Take it to the bank
Local attorneys get creative to finance big cases
Friday, September 27, 2013 7:00 AM
Brad Schroeder was four years into litigating his first class-action lawsuit when the bills for hiring expert witnesses were starting to come due.
“It got to the point where I was going to have to borrow some money just to get through it,” he said.
Schroeder’s problem is faced by many litigators: how to cover the costs associated with pursuing a case that you might not win on behalf of clients who don’t have the financial wherewithal to cover ongoing expenses.
He turned to a source used by a great many Greater Des Moines litigators: The local banker. Another growing trend is to to turn to litigation financers who fund a case in exchange for a share of any judgment. Steve Wandro, a prominent Greater Des Moines attorney, said he is leery of the practice, but with bank financing difficult for all borrowers, including lawyers, he anticipates a time when he will use independent funders.
The investors frequently are groups of lawyers who pool their money and invest in cases, frequently class-action lawsuits. It helps litigators from small firms – Schroeder, for example, has four attorneys in his Hartung & Schroeder P.C. in Des Moines – take the risk of pursuing a case in which there is no guarantee that they’ll be paid.
The trend has yet to land in any big way, if at all, in Greater Des Moines. A Business Record call to one prominent law firm drew the response that “no one around here has heard of it.”
Schroeder and a few other litigators are aware that investor funds are available, but they are leery of the practice.
“It raises the question of who is calling the shots,” said Des Moines attorney Steve Wandro, who has been involved in several class-action lawsuits.
Wandro said the investors are not shy about marketing their services. He receives emails and telephone calls at least once a week from such investment groups.
“I can see a time when I’ll have to use them,” he said.
Take it to the bank
For now, Schroeder and Wandro use the tried-and-true business practice of using their own savings combined with getting an operating line of credit from a bank.
In 2004, Schroeder filed a lawsuit on behalf of Des Moines resident Lisa Kragnes alleging that the city of Des Moines was charging an illegal tax by collecting money from the city’s utility customers. The city called it a franchise fee and claimed the money was needed to pay for crucial municipal services.
Kragnes discovered the fee on her MidAmerican Energy Co. utility bill. The company collected the money and turned it over to the city. Recently divorced, she was watching every penny. Her ex-husband recommended that she contact Schroeder, whose firm specialized in family and business law, about the 1 percent fee added to her bill. That fee – Polk County District Judge Joel Novak has ruled that was an illegal tax – eventually grew to 5 percent.
Schroeder said he first had to consider whether to take the case.
“I assumed I was going to have to come up with some cash,” he said. Clients rarely have the $600,000 on hand to cover the costs of hiring expert witnesses and the additional expenses of chasing a case through inevitable appeals. “I try to keep a sufficient amount of money on hand so that I don’t have to borrow,” he said.
The city of Des Moines was in no mood to drop the franchise fee after Judge Novak ruled in 2006 that the fee was in fact an illegal tax. It appealed, and lost, before the Iowa Supreme Court. The city kept appealing, losing every appeal, including one to the U.S. Supreme Court.
To finance the nine-year case, Schroeder employed another tactic that is common among litigators handling complex cases. He brought in two lawyers from other Greater Des Moines law firms. He wanted their expertise in handling class-action cases, but he also wanted their financial support.
“You’re trying to keep an eye on who the good litigators are, but you’re also looking for some guys with deep pockets in anticipation it doesn’t go your way,” he said. Schroeder brought in Bruce Stoltze of Stoltze & Updegraff P.C., who had extensive experience in class-action cases, and Steve Brick of Brick Gentry P.C., a prominent Greater Des Moines law firm that brought legal expertise and deep pockets.
Nevertheless, in 2008, Schroeder went to Earlham Savings Bank and told bank officials that he needed a loan to pay bills in the Kragnes case. He already was a bank customer. And the loan process was straightforward.
“They basically told me to bring in some tax returns,” he said.
Schroeder obtained a $200,000 line of credit at an interest rate of about 6 percent – “a little higher than normal,” he said. After borrowing about $100,000 against the line of credit, the loan was paid off in two years.
Time slows between verdict and payday
Earlier this month, Schroeder filed a motion for what amounts to the bill in the Kragnes case on behalf of himself, Stoltze and Brick. If approved, the attorneys and their firms would receive about $15 million of the nearly $40 million the city has been ordered to gas and electric utility customers who paid the franchise fee.
Schroeder said that if someone had offered nine years ago to pay him $300 an hour to take the Kragnes case and pay his expenses, “I would have taken it in a heartbeat.”
Instead, he took the case knowing that there might not be a payday.
The risk factor is where litigation funding comes into play, Wandro said.
Such financing typically comes in two forms.
One is post-judgment financing, in which groups will finance an attorney’s expenses and receive a percentage of a settlement once it is paid, which can be several years after a final ruling.
“They charge a very hefty interest rate,” Wandro said. “The only risk is that the settling party doesn’t pay up.”
The other form is pretrial financing, which has drawn the attention of private equity groups as well as groups of attorneys who form their own litigation funding companies. The financiers take on the risk of litigation.
“That gets you into conflict (of interest) situations,” Wandro said. “That’s the point that always concerned me. Who’s calling the shots in the litigation, the financer who’s advancing funds or the client? That’s much riskier; the cost of the financing is much higher, because the financer is taking on the risk of litigation.”
What makes such financing attractive is that the financial crisis has led banks to become more conservative in lending to lawyers as well as other businesses, he said.
Wandro said that he finances cases by using a standard bank loan, putting up his receivables as security.
“Prior to the credit crunch and the cratering of the real estate markets, it was not difficult to get credit,” he said. “But since that time, there has been a huge contraction in the credit market for attorneys.”
Wandro said he would not borrow based on a specific case, but would tell a lender that a contingency fee could be included in his receivables.
Litigation financiers fill that void. The payoff can be generous for them, with the money being advanced for a return of up to 25 percent of a settlement.
“I get emails and cold calls all the time saying ‘consider us as your financing source,’” Wandro said.
For now, he is not ready to return the call.
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