December 07, 2010
Financing Divorce Litigation
Posted by Christine Hurt

I don't like talking about divorce, or really litigation, but I like talking about finance.  Yesterday, the NYT had a front-page story about Balance Point, a firm that finances divorce litigation in return for a "reasonable percentage" of the ultimate settlement.  (This percentage is not stated.)  Litigation finance companies, like contingency fees, can serve a legitimate purpose of allowing meritorious claims to continue to judgment.  Without these vehicles, parties might be forced to end litigation or settle for nonoptimal amounts due to liquidity problems.  If you believe in a common law system of precedent, then you would like the system to follow the law, not just the money.

However, there are some concerns that the article does not raise.  First, the reason that divorce cases are not helped by contingency fee arrangements is that they are prohibited in that area.  The Model Rules of Professional Conduct, Rule 1.5(d) expressly prohibit contingency fees in domestic relations cases where the fee is contingent on the securing of a divorce or obtaining a property settlement.  One policy reason for this is that the law is meant to encourage (or at least not discourage) reconciliation.  If your divorce lawyer, who may become a confidante and trusted advisor, will only get paid if you divorce and get a settlement, she may steer you away from reconciliation.  So, what about Balance Point?

At least on the website, there is no mention of how Balance Point gets repaid if there is no settlement.  The website does not mention reconciliation at all. 

The site speaks of Balance point as being able to become part of the legal team, providing experts who are experienced in finding and valuating assets.  The NYT article quoted the founder, Stacey Napp, whose own protracted divorce showed here that there might be a market for this type of financing, as saying that the cases they are interested in have estimated assets of $2 to $15 million.  Apparently these are the fighting cases.

The website does seek to assure attorneys that bringing in Balance Point will not violate ethical rules on referrals or sharing profits with nonattorneys:  "We have researched the issue of legal referrals to Balance Point by retaining the premier expert in the field of legal ethics. This Beverly Hills lawyer has provided us with an opinion letter and confirmation that the Balance Point model meets the ethical standards by which lawyers are bound."  According to the website, I can ask to see this legal opinion, but I have not gone the extra mile for this blog post.

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