Adams and Reese Partner and ethics attorney Lucian Pera, in the firm's Memphis office, was interviewed in a Bloomberg BNA and ABA Lawyers' Manual on Professional Conduct article, "Litigation Funding Contract Didn't Violate Ethics Rules," as the New York Supreme Court ruled that a class action law firm can't invoke ethics rules to void a litigation funding agreement that gave a hedge fund a security interest in the firm's accounts receivable.
The ruling allows Hamilton Capital VII to go forward with a $12 million lawsuit seeking repayment of principal and interest and damages for unjust enrichment from the law firm, which was given a revolving line of credit under the parties' agreement. Justice Shirley Werner Kornreich said defendant Shahin (Shawn) Khorrami and his law firm, Khorrami LLP, failed to show that the credit agreement—which allowed the firm to borrow $20 million in working capital from Hamilton—amounted to an improper fee-sharing agreement with a nonlawyer, in violation of New York Rule of Professional Conduct 5.4(a).
Pera told Bloomberg BNA he believes the court made the right decision.
Pera said he wasn't persuaded that Khorrami LLP's financing agreement was distinguishable from those upheld in other cases simply because it included a security provision that gave Hamilton an interest in the firm's revenues “that lived past the life of the loan.”
“Ownership means ownership,” Pera said, rejecting the notion that the clause gave Hamilton an equity stake in Khorrami LLP.
While most cases addressing the enforceability of litigation financing agreements have involved loans secured by an interest in anticipated recoveries from specific cases, Pera said the black letter of Rule 5.4 doesn't provide much support for arguments to invalidate agreements that are tied to a firm's general revenue.
Pera also said the litigation financing industry is evolving, and that third-party funders are increasingly willing to bet on firms rather than specific cases.
“Lenders are doing very different things,” he said. “It is still somewhat of a Wild West.”