Litigation Financing: A Trap For The Unwary?

Ever wonder how some plaintiff’s attorneys fund their cases or smooth out their cash flow?  In a recent case, it seems that one method is to obtain funding from outside sources secured on the estimated value of the firm’s cases, that is, on the settlement or verdict value of each case.  According to Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., the prevailing rate of interest in these transactions is substantial ranging from 3.5% to 3.99% compounded monthly or an annual rate of nearly 40%!

Like many states, New York makes it a criminal offense to charge rates of interest on a loan beyond certain stated percentages.  In Kelly, the plaintiffs argued that the arrangement that resulted in funding of over $1,200,000 was, in fact, a loan subject to New York’s usury laws.  In contrast, the defendants argued that the usury laws only apply to “loans,” and not to transactions that involve interest to be paid based on a contingency not in the control of the debtor. In this case, the finance company contended that the contingency of whether a case settled or a jury returned a favorable verdict was not the  law firm’s control and therefore was not a “loan.”

In Kelly, it was bad news for the lawyers: the court held that the transaction was not a loan but an agreement that created an ownership interest in the proceeds of the lawsuits being prosecuted by the plaintiffs on behalf of their clients.

The Kelly case is a fascinating insider’s view of the recent trend of third party litigation financing where either law firms or their clients are advanced funds in exchange for a piece of the action on the tail end when the case settles or a favorable plaintiff’s verdict is obtained. Unfortunately, the price of admission is steep, with interest rates of near 40%.  These arrangements have ramifications for the defendants in these financed cases because the plaintiff’s settlement demands now must include not only the amount of outstanding medical bills or lost wages, but any sums owed to the third party financing companies.

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Alcohol Tolerance and Spoliation of Evidence Examined by NJ Court

Although frequently tragic, Dram Shop cases are never boring. They always involve a discussion of alcohol and the whacky ways that people find to get themselves in trouble. Dram Shop trials usually involve conflicting testimony about who drank what, when they drank it and the effect of that consumption on one or more persons.

In Davis v. Barkaszi, the jury was entertained by conflicting testimony about how much Justin Barkaszi had to drink at KC’s Korner bar before he got into a car accident while under the influence of alcohol. Some patrons recalled him consuming numerous shots of vodka while others recollected a far less raucous evening. Despite this disagreement, the medical records recorded a blood alcohol concentration (BAC) of .191%, well over the legal limit of .08% for operating a motor vehicle.

A key liability issue was whether the bar served Barkaszi when he was “visibly intoxicated.” During the trial, plaintiff’s expert testified that Barkaszi consumed 18 ounces of vodka. He also concluded that Barkaszi was a man of “average alcohol tolerance” based on statements that Barkaszi did not drink heavily on a regular basis. Thus, the plaintiff’s expert concluded that Barkaszi would have displayed evidence of “visible intoxication” while at the bar. The defense attorney planned on attacking this conclusion by eliciting testimony from witnesses including the plaintiff that Barkaszi drank much more heavily and frequently than assumed by plaintiff’s expert. According to the defense, Barkaszi had a high level of tolerance for alcohol and would not have demonstrated signs of “visible intoxication” at the bar despite his copious consumption of vodka.

In addition, KC’s Korner had a videotape system that ran on a continuous loop that taped over the prior footage after one week’s time. The bar owner was prepared to testify that he reviewed the tape after the accident, found that it corroborated his bartender’s version of the events and decided that there was no reason to preserve the tape. At trial, the court prohibited the bar owner from explaining his decision not to preserve the tape and gave the jury an “adverse inference” charge inviting them to conclude that the tape would not have supported the bar’s position at trial.

The New Jersey Appellate Division vacated the jury verdict in the plaintiff’s favor and remanded for a new trial. The court held that the bar should be permitted to develop evidence of Barkaszi’s customary alcohol consumption to demonstrate that he had a significant tolerance to alcohol, a concession that would undermine the opinion of plaintiff’s expert. Further, the Appellate Division held that the adverse inference charge on the issue of the supposed spoliation of evidence was improper because plaintiff never made the threshold showing that the bar violated a protocol or practice concerning the preservation of evidence.

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Closing Statements: How Far Is Too Far?

Trial lawyers relish the challenge of addressing the jury during closing argument. After laying the groundwork with the introduction of documentary evidence and testimonial admissions, defense counsel finally gets the opportunity to “connect the dots” and persuade the jury of the righteousness of his defense.

Just how far can a defense attorney go before he jeopardizes an otherwise hard fought victory? Where is the line between fair comment and an improperly prejudicial remark?

In Chappotin v. City of New York & Con Ed, the defendant’s main defense was that the plaintiff’s accident did not occur as he alleged and that plaintiff was unworthy of belief. During his summation, defense counsel urged the jury to reject the plaintiff’s story, arguing that “this is a man who has played the system going on 15 years [because he was already on disability]….here’s someone who doesn’t have a concern about getting medical care. He doesn’t have a concern about working…” Even more pointedly, defense counsel warned that “money is a great motivator. Now, Lord knows it’s true, that he’s looking for my money. And I don’t want to give it.”

Procedurally, the plaintiff’s attorney objected to only 2 of the 15 comments that plaintiff claims were beyond the pale of proper advocacy. The trial judge upheld those objections and gave a curative instruction. After the jury rendered a defense verdict, the trial court set the verdict aside based on those comments and an appeal followed.

The First Department reinstated the verdict and found that the defense counsel came close to, but did not overstep, the fine line between acceptable “rhetorical comment” and improperly prejudicial argument. The court also noted that plaintiff’s attorney failed to object at trial to 13 of the 15 comments and thus failed to preserve those objections on appeal.

Trial counsel walks a fine line between winning a bitterly contested trial at all costs and ensuring that the resulting verdict will stand up on appeal. When trying cases, trial counsel must be bold, creative and sometimes uncomfortably direct and aggressive. The hard part is discerning when how far is too far, putting a favorable verdict in jeopardy on appeal.

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