Funding while a case is on appeal: weighing 2 key options

As any trial lawyer can attest, a case is not over just because an award or judgment has been rendered. One of the most common impediments to final resolution is an appeal.

Transitioning from the courtroom to the appeals process is expensive and can cause significant delays in when you’ll be compensated for your services. Consequently, firms faced with defending an award or petitioning a higher court for review can often suffer cash flow constraints due to the substantial resources they must devote to arguing on appeal.

Dealing with financial pressure and the additional stress of protracted litigation can be overwhelming. One way to abate the pressure before it starts is to make sure your firm is well financed from the outset. Keeping operations running smoothly and having adequate reserves for mounting case costs can help you stay focused on the merits of your case during the appeals process.

The good news is that when it comes to obtaining financing for your firm, there are a wide variety of options:

1) Non-recourse appeal funding

With non-recourse appeal funding, a funder estimates the likelihood of the success of your case and its value, and then provides you a cash advance based on a percentage of the projected value. If the appeal is lost or you don’t receive any fees, then you don’t owe the funder anything. If it is won, then you must pay the funder a return—generally at a steep rate or by pledging a considerable portion of your award.

On the surface, this may look like a solid option for staying afloat during a long-waged battle when you’re unsure of whether you’ll be successful or want to limit your personal liability. However, it’s not without pitfalls. In many cases, non-recourse funding options aren’t truly non-recourse—if you were lose your case on appeal, and that one case served as the exclusive source of repayment, it’s possible that certain provisions in your contract could be triggered. These provisions, aptly named a “bad boy” guaranty, can potentially cause you or any guarantors to become personally liable for damages to the lender. This would render your non-recourse loan into a full recourse loan.

Many instances can trigger a bad boy guaranty, so being aware of them is crucial. The triggers, known as “bad acts,” can include such things as failure to perform under the funding agreement, fraud, misappropriation, intentional misrepresentation, bankruptcy, insolvency or fraudulent transfer. Non-recourse loans can be useful when used in the appropriate situation, but fully understanding your liability is key to making a sound decision.

2) Line of Credit

Unlike non-recourse appeal funding, a line of credit provides you with working capital that can be used for any law firm expense and isn’t tied the outcome of your appeal only. With a line of credit, you can leverage your entire case portfolio to secure the loan, providing a more stable source of funds accessible when you need it. Plus, doing so reduces the risk to the lender, which means you can receive much more reasonable rates than other non-recourse financing options.

Obtaining working capital for your firm through a line of credit rather than case funding is thought of as more of an investment in your firm—it’s there not only to see you through a large, complex case on appeal, but also to help stabilize operations and smooth out cash flow, allowing you to grow your firm while concurrently achieving the best outcomes for your clients.

Navigating the appeals process is a time-consuming and costly endeavor. Knowing everything can run smoothly in your firm while you remain focused on the case at hand is essential to your success. Having financing in place before crunch time can significantly cut down on the added stress you face while ensconced in litigation and researching all potential options before making a decision is key.