Author: TSA Press

Econet is relying on diesel generators, and says it is becoming ‘uneconomical’ to guarantee services as power crisis looms. Picture: Philimon Bulawayo, Reuters

By Hilary Schmidt, International Banker

According to Cambria, the suspension was due to a “collective refusal to pay historical and contracted pricing to Payserv Africa in US dollars”, with the investment company alleging that Zimbabwean banks have indicated that they are now prohibited by the central bank from paying external invoices in US dollars. Although its bank clients have made prior commitments to Payserv to pay invoices in dollars, the government has introduced a new currency, which is creating a raft of problems within Zimbabwe.

It was only in February that Zimbabwe launched its new currency, having scrapped its 1:1 peg to the US dollar for bond notes and coins that had been in effect since 2016. But with the country showing little faith that such a peg could be maintained, the central bank merged the currency into the less valuable transactional exchange unit, known as the Real Time Gross Settlement (RTGS) dollar (ZWL). The reason for doing so has primarily been to end the shortage of US dollars, which have been extensively used as legal tender in Zimbabwe over the last 10 years or so, as well as end shortages of crucial imported goods such as fuel and medicine.

But during the few months following its introduction, the RTGS dollar plummeted from its initial value of ZWL2.50 to the US dollar when it was introduced to more than ZWL6.00 on the official interbank market by mid-June.

The black-market rate, meanwhile, has been trading at around ZWL9.00 per US dollar. Monetary authorities, however, are suggesting that the lack of RTGS dollars in circulation will eventually prevent the continuation of this parallel market rate. Nevertheless, for the time being, the collapse in the value of the RTGS dollar on both markets has led to massive price spikes that are now making the cost of necessary goods such as fuel much too expensive for most Zimbabweans. This has not gone unnoticed by Zimbabwe’s President Emmerson Mnangagwa. “We are seeing a lot of fluctuations in the local rate of forex. As a consequence of that, we are witnessing price increases.”

The depreciating RTGS dollar is also having a severe impact on Zimbabwe’s gold industry, which generates nearly half of the country’s mineral-export revenues and represents around one-third of all mining jobs. With the central bank paying 55 percent of miners’ earnings in foreign currency and the remainder in RTGS dollars, there is a growing dichotomy being felt by miners, with almost half of their earnings losing substantial value whilst most of their expenses are denominated and paid out in foreign currency. As such, major gold producers in the country such as Metallon Corporation have stated that they are now feeling the effects of “the delay of payments for gold deliveries, and foreign currency shortages for securing key inputs”. Indeed, it has been reported that Metallon has filed a lawsuit against the central bank for its failure to access sufficient foreign-currency earnings.

And from a macroeconomic perspective, the weakening currency is pushing the economy towards the brink of yet another bout of hyperinflation, with Zimbabwe currently experiencing the highest rate of price rises since 2008—when under former President Robert Mugabe, spiralling inflation ended up hitting a peak of 500 billion percent, completely destroying the value of the populace’s savings.

Mnangagwa has acknowledged the recent currency-fuelled issues in the country. “You sleep today with the rate at one US dollar to five… and the next morning it’s at one to six, one to seven, one to eight and so forth. And when they do that, the price of bread increases according to the exchange rate,” the president lamented.

Much of the problem seemingly lies with the activity of currency speculators. According to Eddie Cross, a Zimbabwean economist and former Member of Parliament as well as the founding member of the Movement for Democratic Change (MDC) party, speculators are manipulating the exchange rate to profit at the expense of Zimbabweans. “There is no justification for the current open market exchange rates. The economic fundamentals here are now sound, and in my view rates should not be above 4 to 1,” Cross recently told the local publication The Herald. As such, he has pressed for the government to take steps to contain the ongoing and excessive speculator-fuelled volatility.

On a positive note, however, there is evidence that some progress is being made to contain the fallout from the rapidly weakening RTGS dollar. The central bank recently struck a major deal with the International Monetary Fund (IMF) to implement economic reforms and support the Zimbabwean currency. The Staff Monitored Programme, which runs from May 15, 2019, to March 15, 2020, will “emphasise the restoration of macroeconomic and financial sector stability” as well as support the adoption of reforms “to allow the effective functioning of market-based foreign exchange and debt markets”. For instance, it will prevent the central bank from simply printing money—such a move would be “critical to support the new currency”, the IMF noted. The deal also prohibits the government from borrowing from the central bank in order to repay its obligations, as this would exacerbate the currency crisis; and it also allows the IMF to monitor the implementation of much-needed currency reforms in the country. Indeed, the multilateral institution has already acknowledged that “significant economic reforms” are underway.

Somewhat controversially, moreover, Mnangagwa recently declared that Zimbabwe will have a new national currency in place by the end of the year. This would involve getting rid of the multi-currency facility currently in place that allows Zimbabweans to use the US dollar, the South African rand and other foreign currencies as legal tender alongside the RTGS dollar. “A country cannot develop using other countries’ currencies, without its own currency,” Mnangagwa recently observed, adding that the country has already “started that journey” to have its own currency. And according to state media, the president confirmed that once the national currency is introduced, it will not be possible to use foreign currencies in Zimbabwe for domestic transactions. Mnangagwa has also reportedly blamed the recent jump in commodity prices on the lack of a local currency.

Cross has welcomed the president’s move, arguing that a national currency will strengthen the central bank and monetary policy, as well as give Zimbabwe control over its own money. Cross also believes that once introduced, the Zimbabwean currency would be “the strongest currency in the region, of that I’m absolutely certain”.

But Zimbabwean economist Clemence Machadu believes that simply introducing a new currency without addressing key underlying economic fundamentals will be effectively meaningless. “We already have a currency that is failing, that is the ZWL or RTGS, and introducing a successor currency without first addressing the underlying issues is just window-dressing,” Machadu recently asserted. Such sentiment was also echoed by Zimbabwean economist John Robertson, who warned that without sufficiently building the country’s foreign-currency reserves and boosting exports, any new currency that is introduced will not be adequately supported. “I’m suspicious that in six months we will not have the money. Maybe we will have to borrow, but it means we will fall deeper into debt,” Robertson said.

The government also appears to be facing resistance from opposition parties over the move. The current MDC leader, Nelson Chamisa, for instance, does not think Mnangagwa’s plans to introduce a new currency is the right move. “The problem that Zimbabwe faces is not currency, it’s politics. Until we fix our politics, deal with the legitimacy issues and address the fundamentals of the economy, introducing a new currency will not work; it’s about the fundamentals,” Chamisa recently remarked. And the Zimbabwe Economic Freedom Fighters (ZIM EFF) party has also expressed concern, arguing that “a clean-up of the political space, the execution of an independent and effective justice system, an independent Reserve Bank and complete eradication of corruption in Government” should first be achieved before Zimbabwe can even contemplate the introduction of a new currency.

He made the remarks on the occasion where a visiting delegation from China’s Zhejiang Province and the Zimbabwean government officials and business leaders witnessed the signing of a twinning arrangement between Zimbabwe’s Chinhoyi City and China’s Dongyang City.

He said Zimbabwe possesses vast tourism opportunities which if fully harnessed, could help the country in its quest to become an upper middle income economy by 2030.

It emerged at the meeting that Zimbabwe had set aside 1,200 hectares of prime land in the resort town of Victoria Falls for tourism development.

“I urge you, prospective investors (from China), to seize this opportunity to turn Victoria Falls into a competitive tourism hub and financial center,” Mnangagwa said.

The resort town, in Matabeleland North Province, is home to the magnificent Victoria Falls, one of the seven natural wonders of the world.

On Wednesday, officials from the two countries are set to sign twinning agreements between Zhejiang Province and Matabeleland North Province, and Jinhua City and Victoria Falls.

Mnangagwa said his government has a plan to develop a tourism corridor along the Zambezi River, covering two provinces in the north and western parts of the country.

Ge Huijun, head of the Chinese delegation and chairman of the People’s Political Consultative Conference (CPPCC) Zhejiang Provincial Committee, said China was keen to consolidate its friendly ties and cooperation with Zimbabwe, particularly in the tourism sector.

“Zimbabwe is an important partner of China in Africa. Today, we come from afar to Zimbabwe to comprehensively strengthen our exchanges and collaboration with Zimbabwe and set an example of mutually beneficial cooperation between China and Africa,” Ge said.

She said cooperation between Zhejiang and Zimbabwe continued to grow, with seven reputable companies from the province making significant investments in Zimbabwe over the past few months.

Bilateral trade between Zhejiang and Zimbabwe grew by 17.32 percent in 2018 to 180 million U.S. dollars, and there was huge potential for further growth, Ge said.

She urged Zimbabwean companies to participate in China’s business events to grow business opportunities and expand cooperation between the two countries.

Post published in: Business

Hunger, rocketing inflation, power blackouts, fuel queues – Zimbabwe has been here before, but it’s been a decade since things were quite this bad, ever-resilient citizens in the capital, Harare, say.

The trigger for a sudden surge in prices came last month, when the US dollar was abandoned as legal tender, 10 years after Zimbabwe ditched its worthless local currency and dollarised as inflation hit 89.7-sextillion percent – that’s 20 zeroes.

The same ruling party is at the helm now as 10 years ago, noted Godfrey Kanyenze of the Labour and Economic Research Unit of Zimbabwe, a trade union-linked think tank. And that has added to the worries, he said, because few people trust it has the ability to steer the country out of the current mess – in which a third of the rural population is struggling to cover basic food needs.

Zimbabwe already faces a range of humanitarian concerns, with the UN and international aid groups filling gaps in food security, health and HIV care, water and sanitation, and social protection for vulnerable citizens.

“This is management by crisis,” Kanyenze told The New Humanitarian. The government is “pushing a mantra of ‘austerity for prosperity’, but it’s a government without a human face and it’s just knee-jerk reactions.”

The government says the decision to return to a single, Zimbabwean, currency is crucial to stabilising the economy.

John Kazingizi sells fruit and vegetables with his wife in Hatcliffe market, a high-density suburb of Harare. “What worries me most is prices keep increasing and my sales keep going down, as people are no longer buying as they used to,” he told TNH last week.

The couple struggle to find the money to buy a little fresh stock each day and meet their basic household costs – including repayments on a debt they took out to cover school fees for their five children. “We just need our economy to work again,” said Kazingizi.

The Zimbabwe Coalition on Debt and Development, a social and economic justice NGO, has argued that banning the US dollar and all foreign currencies will simply boost the black market.

“There is a need to address the root causes of the current currency crisis, which are rampant corruption, mismanagement of public finances, and impunity being enjoyed by those that are fuelling the crisis through arbitrage and resource haemorrhage,” the NGO noted in a press statement.

The central bank’s move has not put an end to strike threats, which likely helped prompt the government’s currency decision last month. The Zimbabwe Congress of Trade Unions is warning it will call a stayaway to protest the rising cost of living, although it has not yet set a date.

When the unions last led a work stoppage in January, following the sudden announcement of a fuel price increase of 150 percent, security forces shot dead 17 people and raped 17 women, according to Human Rights Watch.

Fuel prices have been hiked three-more times since January, with an average daily commute now costing as much as $20.

More of the same

President Emmerson Mnangagwa’s cash-strapped government had long insisted the Zimbabwe dollar would only be re-introduced when the economic fundamentals were right.

Yet with inflation almost hitting 175 percent for June, 18-hour power cuts, and 3.5 million people facing drought-induced hunger in the countryside, “the fundamentals are clearly out of whack,” noted Mike Chipere-Ngazimbi, economics researcher at South Africa’s University of Pretoria.

A disastrous harvest – with maize production just 45 percent of last season – has compounded the hardships. The World Food Programme aims to reach 1.2 million people with food aid, but by March next year an estimated 5.5 million will be unsure where their next meal will come from.

When Mnangagwa came to power 18 months ago after a military coup ended the 30-year reign of President Robert Mugabe, he promised reforms.

But Mnangagwa, a ruling party stalwart, has failed to deliver a programme attractive enough to investors or multilateral financial institutions, or win over a country shocked by the army’s violent enforcement of last year’s close-run election result.

The one bright spot in Zimbabwe’s recent economic history was a period of coalition government between Mugabe’s ZANU-PF and the opposition Movement for Democratic Change lasting from 2009-2013. Then, GDP growth ramped up to more than 9 percent – although overall poverty levels remained stubbornly high.

To rescue the country from hyperinflation, in which prices doubled almost daily, an early decision in 2009 did away with the Zimbabwe dollar in favour of a basket of foreign currencies. The downside was foreign currency shortages in an import-dependent economy where more dollars leave the country than arrive.

Since then, an ever-more creative series of currency policies have been put in place to address that problem.

Currency conundrums

In 2016, the government introduced bond notes and coins, supposedly worth the same as the US dollar. But they steadily lost value on the informal market – and became an immediate source of arbitrage profits for the well-connected.

The Mnangagwa government has encouraged adopting mobile money to reduce the need for physical cash. According to the reserve bank, mobile money was used for 85 percent of all retail transactions in the last quarter of 2018.

But high transaction fees and a 2 percent government tax makes mobile money expensive – further eroding people’s purchasing power. In the rural areas, where mobile money is the common payment system for livestock sales, people are turning to barter instead, according to FEWS NET, the USAID-funded early warning hunger monitor.

In February, as a step towards creating a local currency, the government introduced the Real Time Gross Settlement dollar, or RTGS – effectively a digital currency harmonising bond notes, mobile money, and debit cards tied to an official US dollar exchange rate.

Immediately, the RTGS dollar began to lose value on the parallel market.

“The economic situation makes us feel like orphans in our own country.”

Last month, the RTGS dollar was trading on the streets at about 13 to the US dollar, more than double the official interbank rate.

On 24 June, the government abruptly decreed that the country’s sole legal tender was the RTGS, renamed the Zimbabwe dollar, and abolished the use of multiple currencies. The aim was to end the informal market contributing to galloping inflation and restore government control over monetary policy.

Civil servants had been threatening to strike, demanding payment in US dollars, and there were reports the military was also unhappy with their RTGS denominated pay packets.

But the introduction of the Zimbabwe dollar has not halted its slide on the black market, and soon after the ban on the use of foreign currencies was announced, Finance Minister Mthuli Ncube said the tourist destination of Victoria Falls was exempted.

“It’s very clear the decision to move to a local currency was done in haste,” said Kanyenze of the labour think tank. “The economy was re-dollarising, and particularly the military were demanding to be paid in dollars.”

Kazingizi, the fruit and vegetable seller, said he sees little sign that things will improve any time soon. His wife gets up every day at 3 am to go to the market, he said, but the family still struggles to stay afloat.

“The economic situation makes us feel like orphans in our own country,” he told TNH.

Post published in: Business

The practice of estate law pervades all aspects of my life, professional, religious, and personal. I cannot avoid making connections, telling stories, or analyzing issues with my legal lens. On a recent family trip to Israel, I was unable to escape the obvious connections between the Jewish homeland and the theory, law, and ramifications of inheritance as I experience them in my daily practice.

Amongst many religions and people, the land of Israel is referred to as the inheritance of the Jewish people. To inherit means to receive property as an heir at the death of the previous holder. In the case of the land of Israel, the Jewish people are said to have inherited the land from God. Readers of the Hebrew Bible cite Deuteronomy 4:1 as a source: “And now, O Israel, hearken to the statutes and to the judgments which I teach you to do, in order that you may live, and go in and possess the land which the Lord, God of your forefathers, is giving you as the legacy for the inheritance of the land to the Jews.”  Additionally, Genesis describes God’s promise to Abraham, then Isaac, and then Jacob (Genesis 15:18-21, 26:3 and 28:13). The specifically inherited land is further detailed in Exodus 23:31 as the territory from the River of Egypt to the Euphrates River. It may be said that certain moral and religious standards are attached to the inheritance as Leviticus 18:26 states, “But you must keep My laws and My rules, and you must not do any of those abhorrent things, neither citizen nor the stranger who resides among you.”

Religious and political beliefs aside, it is impossible to travel through Israel without feeling the connection between the Jewish people and the land.  This relationship is evident on visits and tours throughout the country, whether it is walking the ramparts of Jerusalem’s Old City, hiking the green valleys of Galilee, or sailing the Mediterranean coast. Each town bears some historical significance, whether an event from the Bible or a modern-day feat.

Applying the concept of inheritance to the relationship among God, Israel, and the Jewish people reveals the same complications and conflicts that plague inheritances among families. Leaving an asset to one beneficiary over another generally results in some kind of complication. Following the transfer of assets, family relationships, specifically those between the decedent and her children, are questioned based on the size and tenure of the gift. Furthermore, inheritances, especially when one child is given more than another, causes strain between siblings. Often there are reasons for one child being treated better than other. Such rationale does not remove the hurt that many feel when they do not receive similarly to their family members, even if it can be explained. Heirs bear unanswered questions as they can no longer speak to the decedent.

In visiting Israel, meeting its inhabitants, reading its newspapers, and learning its history, I could not help but focus on the idea of inheritance, specifically inheritance by a people. My interest, however, was not about the right to the land or political and religious beliefs, but the responsibility of the heir. If one is blessed enough to receive an inheritance, it behooves her to honor the decedent — the giver of the gift — and her memory by acting responsibly. This means accepting a bequests with grace and not wasting assets, editorializing others’ relationships, or lacking empathy. If there is a question as to title to an asset or the validity of a last will, out of respect to the decedent, one should handle herself with reasonableness, decorum, and even humility. Moreover, it is important to understand that no one is entitled to any asset. You are granted a bequest by the grace of the decedent. There is a reason why inheritance is often referred to as “found money.” The beneficiary did not work for it. It is a gift and all more reason to act with propriety.

At the same time, it is also difficult to be the chosen child, the one who receives more. Certainly the Hebrew Bible relays many examples of children treated differently by their parents and the trials experienced by the favored and disfavored siblings. The controlling heir may need to work with her siblings, to provide for them to be sensitive to their financial and emotional needs. Perhaps this is the greatest lesson learned on my trip. With inheritance comes an obligation to act with decency and to ensure that all of our siblings are provided for and treated with respect and protection. Israel strongly reminded me of this, by way of its armed forces, bustling economy, hospitals and medical care, tourists from around the world, and most poignantly, the free practice of different religions.

Cori A. Robinson is a solo practitioner having founded Cori A. Robinson PLLC, a New York and New Jersey law firm, in 2017. For more than a decade Cori has focused her law practice on trusts and estates and elder law including estate and Medicaid planning, probate and administration, estate litigation, and guardianships. She can be reached at cori@robinsonestatelaw.com. 

Litigation funding generally comes in two varieties — funding to a claimholder or funding to a law firm.  Last year, an advisory ethics opinion by the New York City Bar Association called into question the propriety of providing funding to a law firm in certain circumstances.  Ethical concerns about litigation funding are already one of the main reasons that some attorneys shy away from litigation funding — so what is the current state of play?  Can law firms ethically take litigation funding secured by their anticipated fees?

ABA Model Rule 5.4(a), the widely adopted provision which addresses the “Professional Independence of a Lawyer,” contains a general rule that “a lawyer or law firm shall not share legal fees with a nonlawyer.”  According to the comments to the model rule, “[t]hese limitations are to protect the lawyer’s professional independence of judgment” and “also express[ ] traditional limitations on permitting a third party to direct or regulate the lawyer’s professional judgment in rendering legal services to another.”

ABA Model Rule 5.4(a) does not preclude law firms from taking recourse funding on a fixed return basis from a litigation-finance company (or from a bank or other funding source).  According to the New York City Bar Association, “the fee-sharing rule does not forbid a traditional recourse loan requiring the lawyer to repay the loan at a fixed rate of interest without regard to the outcome of, or the lawyer’s receipt of a fee in, any particular lawsuit or lawsuits.”   This includes fixed return loans made with recourse to fees that have already been earned but have not yet been collected.

But the question becomes more complicated when the funding is nonrecourse — i.e., when the returns for the litigation-funding arrangement depend on the law firm’s ultimate success in specific matters and, if successful, the amount of fees earned.  At Lake Whillans, we have seen inquiries for this type of law firm financing increase as firms seek ways to accelerate monetization of their contingent interests, meet current case needs, and enable firm growth and client acquisition.  Realization of contingent fees can take years, and despite their successes, firms may have less cash than they would like or need to grow their business and pay their attorneys while waiting for contingent fees to be realized.

Because this type of funding has been in such high demand, in the litigation-funding industry it has been common practice to provide funding to law firms secured against a basket, or portfolio, of cases, rather than a single case, to avoid running afoul of ABA Model Rule 5.4.  Although litigation funders like Lake Whillans have no right to control the cases funded as a matter of contract, tying returns to a basket of cases further ensures that funding does not appear to compromise an attorney’s independence and professional judgment.

One interpretation of Rule 5.4, called the “direct relation test,” posits that Rule 5.4 “intend[s] to bar any financial arrangement in which a nonlawyer’s profit or loss is directly related to the successfulness of a lawyer’s legal business.”  Some legal ethicists consider earned but not yet collected fees to not implicate a business’s success, but consider that unearned contingent fees do depend upon the successfulness of the lawyer’s business.  This distinction between lending against earned but uncollected fees and unearned contingent fees seems academic and ignores the reality that most businesses are permitted to secure financing based on expectations about future earnings.  Courts have generally agreed that this is a distinction without a meaningful difference.

In a 2015 case, for example, a New York court rejected the argument that “a credit facility secured by a law firm’s accounts receivable constitutes impermissible fee sharing with a non-lawyer.”  In that case, significantly, the agreement entitled the funder to a “percentage of the Law Firm’s gross revenue . . .  essentially composed of contingent fees earned on client settlements and verdicts.”  The court stated:

[C]ourts have expressly permitted law firms to fund themselves in this manner. Providing law firms access to investment capital where the investors are effectively betting on the success of the firm promotes the sound public policy of making justice accessible to all, regardless of wealth. Modern litigation is expensive, and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm’s accounts receivable helps provide victims their day in court.

That decision came on the heels of another New York decision similarly finding such an agreement enforceable.  That court similarly recognized the value of litigation-financing arrangements: “There is a proliferation of alternative litigation financing in the United States, partly due to the recognition that litigation funding allows lawsuits to be decided on their merits, and not based on which party has deeper pockets or stronger appetite for protracted litigation.”  The court quoted a 1997 Delaware case “not[ing] that there is no suggestion that it is inappropriate for a lender to have a security interest in an attorney’s accounts receivable. It is, in fact, a common practice. Yet there is no real ‘ethical’ difference whether the security interest is in contract rights (fees not yet earned) or accounts receivable (fees earned) in so far as Rule of Professional Conduct 5.4, the rule prohibiting the sharing of legal fees with a nonlawyer, is concerned.”

A number of other decisions have likewise either summarily dismissed the idea that a financed law firm should be relieved of its obligations “under guise of ethics” or concluded that a lender had properly secured an interest in contingent fees without reaching the ethical question.   There does not appear to have been any decision in which a litigation-financing arrangement for contingent fees has been held illegal or unenforceable due to alleged “fee splitting” concerns.

But a New York City Bar Association advisory opinion issued in July 2018 called the practice into question.  The opinion noted that ethics opinions both from the New York City Bar and other bar associations have prohibited arrangements where, for example, a marketing service or landlord would be paid based on a percentage of a law firm’s revenues.

Rule 5.4(a) forbids a funding arrangement in which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters. That is true whether the arrangement is a non-recourse loan secured by legal fees or it involves financing in which the amount of the lawyer’s payments varies with the amount of legal fees in one or more matters.

The opinion acknowledged that it appeared to be at odds with the New York courts that had found such arrangements enforceable but concluded that “New York courts could be expected to enforce the arrangements, because lawyers who violate the Rules cannot ordinarily invoke their own transgressions to avoid contractual obligations.”  The opinion also acknowledged that its advice might be seen as “overbroad” but contended that, if so, the place for a remedy should be in the state judiciary or state legislature, which ultimately has authority to change the ethics rules.

The New York City Bar Association opinion has caused significant consternation among funders and attorneys.  Ultimately, the New York City Bar established a “Litigation Funding Working Group” to address the “ethics rules and framework” related to the advisory opinion, current and best practices for litigation funding, and disclosure issues, among other topics.  In establishing the working group — which includes NYU ethics professor Stephen Gillers and former SDNY Judge Katherine Forrest — the NYC Bar indicated it “will not be revisiting Opinion 2018-5, but is open to exploring potential revisions to the ethics rules and/or legislation.”  It expects to issue findings by the end of 2019 and recently received comments from interested parties.

The vast majority of bar associations have not opined on this issue but the handful that have reached a similar conclusion to the NYC bar:  Maine, Missouri, Nevada, North Carolina, Texas, Utah, and Virginia.  Although many of these opinions predate the large-scale litigation funding industry, the basic idea is generally the same as the NYC bar precedents.  The only bar association to have affirmatively approved of contingent financing appears to be Philadelphia, which found no issue with contingent, fixed-return financing because it “appears to be no different than when an attorney negotiates a loan from a bank to cover operating costs or as working capital.”

So where does this leave law firms seeking funding — particularly law firms that are seeking financing against a portfolio of cases?

• First, the New York City Bar Association advisory opinion is just that — advisory — and, while it may be persuasive should an ethics issue arise, it is not a prohibition on litigation financing of law firm portfolios. Ultimately, it is one effort at an interpretation of an ethical rule that is subject to multiple interpretations.
• Second, under New York law these funding agreements remain enforceable and legally valid providing peace of mind from that perspective both to the funder and law firm. We are unaware of any jurisdiction that has declined to enforce this type of funding agreement on the basis of the fee-splitting rule.
• Third, the ethical issue at stake is ultimately the independence of the attorney, and the attorney can ensure that such independence is not compromised both in practice and through terms in the funding agreement protecting attorney independence. Numerous ethics experts have opined that the distinction between prohibiting litigation funding based on a law firm portfolio and bank lending is illusory in this context.  The NYC Bar opinion, according to Professor Anthony Sebok and Hinshaw & Culbertson Partner Anthony David, “creates distinctions between the loss of independence of lawyers who engage in traditional borrowing from their banks — where they place all of their receivables at the ultimate mercy of the ender if they default — and the supposed greater loss of independence where instead the lawyer borrows based on the results of specific cases, where the lender has no recourse if the cases fail to yield those results.  Such an interpretation is, surely, absurd.”

Each firm must weigh the risks and benefits of seeking portfolio financing and seek outside advice if necessary.  While we view the NYC Bar opinion and those like it as ill-considered and overly formalistic, they are a reality with which a law firm seeking funding must be comfortable.  (Anecdotally, based on the inquiries Lake Whillans receives, the opinion has not stopped law firms from actively seeking portfolio financing in New York or elsewhere.)  The landscape continues to evolve and funders and attorneys alike hope that a more reasonable and realistic interpretation of Rule 5.4 prevails.  Until that consensus emerges, Lake Whillans and, we expect, other funders will work with law firms and their counsel to craft agreements that address their concerns and minimize risk.