Hergott: Litigation lenders rapped

His lawyer required Mr. LeBlanc to come up with the money to pay for disbursements.

An October 18, 2012, judgment from the highest court in New Brunswick is paving the way for a change in the law in other jurisdictions, including British Columbia.

A 17-year-old motorcyclist, a Mr. LeBlanc, was seriously injured in a crash when an oncoming van forced him off the road. The defending insurance company denied liability, blaming LeBlanc for being the author of his own misfortune.

LeBlanc hired a lawyer. His lawyer required Mr. LeBlanc to come up with the money to pay for disbursements, the dollars that would be spent taking the case to trial. Those disbursements ended up costing over $26,000.00.

There was a standard contingency fee arrangement, with the lawyer’s fees to be paid as a percentage of the compensation LeBlanc ended up with, if any.  I say “if any” because no compensation would be payable if LeBlanc was found to be at fault.

The lawyer was willing to risk his fees on the outcome of the case, but was not prepared to risk putting his own money out to pay for the disbursements. In the words of the New Brunswick Court of Appeal: “Only a foolhardy lawyer would have agreed to undertake that risk”.

LeBlanc was forced to find financing. He went to two banks, asking for a line of credit. Both banks refused him credit.  No surprise there:  why would a bank give a line of credit to a 17 year old, disabled from working, on the basis of an uncertain legal claim?

There was one company willing to lend money to LeBlanc: Seahold Investments. Seahold Investments is what I refer to as a “litigation lender”. They take the risk of lending money to fund litigation.

They are paid handsomely for taking that risk.  The interest rate referred to by the New Brunswick Court of Appeal was 2.4 per cent per month, compounded monthly. By my calculation, the equivalent annual rate is almost 33%.  I expect there were set-up charges on top of that interest rate as well.

The interest expense LeBlanc ended up incurring to finance the disbursements was over $14,000.00, approximately 54 per cent of the cost of the disbursements themselves.

LeBlanc was successful. He was completely exonerated of fault, and able to move forward to pursue fair compensation for his injuries and other losses.  He was awarded costs against the defending insurance company.

The issue that the New Brunswick Court of Appeal faced was whether or not LeBlanc could recover reimbursement of the over $14,000.00 of interest as part of his “costs”.

The Court of Appeal considered whether or not the high interest loans were necessary, and found: “Without financial assistance from a third party, Mr. LeBlanc would not have been able to enforce his rights in the courts. The loans granted by Seahold Investments were therefore essential to allow Mr. LeBlanc access to justice…”

Addressing the necessity square on:  “The loans taken out by Mr. LeBlanc were necessary to prevent a most unjust outcome for his legal dispute with the respondents:  the settlement of his claim for a pittance or perhaps even its abandonment.”

As you might have already anticipated, the defending insurance company was ordered to pay the interest.

The law in B.C., at present, does not allow for recovery of the cost of disbursement financing as costs. That issue is poised to go to the B.C. Court of Appeal for consideration.