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Select Ethical Issues Present in Litigation Funding

Select Ethical Issues Present in Litigation Funding

The following article was contributed by John J. Hanley, Partner at Rimon Law Litigation financing is on the rise in the United States and provides some claimants a valuable means for paying the costs of pursuing a legal claim. Lawyer involvement in litigation financing transactions raises many ethical issues for a lawyer such as competence, duty of loyalty, the potential waiver of privilege and interference by a third party, to name a few. Competence The first rule for lawyers under the New York Rules of Professional Conduct (the “NY RPC”) is competence.[1]  Lawyers and law firms should tread carefully when considering undertaking client engagements in a subject area in which they do not have the requisite knowledge and skill to provide competent representation of their clients. Official Comment 1 to Rule 1.1 provides in part that factors relevant to determining whether a lawyer has the requisite knowledge and skill in a matter include the relative complexity and specialized nature of the matter, the lawyer’s general experience, the lawyer’s training and experience in the filed in question, and the preparation the lawyer is able to give the matter.[2] This does not mean that lawyers cannot deal with matters in which they are initially unfamiliar.  Indeed, the American Bar Association points out in comments to Rule 1.1 that “[a] lawyer need not necessarily have special training or prior experience to handle legal problems of a type with which the lawyer is unfamiliar. The analysis of precedent  . . . and legal drafting are required in all legal problems. Perhaps the most fundamental legal skill consists of determining what kind of legal problems a situation may involve, a skill that necessarily transcends any particular specialized knowledge. A lawyer can provide adequate representation in a wholly novel field through necessary study.”[3] According to the New York City Bar Report to the President by the New York City Bar Association Working Group on Litigation Funding: “[a] lawyer whose client seeks third party funding should determine at the outset whether he or she has the transactional experience and sophistication required to negotiate a beneficial agreement with the funder or whether a specialist in the field should be involved.”[4] Competence in litigation finance includes familiarity with various litigation financing structures and privileges against disclosure, among others.[5]  For example, the structure may involve different types of collateral, different means of financing legal fees and expenses, the manner in which funding is disbursed and the return structure of the financing.  A lawyer concentrating her or his practice on litigation funding may also be better able to determine “market” terms of the financing. Duty of Loyalty and the Lawyer’s Financial Interests Of course, the lawyer is the client’s fiduciary and agent who owes his or her client undivided loyalty and is forbidden from putting her interest above that of the client. The New York State Bar Association, Committee on Professional Ethics reminds lawyers that their financial interests must not interfere with the representation of the client.[6] Ordinarily, there is nothing adverse to a client about a lawyer getting paid for legal services[7] but in a litigation funding transaction the lawyer could have a personal interest in respect of the transaction. For example, the litigation funding agreement may facilitate payment of a portion of the lawyer’s fees or ensure certain expenses borne by the lawyer will be repaid.[8] The American Bar Association posits that if a lawyer has a relationship with a litigation funder that creates a financial interest for the lawyer . . . it may interfere with the lawyer’s obligation to provide impartial, unbiased advice to the client (the “ABA Report”)[9]. The ABA Report goes on to say that a lawyer with a long-term history of working with a particular funder may have an interest in keeping the funder content which would create a conflict even in the absence of an explicit agreement. The NY RPC, specifically Rule 1.7(a)(2), like the Model Rules of Professional Conduct, prohibits a lawyer from representing a client if “there is significant risk that the lawyer’s professional judgment on behalf of a client will be adversely affected by the lawyer’s own financial, property or other interest.” Additionally, Rule 5.4 of the NY RPC, and its analogous provisions in other jurisdictions, requires that a lawyer maintain independence[10].  Consequently, such lawyer, representing a client in a matter for which litigation funding is sought, in general may be able to represent the client with respect to the litigation funding agreement but should disclose the lawyer’s relationship with the funder and receive the client’s informed written consent. Communication and Confidentiality Rule 1.4 of the NYRP Conduct requires a lawyer to communicate promptly, and provide complete information, to the client regarding the matter, and to reasonably consult with the client about the means to achieve the client’s objectives.[11] Reputable litigation funders are usually careful to provide in the litigation finance documents that the funder will not be involved in discussions between the lawyer and client regarding the matter, and that the funder will not direct or control the litigation. In certain circumstances an inexperienced lawyer may consider involving the funder in discussions about case strategy, but caution is in order. If a party other than client and the attorney is involved in communications involving legal issues or the case, the attorney-client privilege and confidentiality of communications is likely breached and the attorney may be guilty of legal malpractice. Indeed, Rule 1.6 of the NYRPC requires that a lawyer not knowingly reveal confidential information, or use that information to the disadvantage of the client or advantage of the lawyer or a third person, subject to certain exceptions.[12] Conclusion An attorney who represents a client in a matter that is to be funded pursuant to a litigation funding agreement should consider the ethical implications discussed in this Insight, among others, before representing the client in the funding agreement. Counsel would avoid all of the ethical considerations that may arise by referring the client to an outside attorney experienced in litigation finance.
[1] N.Y. Rules of Prof’l Conduct R.1.1.  The California Rules of Professional conduct and the American Bar Association Model Rules of Professional Conduct (“MRPC”) also make this the number one rule.  Indeed, all fifty states and the District of Columbia have adopted legal ethics rules based at least in part on the MRPC. [2] N.Y. Rules of Prof’l Conduct R.1.1, Comment [1]. [3] Available here ABA Comment to Rule 1.1 [4] Report to the President by the New York City Bar Association Working Group on Litigation Funding (February 28, 2020). [5] Others includes, without limitation champerty, maintenance, barratry, usury and required disclosures. [6] N.Y. Comm. on Prof’l Ethics, Formal Op. 769 (November 4, 2003). [7] The State Bar of California Standing Committee on Professional Responsibility and Conduct Formal Opinion No. 2020-204. [8] Id. At 3. [9] American Bar Association, Informational Report to the House of Delegates Commission on Ethics 20/20. [10] N.Y. Rules of Prof’l Conduct R.5.4. [11] N.Y. Rules of Prof’l Conduct R.1.4(a). [12] N.Y. Rules of Prof’l Conduct R.1.6(a). See also the American Bar Association’s Model Rule 1.6.
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YPF Dispute Under Consideration in US Court

By John Freund |

A three‑judge panel of the U.S. Court of Appeals for the Second Circuit is weighing whether the case involving the Argentine nationalisation of oil company YPF should have been litigated in the U.S. in the first place. The original ruling awarded approximately $16.1 billion to minority shareholders.

An article in Finance News highlights that Burford Capital—which provided substantial litigation finance support for the plaintiffs—is now under scrutiny, and the uncertainty has already knocked more than 10 % off Burford’s share price.

According to the report, two of the appellate judges expressed scepticism about whether U.S. jurisdiction was appropriate, signalling a possible shift in the case’s trajectory. The funding provided by Burford makes this more than a corporate dispute—it's a pivotal moment for litigation funders backing claims of this magnitude. The article underscores that if the award is overturned or diminished on jurisdictional grounds, the returns to Burford and similar funders could shrink dramatically.

Looking ahead, this case raises critical questions: Will funders rethink backing multi‑billion‑dollar sovereign claims? Will lawyers and funders factor in jurisdictional risk more aggressively? And how will capital providers price that risk? The outcome could influence how global litigation finance portfolios are structured—and the appetite for large‑ticket sovereign cases.

FIO Flags Rising “Tort Tax” Driven by Third‑Party Litigation Financing

By John Freund |

A recent industry move sees the Federal Insurance Office (FIO) of the U.S. Department of the Treasury warning that the growth of third‑party litigation funding is putting fresh stress on the U.S. property‑casualty insurance sector. The FIO’s 2025 Annual Report on the Insurance Industry highlights the so‑called “tort tax” as a new burden, with insurers and consumers increasingly feeling the cost.

An article in Insurance Business explains that third‑party litigation funding—in which outside investors finance lawsuits in exchange for a share of potential settlements—is now viewed by federal regulators as a significant factor driving up claims costs for insurers.

The report quantifies the burden, pointing to an average annual cost exceeding $5,000 per household. In response, insurance trade groups like the American Property Casualty Insurance Association (APCIA) are throwing their weight behind federal bills such as the Litigation Transparency Act of 2025 and the Protecting Our Courts from Foreign Manipulation Act of 2025, both of which aim to bring greater scrutiny and disclosure to litigation funding practices.

The report also draws on lessons from state-level reforms. In Florida, new legislation that slashed legal filings by over 30% has already helped insurers reduce premiums and issue customer refunds—offering a case study in how tort reform can yield near-term results. While the report also examines the insurance industry’s evolving role in climate resilience and loss mitigation, it makes clear that rising legal system costs remain an urgent and unresolved challenge.

For the legal funding sector, the report underscores a shifting regulatory landscape. With calls for federal oversight gaining traction, funders may soon face new transparency requirements, rate limitations, or reporting obligations. The FIO’s framing of litigation finance as a systemic cost driver is likely to spark renewed debate over how to balance consumer protection, insurer stability, and access to justice.

ClaimAngel Hits 18,000 Fundings, Sets New Transparency Benchmark in Litigation Finance

By John Freund |

The plaintiff‑funding marketplace ClaimAngel announced it has surpassed 18,000 individual fundings—a milestone signaling its growing influence in the legal funding arena. The platform, founded in 2022 and headquartered in Boca Raton, Florida, positions itself as a disruptor to traditional litigation finance models.

An release in PR Newswire outlines how ClaimAngel offers a single standardized rate of 27.8% simple annual interest and caps repayment at two‑times the amount funded after 46 months—significantly lower and more predictable than many legacy funders. The platform also claims to bring efficiency and transparency to the market by hosting a marketplace of over 25 vetted funders, allowing competing offers, and integrating directly into law‑firm workflows.

How claimants benefit: The core value proposition is to give plaintiffs “breathing room” when insurers use time as a weapon, enabling lawyers and clients to press for better settlement outcomes rather than settling prematurely under financial pressure. With over 500 plaintiff‑side law firms now using the platform, ClaimAngel is positioning itself as a credible alternative to more opaque “Wild West” funding practices—where a $5,000 advance could balloon into a $30,000 repayment by settlement.

ClaimAngel is striking at the heart of two key pain points: (1) lack of standardized pricing and (2) lack of transparency in funding terms. By offering a fixed rate and capped repayment in a marketplace format, it may prompt other players to rethink fee structures and disclosure practices. The milestone of 18,000 fundings also signals broader acceptance of tech‑driven innovation in a space often slow to modernize.