Ethical Litigation Funding in Texas

December 13, 2017

Litigation Funding in Texas: Is it Ethical?

By: Eric Chenoweth, Investment Manager and Legal Counsel

As the largest commercial litigation funding company in Texas, Bentham IMF is often asked by attorneys in the Lone Star State about specific ethics issues and their relation to funding.

In Texas and elsewhere, Bentham helps law firms and commercial litigants gain access to the justice system by investing in cases that may not otherwise have been able to proceed without financial assistance from a funder. We are highly selective about the cases we take, and only provide non-recourse financing to meritorious commercial cases with a high likelihood of success.

In 2014, we created and adopted a Code of Best Practices in an effort to increase transparency into our funding operations as well as to codify the ethical standards we abide by. As our team is comprised of talented litigators who’ve worked for some of the most prestigious law firms in the country, we are well-versed in the ethical issues that face litigators and firms when they consider funding options.

Though funding has become a more common tool for commercial litigants and their lawyers in recent years, we still receive questions from potential litigants about basic ethical issues. Certainly, one of the most fundamental is whether funding is even allowed under their state’s legal ethics rules.

The answer, of course, is an unequivocal yes. Texas, in particular, has a long history of alternative funding arrangements, as Texas firms helped pioneer and popularize the use of contingency fees. Funding is a logical extension of that tradition. It is designed to help firms and litigants reduce the risks associated with a full-contingency arrangement. By providing fees in advance, a funder allows lawyers to focus squarely on their cases, rather than on how they will finance them. For litigants, funding ensures that they can afford to hire the most qualified counsel for their cases.

Texas, additionally, has no lingering impediments to funding from maintenance or champerty. As Cornell Law School Professor W. Bradley Wendel recently wrote for The Advocate, a publication of the Texas Bar Association Litigation Section, lawyers are prohibited under the Texas Disciplinary Rules of Professional Conduct from obtaining a proprietary interest in the underlying subject of a litigation. Yet, “this does not mean that third parties are similarly prohibited from doing so,” Wendel said. “And in many states, including Texas, providing financial assistance to a litigant in exchange for a financial interest in the outcome is permitted.”

The courts have also weighed in. In his article, Wendel noted that in the leading Texas case on funding — Anglo Dutch Petroleum International Inc. v. Haskell, a 2007 case involving the use of funding in an oil-and-gas industry lawsuit — the First Court of Appeals showed that Texas “is not one of the states that continues the ancient common-law prohibition on champerty and maintenance.”

Wendel also remarked that the court found funders “purchase a contingent right to a portion of the plaintiff’s recovery. The funding agreement does not create an absolute obligation on the part of the plaintiff to repay the advance. As a result, … these transactions are investments, not loans, and therefore not subject to state usury limitations.”

Litigation investments often lead to another common ethical question among attorneys and litigants: Does financing by a litigation funder entitle it to retain an element of control in the case? The answer is no.

Bentham essentially acts as a silent partner, providing financial assistance and sharing in the proceeds from a successful recovery. While we may receive updates about the progress of the case, we do not dictate legal strategy nor control the terms of settlement.

If you have more questions about ethical funding in Texas, or to simply learn more about our funding options, we would love for you to contact us for a consultation.