MS: Now, the law doesn’t say they have to pay for those expenses. It’s just been kind of the standard operating procedure, because who else is going to pay for them, right? The plaintiff can’t afford, typically, to front those. And so the tradition has been that the law firm advances those. So not only are they out their overhead and these kinds of expenses, they’re having to come out of pocket for tens of thousands of dollars on many of these cases. A typical client of ours has about 200 cases in various stages of development; some they’re signing up just this week, some are resolving this week, and all stages in between.
MS: The net effect is that they build up this large dollar amount, invested, if you will, in their ongoing case expenses, because as one case settles, they have to use those funds to pay for case expenses for a new case. And over time, that money can really add up. In fact, it can easily be hundreds of thousands of dollars. It is, for most of our clients. And for many clients, it’s millions of dollars; millions of dollars that they’ve had to pay into their cases, that they don’t get paid interest on that money. The only cash available for use for anything at a law firm is after-tax cash. So this is after-tax cash that the owners have essentially loaned to their business, interest free, with no coupon, and really, no hope of repayment until some day, maybe when they wind their practice down.
MS: So we’ve really focused on those case-expense dollars. And interestingly, so they have to pay all this money, the IRS says that case expenses advanced by a plaintiff lawyer are not expenses, right? Because they come back to the law firm about 95% of the time, the IRS has ruled that the moneys they’ve put into their practice for case expenses are really a loan they’ve made or a lot of miniature loans they make to their clients. So they can’t even report these expenses on their income statement to reduce their taxable income. They have to book them as an asset on their balance sheet, as a loan. So it’s kind of a double-edged sword.
MS: So we’ve really focused on that aspect of it, and we’ve taken advantage of the fact that around the country, whenever the bar has opined on case expenses and how they should be treated, they have consistently said that if a law firm decides to borrow money to fund those case expenses from a third party, such as Advocate, and if the technology is in place, such that the law firm can document, “This is exactly what I borrowed for this client. And here’s exactly the interest I paid to the lender for this client, specific to the penny,” they’re able to essentially get reimbursed from the case for the borrowing costs, just like all the other case expenses.
MS: So at the end of a case, when they sit down with their client, they will typically say, “Okay. Our fee is a third, and then we also had these expenses.” And they show them the receipts. “We paid this expert witness this much,” and such, and such. Well, our clients now have an additional receipt at the settlement, which is showing all of the case expenses they borrowed from Advocate for that particular case. And it shows the interest they paid us during the case. So they’re able to get back all of the borrowing costs they paid to us during that particular case because we’re able to keep track and document it. So we have about 480 law firm clients. As I mentioned, we’re funding about 75,000 cases. And we’re funding and tracking those, realtime, 24/7, so that our technology is standing by and ready to print out a receipt whenever they’re ready to close a case.
MS: So the value proposition, really, to try to help these plaintiff lawyers, is that they’re able to get back the cash that they’ve tied up in their cases, back out of the practice … Or they can leave it in the practice, too, but they’re able to get it out of the cases by borrowing it from us. And the net cost of borrowing on these case expenses is 0 for the cases that they win or are successful on. That’s about 95% of the time. So our clients get back, on average, about 95% of what they pay us. So the net cost of borrowing for our clients, on average, is well below 1% per year.
MS: So the concept is because we’re really only dealing with successful law firms, our clients don’t need the money. But we help them understand that, “Look, if you can get back the cash you have in your cases at a net cost of less than 1% per year, could you find something good to do with that,” right? And of course, they can. Every law firm’s different. They have different goals. We try to come alongside them at first, really, and just hear about their goals, and then help them understand how being our client could help them achieve those goals. They may be wanting to grow. Well, becoming our client would give them the capital, very low-cost capital, to be able to hire more employees, or to do more advertising, or to lease additional office space. They’d be able to help even more people in their community.
