law 200.1 The question of the permissibility of such arrangements in light of Rule 5.4(a) of the New York Rules of Professional Conduct, which prohibits fee sharing with a non-lawyer, and TPLF arrangements arises. This Insight focuses on New York practice. As stated below, substantial precedent suggests that Rule 5.4(a) was not intended to preclude TPLF arrangements, and the New York City Bar Association has made two proposals intended to clarify Rule 5.4(a) in that regard. Rule 5.4(a) And TPLF Arrangements Rule 5.4(a) of the New York Rules of Professional Conduct provides, in relevant part, that a “lawyer or law firm shall not share legal fees with a non-lawyer.”2 In July 2018, the New York City Bar Association issued a non-binding opinion which concluded that future payments to a litigation funder contingent on the lawyer’s receipt of legal fees could violate Rule 5.4’s prohibition on fee sharing with non-lawyers.[1] The main thrust of the non-binding opinion was to protect the lawyer’s professional independence and judgment. The opinion was widely criticized and met with strong disagreement from the litigation finance community and some legal ethicists, who declared it is simply “wrong” or, at a minimum, overly broad and misguided.[2] In October 2018, the City Bar’s President formed the Litigation Funding Working Group (the “Working Group”) to study TPLF and provide a report. In 2020, the Working Group released a 90-page report finding that the prior opinion was neither binding nor a required rule of practice, and that Rule 5.4 should be revised to make clear that litigation funding should not be prohibited.[3] The report stated that Rule 5.4 “should be revised to reflect contemporary commercial and professional needs and realities” and “lawyers and the clients they serve would benefit if lawyers have less restricted access to funding.” The report made two proposals, both of which focused on lawyer independence and disclosure of the arrangement to clients.  The proposals are substantially similar. Proposal A would require TPLF be used for a specific legal representation, prohibit participation in the litigation by the funder and require the client’s informed consent.  Proposal B would permit funding to be used for the lawyer’s or law firm’s practice generally, allow the funder to participate in the litigation for the benefit of the client and not require the client’s informed consent although the client must be informed of the arrangement in writing. As of today, neither proposal has been implemented, and the Working Group noted that “a number of lawyers and funders believe that such a statement is unnecessary under the current Rules of Professional Conduct,” given that Rule 5.4 was not designed to prohibit such arrangements, as discussed in the following section. Court Rulings Regarding Rule 5.4 And TPLF Arrangements The courts that have addressed litigation funding in light of Rule 5.4 have concluded that the ethics rules do not preclude a financing interest in future attorneys’ fees or law firm revenue. In 2013, in Lawsuit Funding, LLC v. Lessoff, a New York trial court held that the litigation funding arrangement at issue did not violate Rule 5.4.[4] In that case, the law firm received an advance secured by future contingency fees through a litigation funding agreement styled as a Sale of Contingent Proceeds. “The [agreement] called for [the funder] to receive a portion of the contingent legal fee that [attorneys] were expected to receive if five specifically named lawsuits were adjudicated in favor of [the] clients.”[5] The court noted that “several other jurisdictions have addressed the interplay of alternative litigation financing and Rule 5.4(a),” and did not find an ethical violation.[6] Judge Bransten adopted the PNC Bank Court’s reasoning and held that the litigation funding arrangement did not violate Rule 5.4, and went on to state that:
There is a proliferation of alternative litigation financing in the United States, partly due to the recognition that litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation. See A.B.A. Comm. on Ethics 20/20, Informational Report to the House of Delegates 2 n.6 February 2012 . . . Sandra Stern, Borrowing from Peter to Sue Paul: Legal & Ethical Issues in Financing a Commercial Lawsuit ¶ 27.02[3] (2013). Therefore, this Court adopts the PNC Bank court’s reasoning and finds that the Stipulation does not violate Rule 5.4(a) and is not unenforceable as against public policy.
In 2015, in Hamilton Cap. VII, LLC, I v. Khorrami, LLP, another New York trial court stated that “other courts have analyzed the legality of [litigation] financing arrangements between factors and law firms and held them not to run afoul of the applicable ethical rules.”[7] In that case, the lender was entitled “to a percentage of the Law Firm’s gross revenue as part of the consideration for the money loaned to the Law Firm.”[8] There, the plaintiff was in the business of lending money to law firms and the loans were secured by the law firm’s accounts receivable. The law firm asserted, among other things, that the contract was unenforceable because the additional compensation to be paid to the lender in the amount of 10% of the law firm’s gross revenues collected between dates certain was an illegal fee-sharing arrangement. The court pointed to Judge Bransten’s decision in Lessoff and described it as “on point and persuasive.” Judge Kornreich ruled in favor of the lender, found the agreement was enforceable and did not violate Rule 5.4:
While it is well settled that actual fee-sharing agreements are illegal and unenforceable . . . the case law cited by defendants does not support the proposition that a credit facility secured by a law firm’s accounts receivable constitutes impermissible fee sharing with a non-lawyer. To the contrary, as Justice Bransten [in Lawsuit Funding, LLC v. Lessoff] explained, courts have expressly permitted law firms to fund themselves in this manner. Providing law firms access to investment capital where the investors are effectively betting on the success of the firm promotes the sound public policy of making justice accessible to all, regardless of wealth. Modern litigation is expensive, and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm’s accounts receivable helps provide victims their day in court. This laudable goal would be undermined if the Credit Agreement were held to be unenforceable. The court will not do so.11
Both the Lessof and Hamilton cases relied significantly on PNC Bank, Delaware v. Berg, 12 in which the Delaware Superior Court noted that it is common practice for a lender to have a security interest in an attorney’s accounts receivable and there is no real “ethical” difference in a security interest in contract rights (fees not yet earned) and accounts receivable (fees earned). In finding that the financing arrangement at issue did not violate Rule 5.4, the court stated:[9]
[D]efendants suggest that it is “inappropriate” for a lender to have a security interest in an attorney’s contract rights. Yet it is routine practice for lenders to take security interests in the contract rights of other business enterprises. A law firm is a business, albeit one infused with some measure of the public trust, and there is no valid reason why a law firm should be treated differently than an accounting firm or a construction firm. The Rules of Professional Conduct ensure that attorneys will zealously represent the interests of their clients, regardless of whether the fees the attorney generates from the contract through representation remain with the firm or must be used to satisfy a security interest. Parenthetically, the Court will note that there is no suggestion that it is inappropriate for a lender to have a security interest in an attorney’s accounts receivable. It is, in fact, a common practice. Yet there is no real “ethical” difference whether the security interest is in contract rights (fees not yet earned) or accounts receivable (fees earned) in so far as Rule of Professional Conduct 5 .4, the rule prohibiting the sharing of legal fees with a nonlawyer, is concerned. It does not seem to this Court that we can claim for our profession, under the guise of ethics, an insulation from creditors to which others are not entitled.
Washington D.C., Utah and Arizona and other States  Washington D.C. adopted a modified rule 5.4(b) in 1991 and, until the developments beginning with Utah and Arizona in 2020, was the only jurisdiction in the United States to permit partial, limited non-lawyer ownership of law firms which removes ethical constraints that may arise regarding lawyer directed TPLF and rule 5.4(a). The Utah Supreme Court issued Standing Order No. 15 effective August 14, 2020 (the “Order”).[10] The Order establishes a pilot legal regulatory sandbox and an Office of Legal Services Innovation to oversee the operation of non-traditional legal providers and services, including entities with non-lawyer investment or ownership with the goal of improving meaningful access solutions to justice problems.  The Order has been amended twice (most recently September 21, 2022) and the program will continue until 2027.  At that time the Supreme Court will determine if and in what form the Office of Legal Services Innovation will continue. The Arizona Supreme Court issued a unanimous order that eliminated its rule 5.4 entirely, creating a new licensing requirement for alternate business structures that are partially owned by non-lawyers but that provide legal services.[11] These reforms remove ethical obstacles presented by rule 5.4(a) regarding lawyer directed TPLF but that is just incidental to their purpose – increased access to the justice system and lower costs. Other states that have considered or are considering similar regulatory reform to close the access to justice gap in the U.S. include California, Illinois, Oregon, Nevada, New Mexico, Indiana, Connecticut and New York, according to the ABA Center for Innovation’s Legal Innovation Regulatory Survey.[12] Qualified Conclusion This Insight is limited to our review of the New York Rules of Professional Conduct and, in particular, Rule 5.4(a), and the limited related precedent. We note that there is no appellate decision in New York to address these issues but the two trial court decisions are persuasive authority. Practitioners should take these limitations into account in analyzing the risks associated with transactions similar to those described in this Insight. Based on the foregoing it would not be unreasonable to conclude that  a court of competent jurisdiction acting reasonably, applying the legal principles developed under the case law discussed above, after full and fair consideration of all relevant factors, and in a properly presented and argued case, would not find a TPLF arrangement which provided a lender a contingent interest in law firm revenue on a case or group of cases, similar to the arrangements discussed above, to violate Rule 5.4(a). John Hanley is a Partner at Rimon Law and drafts and negotiates litigation funding agreements on behalf of lawyers, law firms, claimants and litigation funders. Read more here Ryan Schultz is a Vice President of Business Development for Woodsford and works with claimants and leading lawyers around the world to identify meritorious claims in need of funding.  Prior to joining Woodsford, Ryan was a Partner in the Intellectual Property & Technology Group at Robins Kaplan, LLP.  Ryan helped clients monetize their IP assets in the US and around the world to provide maximum value for their innovations.  Read more here If you are interesting learning more about Litigation Funding, please reach out to John Hanley or Ryan Schultz.[1] The Association of the Bar of the City of New York Committee on Professional Ethics, Formal Opinion 2018-5: Litigation Funders’ Contingent Interest in Legal Fees. [2] See, e.g., Paul B. Haskel & James Q. Walker, New York City Bar Opinion Stuns the Litigation Finance Markets, Lexology (Aug. 31, 2018), available here. [3] Report to the President by the New York City Bar Association Working Group on Litigation Funding, available here [4] Lawsuit Funding, LLC v. Lessoff, No. 650757/2012, 2013 WL 6409971, at *5 (N.Y. Sup. Ct. Dec. 04, 2013). [5] Id. at *1. [6] Id. at *5 (citing PNC Bank, Delaware v. Berg, No. 94C-09-208-WTQ, 1997 WL 529978, at *10 (Del. Super. Ct. January 21, 1997); Cadle Co. v. Schlichtmann, 267 F.3d 14, 18 (1st Cir. 2001); Core Funding Grp., L.L.C. v. McDonald, No. L-05-1291, 2006 WL 832833, at *11 (Ohio Ct. App. Mar. 31, 2006); ACF 2006 Corp. v. Merritt, No. CIV-12-161, 2013 WL 466603, at *3 n.1 (W.D. Ok. Feb. 7, 2013); U.S. Claims, Inc. v. Yehuda Smolar, PC, 602 F.Supp.2d 590, 597 (E.D. Pa. March 9, 2009); U.S. Claims, Inc. v. Flomenhaft & Cannata, LLC, 519 F.Supp.2d 515, 521 (E.D. Pa Nov. 13, 2006)). [7] Hamilton Cap. VII, LLC, I v. Khorrami, LLP, 48 Misc. 3d 1223(A), 22 N.Y.S.3d 137 (N.Y. Sup. Ct. 2015). [8] Id. [9] Id. [10] Utah Supreme Court Standing Order No. 15 (Amended September 21, 2022) (utcourts.gov) [11] Order re R-20-0034 (azcourts.gov) [12] Legal Innovaon Regulatory Survey – An overview of the legal regulatory landscape related to legal innovaon and access to jusce.
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Burford’s Q2 Profits Surge on New Capital

By John Freund |

Burford Capital has delivered its strongest quarterly performance in two years, buoyed by a swelling pipeline of high-value disputes and a fresh infusion of investor cash.

A press release in PR Newswire reveals that the New York- and London-listed funder more than doubled revenue and profitability in the three months to 30 June 2025. CEO Christopher Bogart credited “very substantial levels of new business” for the uptick, noting that demand for non-recourse financing remains “as strong as we’ve ever seen.”

The stellar quarter follows a lightning-quick, two-day debt offering in July that raised $500 million—capital Burford says will be deployed across a growing roster of commercial litigations, international arbitrations, and asset-recovery campaigns. Management also highlighted significant progress in portfolio rotations, underscoring the firm’s ability to monetise older positions while writing new ones at scale. Investors will get a deeper dive when Burford hosts its earnings call today at 9 a.m. EDT.

Burford’s results arrive amid heightened regulatory chatter in Washington and Westminster, yet the numbers suggest the industry’s largest player is unfazed—for now—by talk of disclosure mandates and tax levies. The firm emphasised that its legal-finance, risk-management and asset-recovery businesses remain uncorrelated to broader markets, a pitch that continues to resonate with pension funds and endowments hunting for alternative yield.

For litigation-finance insiders, Burford’s capital-raising prowess and improving margins could have ripple effects: rival funders may face stiffer competition for marquee cases, while law-firm partners might leverage the firm’s deeper pockets to negotiate richer portfolio deals.

Australian High Court Ruling Strengthens Class-Action Funders

By John Freund |

Australia’s litigation-funding industry just received the judicial certainty it has craved.

Clayton Utz reports that the High Court, in Kain v R&B Investments [2025] HCA 26, unanimously held that the Federal Court may impose common-fund orders (CFOs) or funding-equalisation orders at settlement or judgment—ensuring all class members, not just those who signed funding agreements, contribute to a funder’s commission.

The Court reaffirmed Brewster’s bar on early-stage CFOs but found late-stage CFOs fall within the “just” powers of ss 33V(2) and 33Z(1)(g) of the Federal Court Act. Crucially, the bench rejected “solicitor common-fund orders,” ruling that any CFO benefiting plaintiff firms would contravene the national ban on contingency fees outside Victoria.

For funders, the decision cements the enforceability of commissions in nationwide class actions and removes a major pricing risk that had lingered since Brewster. For plaintiff firms, however, the ruling slams the door on a hoped-for new revenue channel.

The Court’s reasoning—tying funding commissions to equitable cost-sharing rather than contingency returns—will likely embolden funders to back larger opt-out claims, knowing a CFO safety-net is available at settlement. Meanwhile, plaintiff firms may redouble lobbying efforts for contingency-fee reform, particularly in New South Wales and Queensland, to reclaim ground lost in today’s judgment. Whether lawmakers move on that front will shape Australia’s funding market in the years ahead.

Locke Capital Backs Sarama in US $120 Million ICSID Claim Against Burkina Faso

By John Freund |

A junior gold explorer is turning to third-party capital to fight what it calls the expropriation of a multi-million-ounce deposit.

According to a press release on ACCESS Newswire, ASX- and TSX-listed Sarama Resources has drawn down a four-year, US $4.4 million non-recourse facility from specialist funder Locke Capital II LLC. The proceeds will pay Boies Schiller Flexner’s fees and expert costs in Sarama’s arbitration against Burkina Faso at the International Centre for Settlement of Investment Disputes (ICSID).

Sarama alleges the government retroactively revoked its Tankoro 2 exploration permit in 2023, halting development of the flagship Sanutura project. An arbitral tribunal chaired by Prof. Albert Jan van den Berg held its first procedural hearing on 25 July; Sarama’s memorial is due 31 October, and the company is seeking no less than US $120 million in damages.

Under the Litigation Funding Agreement, Locke’s recourse is limited to arbitration proceeds and the ownership chain of Sanutura; Sarama’s other assets remain ring-fenced. Repayment occurs only on a successful award or settlement, with Locke’s return calculated on a multiple-of-invested-capital basis and adjusted for timing.

The deal underscores the continued appetite of specialist funders for investor-state claims, particularly in the mining sector where treaty protections offer a clear legal framework and potential nine-figure payouts.