How UCC-1 Filings Protect Litigation Funders

Using UCC-1 Filings to Secure Advances on Future Lawsuits

Companies that provide financial advances on pending lawsuits operate in a high-risk environment. These litigation funding firms, also known as legal funding or pre-settlement funding companies, offer plaintiffs cash advances in exchange for a portion of their future settlement or judgment. To mitigate their risks and secure their interests, many of these companies turn to Uniform Commercial Code (UCC) filings, specifically UCC-1 financing statements.

Understanding UCC-1 Filings

A UCC-1 financing statement is a legal form that creditors file to publicly declare their interest in a debtor’s collateral. While commonly used in secured lending, UCC-1 filings can also serve as a valuable tool in the litigation funding industry to protect investments in future lawsuit proceeds.

How UCC-1 Filings Benefit Litigation Funding Firms

1. Establishes a Legal Claim on Future Proceeds A UCC-1 filing serves as a lien against the plaintiff’s lawsuit proceeds, ensuring the funder has a secured interest in any settlement or judgment. This helps prevent the plaintiff from dissipating the funds before repaying the advance.
2. Deters Other Creditors Publicly filing a UCC-1 statement discourages other lenders or funders from providing additional advances against the same lawsuit, reducing the risk of multiple claims on the same proceeds.
3. Enhances Collection Rights If the plaintiff attempts to avoid repaying the litigation advance, a properly filed UCC-1 can strengthen the funder’s position in recovering the owed amount through legal means.
4. Supports Due Diligence and Risk Assessment Before issuing advances, litigation funding companies can search existing UCC filings to verify if another creditor has already claimed an interest in the lawsuit proceeds. This helps them make informed funding decisions and avoid disputes over priority rights.

Challenges and Considerations

While UCC-1 filings provide important protections, they are not without challenges. Some courts may scrutinize the enforceability of a lien on legal settlements, particularly in jurisdictions where legal funding agreements are subject to regulation. Additionally, if a plaintiff files for bankruptcy, the funder’s interest may be challenged or subordinated to other creditors.

Conclusion

For litigation funding companies, UCC-1 filings serve as a powerful mechanism to secure their financial interests in future lawsuit proceeds. By publicly recording their claims, funders can reduce risks, deter competing claims, and enhance their ability to recover advances. However, they must also navigate potential legal hurdles and jurisdictional variations to ensure their filings are enforceable. As the litigation funding industry continues to grow, strategic use of UCC-1 filings will remain a crucial component of risk management and financial security.

As always, feel free to call me with questions. Robert Fouse - 214-924-3700 - 469-424-3033x 610 - [email protected]