Over the past decade, there has been a substantial rise in the number of attorneys using litigation funding to help prosecute or defend a case. This area is largely unregulated in New York. While this new way of practicing law might help lawyers advocate for clients, it could open a lawyer to liability from the lender, and maybe the client. In a recent suit filed in New York state court, a purported investment professional alleged that counsel was “effectively running a Ponzi scheme” based upon the funding it was receiving to prosecute cases.

Counsel, a mass tort attorney who has sued various large companies, is alleged to have burned through more than $15 million, which was monies collected by investors. According to the pleading — which sounds in breach of contract, fraudulent inducement and seeks an accounting of counsel’s finances based upon allegations of co-mingled investor funds and diverted monies for inappropriate purposes — the suit seeks $2.55 million in compensatory damages, an $8.55 million constructive trust over firm assets, as well as punitive damages.

This example prompts some questions. It’s logical to consider how such a litigation funding lawsuit might impact the underlying claims. If the attorney jeopardizes the claims, based upon the mere allegations contained in a complaint, the attorney could face liability for legal malpractice, or, depending on the facts, possibly breach of a fiduciary duty or even fraud. Furthermore, during discovery in any litigation funding lawsuit, the attorney will surely be asked to produce information/documents which are likely cloaked with an attorney client privilege.

In New York, the attorney-client privilege is the client’s to waive, not the attorney’s. Of course, the litigation funding needs to be disclosed to the client, as most of the time the funding lien is paid before the client receives the proceeds from the suit. The attorney engagement letter needs to be very clear to avoid potential pitfalls.

It’s safe to say that high stakes litigation can be costly, but an attorney thinking of utilizing litigation funding should think long and hard about the facts of the case and how the funds should be applied.