The interests of money and legal ethics have a way of conflicting with each other–as is evident in a number of current developments in the legal industry.

The acceleration of the recent trend of private investors putting money into other people’s lawsuits has prompted debate over what the legal status of the lending should be.  According to an article last month in the New York Times, about $100 million a year is being lent to plaintiffs to cover housing, medical care and other expenses, in nearly every case with the proceeds to be repaid only if the plaintiff wins. The cost of the loans can exceed 250% of the amount lent.

The question is whether these loans should be subject to usury limits or other state laws that protect borrowers. Some states, including Colorado and Maryland, have ruled that the lenders must comply with consumer lending laws.  A bill in Rhode Island makes clear that lawsuit lending would be subject to the same state regulations as other kinds of lending and a bill in Arkansas would ban lawsuit lending completely.

Other states, including New York, have ruled that the companies are not subject to those laws. 

In 2008, the industry’s trade group, the American Legal Finance Association, claiming to take a higher road by proactively seeking a solution, undertook to settle the issue through a legislation sweep. Ohio, Maine and Nebraska have since passed laws establishing more lenient regulations for lawsuit lenders and similar bills are pending in Alabama, Arkansas, Kentucky, Indiana, Maryland, Tennessee and Nevada.  Efforts in other states, including Illinois, have so far failed.

In addition to pondering the legal status of this type of lending, courts are also becoming privy to the details of its internal workings.  The internal conflict in a failed Juridica investment in an arbitration against Romania recently became public after the claimant in that action filed a Houston federal district court racketeering complaint against Juridica, revolving around the issue of what information the funder is permitted to see without compromising attorney client privilege.  Juridica argued that it was entitled to see material relating to the plaintiff’s defense in order to determine whether to continue funding the matter.  The complainant argued that  Juridica’s position compromised client confidentiality and its ability to direct its own case.

While not yet a frequent problem–out of 23 cases in which Juridica has invested or committed $127 million, this is the only one requiring a write-down, according to Juridica’s regulatory filings–the fact situation raises questions about whether the business model will run afoul of US ethical standards.

Of course, with respect to practice ethics, the ABA can do for lawsuit investors what it is doing for laterals and for those attempting to form "alternative business structures" or ABSs, composed of non-lawyer investors–another trend barking up our tree, where conflicts of interest issues also are likely to arise. 

North Carolina already has pending a bill that would allow up to 49% non-lawyer ownership of legal practices and that addresses the conflicts issue directly–non-lawyers would be prohibited from interfering “with the exercise of professional judgment by licensed attorneys in their representation of clients,” and if there is an inconsistency or conflict between the duties to the court, to clients, and to shareholders, the duty to the court “shall prevail over all other duties,” while the duty to the client prevails over that to shareholders. Also, external shareholders controlling less than 5% of the voting stock would not be deemed relevant for a determination of conflict of interest. A problem may be that whatever success there is at the state level in regulating this sort of issue, firms with offices outside of that state will not be able to rely on this legislation.

Until these issues become a matter of settled law, lawyers will have to be on guard against the potential conflicts of interest that a financial interest by a third party in any aspect of a legal matter poses, not only in terms of whether the financial arrangement is one that is conscionable, but also whether the influence of money skews either the reality or perception of justice.

Although, we may just be flattering ourselves about how attractive we and our business is to Big Money.  In case you had your eye on Goldman Sachs, the sometimes-darling sometimes-monster of the financial investing world, you might take a look at the blogosphere discussion of why no firm of their caliber would in fact invest in Big Law.