Litigation lender contracts leave some lawyers indebted for double the amount borrowed

Practice finance

Litigation lender contracts leave some lawyers indebted for double the amount borrowed

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Lawyers who have received litigation funding from Pravati Capital are sometimes caught off guard by contractual arrangements that require them to owe more than double the amount they borrowed.

Pravati Capital has brought at least 14 lawyer-borrowers into arbitration. At least seven of them were ordered to repay more than double the amount they had borrowed no more than two years ago, reports Bloomberg Law.

Bloomberg Law spoke with an attorney, Brownsville, Texas, 81, attorney Christopher Phillippe, who borrowed $ 55,000 from Pravati Capital in March 2018. An arbitrator ruled he owed more than $ 130,000 just 21 months after receiving the money, even though Phillippe only made $ 3,000 in the one case he won that was in the contract.

Litigation funders usually give money to lawyers who prepare a lawsuit and only demand reimbursement if the case wins.

“Pravati contracts regularly extend the industry’s win-win concept by asserting a claim in any matter that passes through the door of a law firm and ensuring that it will be paid even if a major lawsuit goes through. is lost, ”the article reports.

Pravati Capital said its contracts are not difficult to understand. He points out that the arbitrators ruled in his favor in all but one case.

“No one here has been misled,” Pravati said. “People who complain to Bloomberg [Law] signed a contract, accepted advances and chose not to honor their end of the bargain.

Pravati Capital typically charges interest rates of around 18% to 22% per year. In Phillippe’s case, the interest was set at 20%. But in his case, the Pravati award, including interest and fees, “was the equivalent of a deal that was earning about 78% interest a year,” Bloomberg Law said.

“The technical reason that lenders can charge such high interest,” Bloomberg Law explained, “is that their transactions are structured as“ non-recourse ”investments, which means they don’t have the right to perceive only the specific case gains in the agreement. If a court were to find that an agreement gave a funder a right to income from more than those cases, or whatever their outcome, this could be considered like a “recourse” loan, which has limits on interest rates. ”

Bloomberg Law has pointed out these contractual provisions that trip some lawyers:

• Pravati agreements often tie the loan to clusters of cases, and any gain can trigger repayment obligations. “Investing in what the industry calls a law firm’s business ‘portfolio’ reduces the risk for the funder because they are more likely to raise funds,” the article reports. “In this approach, the more cases there are in the portfolio, the lower the risk. “

• Many Pravati contracts list specific cases that are subject to agreement, and they also provide that the law firm will provide “all cases as collateral”, including any fees that the firm “is or may subsequently receive. place “.

“In Phillippe’s case,” Bloomberg Law reports, “he said he believed he agreed to reimburse Pravati from the fees generated by the 12 cases listed in his contract. He was surprised when the lender said he violated the deal by failing to pay Pravati “a single penny” of income in other cases not specifically listed in the deal.

Disputes over cases seen as collateral is an issue in several Pravati disputes, Bloomberg Law said.

• Pravati contracts often include an “interest reserve,” which is used to prevent interest payments from accumulating for two years as business progresses. But interest is then calculated from a principal amount that includes both the amount loaned to the business and the amount of the interest reserve it has funded.

“A Bloomberg Law analysis of the provision in several Pravati agreements shows that the interest reserve provision is the main reason that agreements can become so expensive so quickly,” the article reports.

• Pravati contracts require companies to provide regular financial and case reports. If the reports are not provided, Pravati may consider the borrower to be in default and charge an additional 6% annual interest. A default can also convert the case into a recourse loan that requires repayment, even when there is no gain in any of the cases listed, according to the allegations of a former employee who spoke to Bloomberg Law.

Alexander Chucri, CEO of Pravati, said Phillippe valued his business at $ 4 million before receiving the company money, and he threatened to file for bankruptcy when he fell behind on payments.

Chucri said lawyers chose the interest reserve provision after the company explained the benefit of avoiding capitalization. There is “nothing bad” about this provision, Pravati said.

Chucri said lawyers “tend to withdraw” from collection attempts.

“We have no advantage in bringing these guys into officiating. It’s a challenge for us, ”Chucri told Bloomberg Law. “But that’s how we cover our costs as they try to defraud us. … I can’t let go.

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