Goldberg Segalla attorney Matthew H. Feinberg authored a Law360 article that considers how litigation funding arrangements may expose attorneys to liability from both lenders and clients.

In the article, “Litigation Funding Could Create Ethics Issues for Attorneys,” Matthew uses the example of Benito v. Lake, a complaint filed on October 20, 2025, in the Supreme Court of the State of New York. The plaintiff, an investment professional, alleged that attorney Edward Lake and his law firm were “effectively running a Ponzi scheme” based on the funding the firm was receiving to prosecute multiple cases. The plaintiff alleges breach of contract and fraudulent inducement, alleging Lake burned through more than $15 million in investor funds, saying “neither Lake Law nor Ed Lake ever came close to delivering on their promises.” The suit seeks $2.55 million in compensatory damages, an $8.55 million constructive trust over firm assets, and punitive damages.

“This example prompts some questions,” Matthew says. “It is logical to consider how such a litigation funding lawsuit might affect the underlying claims. If an attorney jeopardizes the claims, even based upon the mere allegations contained in a complaint, the attorney could face liability for legal malpractice or other theories of liability.”

Matthew then cites the following under New York law – in order to plead a cause of action for legal malpractice, a plaintiff is required to plead: (1) the existence of an attorney-client relationship between the parties, (2) negligence by the attorney-defendant in its legal representation, (3) proximate cause between the attorney-defendant’s negligence and the plaintiff’s loss, and (4) actual and ascertainable damages suffered by the plaintiff.

“If an attorney mishandles the funds, thereby breaching the standard of care, it is possible such a breach could proximately cause damages to the client,” he says. “Also, depending on the facts of the underlying litigation, it is reasonable to assume there could be a situation where there is a breach of a fiduciary duty.”

Matthew also touches on the complex situation that could arise in the process of working for investors and the client.

“Considering that the lawyer owes the client fiduciary duties, it is reasonable to think about what duties, if any, are owed to the investors,” he begins. “If a conflict arises between the investors and the client – such as the investor seeking attorney-client privileged documents or otherwise confidential information about the attorney’s client – the lawyer could be put in a jeopardizing situation. Such situations could include having to decide what information can be disclosed to the investors without the attorney unlawfully disclosing privileged information, or having to decide whether a settlement is in the best interest of the client or the best interests of the investors, as the two might not align.”

Matthew argues if the litigation funding appears more like a business transaction entered into between the lawyer and client, that could run afoul of the New York Rules of Professional Conduct, which prohibits such agreements. Additionally, if an attorney uses litigation funding without disclosing it to the client, that could lead to a potential fraud claim. In any litigation funding lawsuit, the attorney will surely be asked to produce information and documents that are likely cloaked with an attorney-client privilege.

“It is safe to say that high-stakes litigation can be costly, but attorneys contemplating the use of litigation funding, which could greatly benefit the client if used properly, should think long and hard about the facts of the case and how the funds should be applied.”

READ THE FULL ARTICLE HERE (SUBSCRIPTION REQUIRED)

MORE ABOUT GOLDBERG SEGALLA’S Matthew H. Feinberg:

Matthew counsels and defends corporate officers, attorneys, stockbrokers, accountants, designers, and other industry professionals in a range of professional liability matters. He draws on years of litigation experience in professional liability defense, including directors and officers (D&O), as well as commercial litigation, premises liability, construction defects, business torts, criminal defense, personal injury, and New York Labor Law. Matthew’s practice also encompasses emerging technologies, blockchain, cryptocurrency, Web3, and NFT matters.