Chapter 13 · Questions & Answers
Funding Your Mass Tort Docket
Your lender needs to be a fund with experience in legal lending and be big enough to grow with you.— Jarret Prussin
I recommend that any mass tort lawyer who’s interested in growing their business schedule a visit with Jarret Prussin, the CEO of SBA Loan Group. For over fifteen years, he’s been a trusted lender to law firms who need Small Business Administration (SBA) loans as well as non-recourse loans.
His track record and reputation are impressive, particularly his ability to help mass tort lawyers calculate what kinds of loans are best suited for needs as well as how much money they will require to meet those goals. He offers a wide array of loans, both big and small, which range from as little as $100,000 all the way up to $150 million.
The SBA Loan Group is the largest packager of SBA loans to law firms in the country as well as one of the nation’s largest providers of large non-recourse loans. Jarret counts some of the highest-profile mass tort law firms among his clients, including Ben Crump, Jim Onder, Bob Hilliard, and Allen Smith. And he’s been directly responsible for funding some of the most influential mass tort litigations of recent years, including Roundup, talcum powder, Zantac, various hernia mesh cases, and others.
I’ve chosen Jarret to helm this important chapter because he has proven exceptionally creative in structuring loans for mass tort lawyers. He possesses a unique ability to maximize loan amounts, while also showing an aptitude for distilling down complex financial concepts into simple everyday language.
If you have questions regarding how to collateralize your docket, grow your operation, or finance just about any aspect of your firm, Jarret is your man.
During the COVID-19 crisis, he was instrumental in helping more than four thousand law firms endure one of the most tumultuous periods in our industry’s history. Despite a litany of challenges—including constantly changing governmental rules—Jarret helped these firms borrow more than a half billion dollars in loans through the Paycheck Protection Program (PPP).
Jarret and his team performed these services— working twenty-four hours a day during the early days of the pandemic—despite the fact he works on a set fee schedule. He did so, he told me, because his clients needed him during a time when some of their revenue streams could have completely dried up. He went the extra mile because he wanted to show them firsthand that he cared about their futures and overall financial health.
That’s always been a hallmark of Jarret’s philosophy:
If you do something good, it’s bound to come back and benefit you in the long run. Which is exactly the kind of lender that every mass tort lawyer wants to have in his or her corner.
—JAcoB MALHerBe
What is the most prevalent misconception that mass tort lawyers continue to have about taking out loans to expand their practices? Many mass tort lawyers, especially those new to the field, fail to recognize that traditional banks are extremely reticent to lend to plaintiff-side law firms. One, they don’t understand how mass tort lawyers find and try cases. And two, the FDIC, which regulates banks, doesn’t recognize a contingent asset—like a mass tort case—as a collateralizable asset. This puts mass tort lawyers at an inherent disadvantage when it comes to taking out traditional bank loans.
Case in point: Let’s say you have a mass tort lawyer who is carrying $20 million' worth of fees and contingent cases. And you have a local bicycle manufacturer who possesses a half of a million dollars in physical inventory, whether it’s the bicycles themselves or the machinery that produces them. Invariably, the bike manufacturer is going to be given more credit than the mass tort lawyer, even though the mass tort lawyer’s collateral will probably be worth far more in the end.
This ignorance, on the part of traditional banks, in determining a fair value for mass tort cases is a constant frustration for plaintiff-side lawyers. Which is why we offer them the option of taking out SBA loans and non-recourse loans. We’re very adept at maximizing loan amounts based on a number of factors, including current and future collateral, the quality of the clients they’ve signed, and their overall growth strategy.
What are the fundamental differences between SBA loans and non-recourse loans? For most lawyers, taking out an SBA loan is the least expensive option to finance their docket, which is why we do hundreds of millions of dollars a year in SBA loans.
SBA loans are user-friendly loans that are regulated by the federal government. Plaintiff-side attorneys can borrow anywhere from $100,000 to $14 million at interest rates that usually hover around 2.75 percent over prime—so they’re looking at roughly 6 percent. As an added bonus, lawyers are given very few restrictions on how their money can be used.
For lawyers who want to take out larger loans—say ten, twenty, or a hundred million dollars—we typically structure these loans on a non-recourse basis. The term “non-recourse” simply means a borrower does not have to sign a personal guarantee like they have to for SBA loans. They don’t have to pledge any of their personal assets. They simply pledge their existing and future cases—or a particular subset of their cases—as collateral.
For most lawyers, taking out an SBA loan is the least expensive option to finance their docket, which is why we do hundreds of millions of dollars a year in SBA loans.
How do you respond to a lawyer who balks at paying 20 percent interest for something like a non-recourse loan? You have to do the math. It all comes back to how you define value because smart debt is good debt in the end. If a lawyer is funding the right mass torts and earning ten times their money at settlement for every dollar they borrow, that’s good debt.
Let’s break down a very simple example to illustrate my point. Let’s say it will take Mass Tort X four years to reach a settlement. If interest on every dollar you borrow is compounded for four years, you’ll owe us $2 back in the end. At the same time, you know you’re going to earn $10 for every dollar you borrowed. Would you pay $2 to earn $10? Personally, I would. I’d take that deal all day long.
Think of it this way: If you’re a Wall Street investor and you make 15 to 20 percent on your money, you’re considered a genius. In the legal space, if you earn less than three to four times on a particular investment, you have room for improvement. There are very few industries where you experience those kinds of returns.
If you’re a Wall Street investor and you make 15 to 20 percent on your money, you’re considered a genius.
In the legal space, if you earn less than three to four times on a particular investment, you have room for improvement.
In the end, it all comes down to costs and timelines. What are your lead acquisition costs? What are your interest costs? And when do you think the case is going to settle? These are the questions we help lawyers answer because if you know those answers, you can quickly figure out how much money should be borrowed.
How prevalent are these types of loans within the mass tort industry? Are a large percentage of mass tort lawyers using these loans to grow their business? A large percentage of the most highly regarded mass tort law firms are taking out these loans. This is due, in part, to the life cycle of a typical mass tort. If you’re a personal injury lawyer working a single-event case, you’re probably looking at anywhere from nine months to three years until settlement.
Your typical mass tort, by contrast, takes five or six years to close if you get in at the beginning. That’s a large chunk of time. Plaintiffside firms use these loans to continue operating and generate new cases while they await settlement. They still have to keep the lights on, pay their rent and their employees, and find new cases. These loans allow them to do just that.
When you talk to lawyers who are reticent to take out these loans, what tends to cause them trepidation? Some lawyers are very risk averse and consider a loan—any loan—to be a four-letter word. Others simply struggle to understand the value of these loans from a pure business perspective.
In many cases, it’s not their fault. When they were in law school, no one taught them how to run their practice or even the economic challenges they were likely to face once they got started. It’s nothing to be embarrassed about. The same thing is true for many doctors.
There’s not a lot of attention given to how to run an effective and highly profitable practice in med school. Which is why we view it as our responsibility to help educate our clients on how to maximize their financial returns and grow their practices. We’ve never been afraid to get our hands dirty—to really get in the weeds, in terms of their current situation and end goals—because we want to make sure they’re leveraging the right amount of capital and maximizing the return on their investment.
What are the most common mistakes mass tort lawyers make when taking out these loans, and what advice would you give them to help rectify those errors? Lawyers really need to do their homework in regard to finding the right lender. This is true when selecting any kind of vendor. Finding the right lead generator. The right intake center. And the right case development partner. Just like in any other business, there are bad apples working in the mass tort space.
Your lender needs to be a fund with experience in legal lending and be big enough to grow with you. Since most of the money you raise will be used to generate new cases and increase your borrowing base, you need a lender capable of making multiple rounds of funding to your firm.
Consider lead generation for a moment. Let’s say there are four key criteria that determine whether a potential client will qualify for a case. An unethical lead generator might stretch their search to include seven criteria instead of four because they know they can sell law firms more leads. That inevitably leads to huge problems because a large number of potential cases are going to either be disqualified or noncompensable. That’s simply a bad business choice and raises all kinds of red flags for us.
We look very carefully at the vendors that our legal clients have chosen to work with.
We also listen very carefully to the mass torts our legal clients want to pursue. If a potential borrower seems interested in only chasing the hottest cases—simply because everyone’s talking about them—that may be a problem. Sometimes, the best investments are the mass torts that fly just below the radar.
We’re all about return on investment; that’s everything to us. Do we want to partner with someone who will spend $4,000 on a signed contract that might, if everything goes right, potentially net them $10,000? Or do we want to invest a hundred dollars on an opportunity that’s very likely to generate $2,000. We’ll take the latter option all day long because we’re earning twenty times our money versus the first one, where we’re earning just two and a half times our money. That’s actually a concept that doesn’t always click right away with a lot of lawyers when they’re looking at different ways to deploy capital into new opportunities. But it’s a valuable lesson we encourage them all to take to heart.
Can you use a specific mass tort to illustrate that principle in action? Let’s take the Pradaxa mass tort, which took four years to settle from 2010 to 2014. Let’s say you were smart and used X Social Media to find your leads. The cost of acquiring each lead with Jacob and X Social Media for Pradaxa was roughly $1,500 per lead. When all was said and done, the total cost for taking out a loan with us, on perclient basis, came out to $3,000.
Consider, however, that the average settlement per client on Pradaxa was $160,000 per plaintiff. Naturally, mass tort lawyers don’t get to keep all that money. If you’re a trial lawyer, you’re going to earn
40 percent in attorney’s fees, which comes out to $64,000 per victim. That’s a major profit.
But even if you were an acquisitions lawyer, who only kept half of that amount, you’re still at $32,000. You’ve just earned ten times your money by taking out a loan and using it to find clients. Personally, if I were an acquisitions lawyer and realized I could find a lead for $1,500, then pay back $1,500 to a lender, and still pocket as much as $29,000 per client, I’d take that in a heartbeat, wouldn’t you?
Which brings me back to an important point: Remember that these are non-recourse loans. So let’s say, for the sake of argument, that the tort fizzles out and doesn’t go the plaintiff’s way. Even if that’s the case, no one can come after your personal assets. That’s why you’re paying the rates that you do. Lenders understand the risks they are taking on. You don’t have to sign a personal guarantee. You don’t have to pledge personal assets.
How do you vet potential borrowers? What are you assessing when a new potential client walks into your office? In most cases, I can size up a deal in five minutes, but I need to know what a lawyer’s existing collateral looks like (i.e., their cases, contingency fees, their annual profits over the last few years, how much money they want to borrow, and what their particular goals might be). If I can answer those questions, I can size up a potential deal very quickly and determine whether an SBA loan or a non-recourse loan is more appropriate.
In general, lawyers tend to be a lot more conservative than other borrowers. On the other hand, some can be a lot more aggressive. Meanwhile, some lawyers want to diversify into a wide range of different torts. Others prefer to focus on just a few torts and pursue those torts very hard. We adjust our advice and finance programs based on their individual needs.
You have built a reputation for being extremely creative in your loan packages . What does “creative” mean? No two inventories are alike. Some lawyers only deal in mass torts; some prefer a mix of mass torts and personal injury cases. Whatever the case may be, we assign a value to their caseload and give them a borrowing base against that figure. Here’s the important fact worth highlighting. Our average borrower takes a loan from us upward of three times. Why? Because of the creative ways we approach these loan agreements.
Let’s say someone has a portfolio that’s worth $12 million and we give him or her a 40 percent loan to value, which is $4.8 million. Let’s say they take that $4.8 million and—as we explained with Pradaxa— each lead costs $1,500. Our loan has enabled them to find 3,200 new cases. At the same time, we have to remember that some of those leads are not going to qualify. Let’s say 30 percent don’t make the cut. Using a rough estimate, the firm is left with a little over 2,200 qualifying clients.
As pointed out earlier, a lawyer’s average Pradaxa payout likely produces $29,000 in legal fees and you have roughly 2,200 clients. That comes out to just a shade under $64 million in legal fees. If I were to turn around and immediately give you another 40 percent borrowing base on that $64 million in earnings, you could turn around and immediately use the incoming $25.5 million to go acquire more cases for a different tort. Or if you’re really shrewd, you can take out an additional loan, even before the settlement arrives, and find new cases to reduce your time to money. As I always say, “Do the math. It validates the value of these loans.”
At what point do mass tort clients stop borrowing? It all depends. We have a particular client who borrowed $100,000 to start his practice. We’ve gotten all the way up to $50 million in loans, and now he possesses a half of a billion dollars’ worth of fee inventories. When Roundup, one of the mass torts he’s been working on, starts to settle, he’s going to pay off his loan. In the end, he’s going to walk away with nine figures in his pocket. At that point, he will be in a position to personally fund all his future endeavors. But you can always choose not to risk your own capital and continue borrowing.
It stands to reason that these loans can be used to finance other needs beyond just client acquisitions, correct? Yes. Some trial lawyers use these loans to hire vendors to work up cases or use them for research and courtroom expenses. If you have, for example, ten thousand Roundup cases, it’s going to take a ton of money to work up those cases. Either you have to work them up yourself or hire a vendor to find medical records, prove the diagnosis, file the case, and communicate regularly with the victims. Our loans have become increasingly vital for both finding leads and handling the overhead required to see cases to settlement.
How do you vet potential borrowers? What are you and other lenders looking at to determine if a mass tort lawyer will qualify for a loan? One, we look at which vendor he or she used to acquire their leads. That’s very important to us. We want to know who those lead generators are. Two, we vet the litigation they’ve chosen to invest in. Three, if you’re an acquisitions lawyer, we will absolutely vet your co-counsel, the handling firm you’ve partnered with. And four, we will do a random sampling of a firm’s actual cases. We will round up all the medical files and do a statistical sample to make sure they’re quality cases.
Roundup litigation is a perfect example. For us, the choice of co-counsels that acquisitions lawyers partner with is one of the most important factors we look at. We want to ensure they’ve partnered with a firm who knows how to negotiate the best deals and are capable, in all honesty, of scaring the shit out of the defense. In short, the company you keep matters a great deal.
How do you grade lead generators? What are you looking for? I am very uneasy about a lot of lead generators because they’ve come to us for money too. We don’t just fund lawyers. So we have a very clear view of their financials as well. And that’s proven insightful. I’m going to be blunt. There are some real scumbags out there, some lead generators who take advantage of mass tort lawyers. And then you have some extraordinarily reputable ones as well.
You really have two types of lead generators out there. Option one, vendors who advertise for lawyers at a rate of cost plus 20 percent, like X Social Media. Or option two, vendors who sell signed contracts. We are wary of some groups who sell signed contracts. They go out and sign up victims on their own and then gouge law firms by heaping on extra fees. Some of these contract vendors charge 400 percent to 1,000 percent markups and have no qualms whatsoever in reselling some of their leads and contracts.
We’re very wary of these vendors because they aren’t taking any risks. They have no skin in the game. The minute they hand a lawyer a signed contract, they get paid for it. It doesn’t matter if the contract is a bad contract or if the case settles or not; they take their money up front.
We look for lead generators who have integrity, like X Social Media, which is committed to helping its legal clients make money and doing all it can to ensure victims find justice. X Social Media doesn’t sell contracts; it sells advertising that generates leads and cases at cost plus 20 percent.
Personally speaking, why do you lend to mass tort plaintiff lawyers? What motivates you to help them? It’s very simple, really. In my opinion, some of the actions—or lack of action—taken by these large corporations are downright criminal. You look at the links between talc powder and cancer, Roundup and cancer, and Zantac and cancer. It boils my blood. If you look at the documents, some going back thirty years, it’s clear to me that they knew talc powder caused cancer. And to make things worse, they knew that African-American women, obese women, and Hispanic women were going to use their products. The fact that some of these highranking executives at these corporations don’t go to jail is astounding. In my opinion, they’re literally getting away with murder. They’re prioritizing profits over people’s lives. I feel good about funding lawyers who are going to oppose these companies in court—people who will fight for what’s right and will help victims win just compensation.
What are the potential pitfalls and dangers that mass tort lawyers should keep in mind when they seek out a loan? I would tell this to anyone, but plaintiff-side lawyers need to be especially careful of which lenders they borrow from. At our firm, we work with a wide array of different financial institutions around the world, which provides us with some unique insights.
Some lenders are far more restrictive than others. When you seek out a lender, make sure you find someone who is easy to work with and won’t handcuff you in terms of how you want to grow your business. You want to look for a lender who has the ability to grow with your business because if your lender gets tapped out, finding ways to raise money is going to become your full-time job for a while. As a lawyer, you want to devote your time to being a lawyer, not raising capital.
Just because you want to borrow a couple of hundred thousand dollars now, doesn’t mean that you won’t need to borrow $10 million tomorrow to keep scaling up and amassing larger inventories. You want a long-term business partner who’s going to be able to lend you the money you need as you grow.
Where do you see the mass tort industry going in the years to come, and how will these loans play a role in that evolution? Technology will become a more massive driver for our business. Certain technologies that are around today weren’t available five years ago. In the past, geography dictated whom victims would choose to hire. Now it’s more of a question of who offers the best lead-generating strategies and who can leverage the most cutting-edge technologies. As a result, the loans we provide are going to become increasingly important in this industry because there’s so much money available, and thus we expect the cost of acquisitions to go up. Most mass tort lawyers can’t finance this stuff on their own. They need to borrow money and leverage their inventory to scale their business.
What final piece of advice do you have for mass tort lawyers who are exploring ways to better fund their dockets? Do your homework. Do your homework on the lead generator you’re partnering with. And do your homework on your lender because every financier does things differently. Go to the best networking events. I recommend MTMP, which is by far the number-one mass tort seminar in the country. It’s the one show you can’t afford to miss because all the major players and best vendors are there.
Also, don’t overlook the importance of post-settlement funding. Mass tort lawyers can get very inexpensive loans—single-digit-interest-rate non-recourse loans—if they want to borrow against their settlements. It’s a way to scale up your business with extraordinary speed and to keep some dry powder available after settlement.