A Florida judge in December ordered an investment banker who orchestrated a shareholder lawsuit against Fresh Del Monte Produce to repay the company’s legal expenses, ruling that the case should not have reached trial.
Such financing also drains money from plaintiffs. Interest rates on lawsuit loans generally exceed 15 percent a year, and most states allow lawyers that borrow to bill clients for the interest payments.
The cost can exceed the benefits of winning. A woman injured in a 1995 car accident outside Philadelphia borrowed money for a suit, as did her lawyer. By the time she won $169,125 in 2003, the lenders were owed $221,000.
Lawyers are not required to tell clients that they have borrowed money, so the client may be unaware that there is financial pressure to resolve cases quickly. Lenders also seek detailed information about cases, which can jeopardize client confidentiality.
A federal judge in Delaware ruled in June that a company suing Facebook for patent infringement had to show Facebook documents that its lawyer had shared with a lender. Citing these issues, critics of lending for lawsuits say the practice should be banned.
“It sends shivers down the spines of general counsels all across the globe,” said Lisa A. Rickard of the Institute for Legal Reform, an arm of the United States Chamber of Commerce.
But proponents, who argue that people often need help to fight corporations, have won a series of victories in state courts and legislatures in recent years, overturning old laws that prohibited investments in lawsuits.
“If you want to use the civil justice system, you have to have money,” said Alan Zimmerman, who founded one of the first litigation finance companies in 1994, in San Francisco, now called the LawFinance Group. “If there’s less money, you’d have less litigation. But then you’d also have less justice.”
A Case in Point
A legal battle between residents of a faded Texas factory town and the BNSF Railway, the nation’s second-largest railroad company, highlights what some see as the benefits and others see as the excesses of lawsuits driven by borrowed money.
Somerville, Tex., 80 miles northwest of Houston, has hosted the noxious work of treating wood to make railroad ties for more than a century. The railroad runs through the town, dividing a small grid of residential streets from the lumber yard and treatment plant where stacks of wood are soaked in preservatives.
Dennis L. Krueger crossed the tracks to begin work at the factory the week after he graduated from the local high school, in 1974. Three decades later, he was found to have a malignant skin cancer that his doctor said was most likely caused by prolonged exposure to creosote, the tar oil in which the ties are soaked.
Mr. Krueger, who is 54 but looks much older, reduced by manual labor and medical treatment, is suing the railroad for damages, claiming that BNSF failed to provide basic safety equipment or to warn workers that the federal government had linked creosote with skin cancer.
He recalled cleaning the inside of the treatment tanks wearing no safety gear except steel-toed boots and mule-skin gloves.
“I got so high off that stuff I’d be laughing one minute and crying the next minute,” said Mr. Krueger, sitting at the local Dairy Queen beneath old photographs of factory workers. “I’ve got a 2-year-old grandson. My goal was to live to 101. What I’d like is a fair shake from the railroad for missing out.”
Mr.Krueger’s lawsuit is financed by investors he has never met. His lawyer from Houston, Jared R. Woodfill, has borrowed more than $3.5 million from a New York hedge fund run by Stillwater Capital Partners, in a deal arranged by the litigation finance specialist Oxbridge Financial Group, also based in New York.
Mr. Woodfill first drove to Somerville in 2000 to meet with a former factory worker who has since died of skin cancer. He said that his work on that worker’s case, which BNSF agreed to settle in 2003, convinced him that toxic emissions from the factory had poisoned the town’s air, water and land.
Mr. Woodfill, who is 42 and the chairman of the Republican Party in Harris County, is empathetic and well-spoken. He found a ready audience in Somerville, which has declined with the railroad industry. The population peaked in the 1930s.
About 1,700 people still live in the timeworn residential section, but automation has further reduced employment at the factory, and a quarter of the households now live in poverty. Residents with a wide range of health problems embraced the idea that the factory was responsible.
Mr. Woodfill signed up workers with skin cancer, like Mr. Krueger, and those with gastrointestinal cancers that he says can be caused by the chemicals used at the factory. He also signed up Somerville residents who never worked at the factory but had developed cancers.
And he signed up property owners with no health problems, arguing that the value of their property had suffered. About 400 people sued the railroad — almost a quarter of the town’s residents.
Oxbridge spent several months reviewing the cases before agreeing to arrange the financing, sending lawyers to Texas to look at documents and to question Mr. Woodfill and his partners. Stillwater Capital is charging about 16 percent annual interest.
“But for a hedge fund, I couldn’t afford to take on a railroad,” Mr. Woodfill said. BNSF’s general counsel, Charles Shewmake, said the company had carefully reviewed claims brought by its former workers and decided they had no merit.
He said the claims by Somerville residents who did not work at the factory were “physically impossible and without any scientific basis.” Company executives were outraged when they learned that a hedge fund was backing the lawsuits, Mr. Shewmake said.
He said that BNSF had been forced to spend millions of dollars mounting its courtroom defense and defending its reputation. “They’re stirring up cases that don’t need to be in the courthouses,” he said.