In Uncategorized on 05/28/2020 at 19:15

The slogan of old Household Finance Corp. echoes through our profession. In recent years, I’ve gotten pitches from litigation lending outfits that will lend money against a home run in the courtroom. Those loans were real loans, although nonrecourse. And anyone taking such would be wise to put the proceeds in their escrow account, appropriately labeled and documented, and draw out the funds only to pay expenses and legal fees.

Judge Lauber comes down heavily on David A. Novoselsky and Charmain J. Novoselsky, 2020 T. C. Memo. 68, filed 5/28/20. It’s Dave’s story.

Dave was a Chicago litigator suing the State of IL for allegedly grabbing fees to which it was not entitled. Somehow doctors were among the grabbed, and a couple doctors (hi, Judge Holmes) ponied up better than $1.4 million, nonrecourse, stated interest but no promissory note or periodic payments, payout due only if Dave and co-counsel bring home the cliché.

Dave never reported the loan proceeds as income (or anything else), and also conceded he didn’t report another $253K. 2020 T. C. Memo. 68, at p. 2, footnote 2.

Now loan proceeds aren’t income, but there must be a noncontingent obligation to repay and a reasonable possibility of repayment. For the standard trudge through the factors, see 2020 T. C. Memo. 68, at p. 20, with 7 Cir no-factor-controlling gloss, and the overwhelming question “Was there a genuine attempt to create a debt, with reasonable expectation of repayment?”

Not this time. The contingency kills the loan.

But Dave had a saver. He could have treated the litigation support proceeds as trust funds, to be applied to fees only as earned (with hourly billing records; courts love those), and expenses per vouchers cataloged “through every passion ranging,” as a much finer writer than I put it.

Except he didn’t.

“The agreements stated (for example) that the money was to be ‘used to pay for all time and expenses incurred by NOVOSELSKY in pursuant [sic] of this litigation.’ If the funds had been meant to be held in trust, Mr. Novoselsky would not have been permitted to keep the money in his personal or business account. See Ill. S. Ct. R. Prof’l Conduct 1.15 (requiring that trust funds be kept separate from the lawyer’s own property). Nothing in the record suggests that Mr. Novoselksy held the counter-parties’ funds in a separate trust account.” 2020 T. C. Memo. 68, at p. 27. (Footnote omitted).

I note that the omitted footnote cites an IL case that says advance retainer fees belong to the firm and not the client. But those fees haven’t been earned yet. And in such a case as this, I’d be surprised if an attorney would be faulted for treating those advance payments as the clients’ money until earned, or expended in pursuance (hi, Judge Lauber) of the clients’ litigation. I always do.





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