Plaintiff Loan Financing in Canada

Almost one year ago, in Bourgoin v Ouellette [(2009), 343 NBR (2d) 58, 177 ACWS (3d) 318], a New Brunswick judge awarded a very interesting kind of legal cost  – interest on a loan the plaintiff had taken out to finance his lawsuit. This was the first time in Canada that interest has been awarded as a cost. Effectively, this shifts some of the burden of paying for these loans from the plaintiff (who would normally see the interest deducted from the settlement) to the defendant (who is now responsible for these as part of the plaintiff’s costs).

Two weeks ago, the MJLH sat down with Hubert Seamans, the president of Seahold Investments, to explore the burgeoning field of plaintiff financing loans in Canada. The following is a transcript of the discussion that ensued:

MJLH: How did you come to be in the plaintiff financing business?

Seahold: I’ve been an entrepreneur since I was 24 and I was involved in many small businesses early in my life. Starting in 1983 I went in to politics, and was Minister of Municipal affairs in the McKenna government in New Brunswick. After leaving politics, I realized there wasn’t a lot of job demand for ex-cabinet ministers [laughs]. So I went in to business brokering, helping people buy and sell businesses. In the course of my brokering I ran across a guy who was involved in plaintiff loan financing. But he was charging a very high interest rate, in fact just below the legal maximum of 60% annually. I knew a fair number of personal injury lawyers and so I talked to them about this guy, and they felt that he was charging exorbitant interest rates. They encouraged me to go in to the plaintiff loan business and put it on a more equitable footing for their clients. So I started lending money to their clients at about half the previous rate, they told other lawyers about my business and 11 years later, we’re doing it coast to coast.

MJLH: How do you decide which cases your firm will take?

Seahold: Well, first off, we only lend to cases that are proceeding on a contingency fee basis. We do this because it is a vote of confidence by the lawyer in the merits of the case, and also because contingency fee cases mean that the client’s financial needs are manageable, and thus something we can help them with. Our goal in lending is to help clients resist the financial pressure to settle quickly and for less money than they deserve.

MJLH: How do plaintiffs find out about your services?

Seahold: We never market to plaintiffs. Instead we approach law firms and inform them of our services. Then, at the firm’s discretion, they can notify their clients about our loans if things get tough for their clients financially.

MJLH: What is the process for plaintiffs to get a loan?

Seahold: We try to remove as much work from the law firm as possible by conducting most of the assessment ourselves and limiting the amount of their time we take up. The client fills out a form and answers 15-20 questions, mostly geared towards the nature of the accident and the size of their financial needs. We then call the law firm back, confirm the details of the client’s story and make a decision.

MJLHL: When you say “accident” does this mean your firm deals mostly with motor vehicle cases?

Seahold: Absolutely. That would be our typical case. We also do some slip-and-fall accidents and some medical malpractice, but of the 500-1000 cases a year we take, 95% of them are road accidents.

MJLH: How do you determine the size of loans you make to plaintiffs?

Seahold: We try to minimize the size of the loan in order to keep clients’ interest payments low, since a $10,000 loan at our interest rates doubles every two and a half years, and the average case length is also about two and a half years. We also try to keep our loan to a maximum of 20% of the size of the final settlement, including both principal and interest.

MJLH: You mentioned that you only take cases that are on a contingency fee basis; if so, then what do plaintiffs spend the money on?

Seahold: The money we lend clients goes to feed kids and pay the rent. A small amount of it may go towards pre-trial disbursements necessary to get these cases to trial, but those are not the main reasons clients need money. This is really an access to justice issues, since otherwise, poor plaintiffs are forced to settle because they’ve been injured, can’t work and run out of money for the essentials of life. That’s where we come in.

MJLH: What are your mechanisms for determining interest rates?

Seahold: We have a flat interest rate for all files. We set that rate when I opened the business eleven years ago and have stuck to it ever since. It’s the same as Sears Canada: 2.4% per month, compounded monthly, which works out to 32.97% per year. Some of our competitors charge different rates on different files, but that’s not our business model.

MJLH: In Burguoin the judge considered whether your interest rate was a reasonable one, and determined that it was. On the other hand, what do you say to those who argue that a 32.97% annual rate is simply too high?

Seahold: Our interest rate is a reflection of the cost of doing business, and I wish it was a lot lower. One problem is the inherent risks of this industry, and we lose about 25% of revenue every year due to bad debts. Another fact is that we raise funds primarily from private investors. This is obviously a business that requires a large cash flow to finance, but so far the banks are unwilling to make large loans to companies like ours. We do have a bank line of credit, but probably 80% of our financing comes from private investors. And private financing is far more expensive than bank financing. When I started we were paying 18% to private investors. We recently moved to 12% and then down to 10%, but that’s still far higher than the interest rates most businesses pay to raise funds. Our interest rates reflect these two facts.

MJLH: Continuing on that theme, why do you think big banks haven’t gotten in to this area in the same way that the American banks have?

Seahold: This is a fairly new field in Canada. We were the first firm to do it nationally and we’ve only been around for 11 years. It’s a whole new way of lending niche and the volumes aren’t established here yet. Our average loan is $15,000. We have a few loans approaching $200,000 but that’s a case that drew on for years and years. We typically limit loans to $75,000 per case.

MJLH: Have you ever thought about financing law firms directly?

Seahold: We’ve considered doing that, and at least one of our competitors does that, but we don’t do that. It’s important to note that financing law firms does not mean that the firm would then lend the money to their clients – that kind of loan is against professional codes of conduct. Money leant to the law firms would be used bridge gaps for small firms that are working on a contingency fee basis, but need money to make ends meet between trials.

MJLH: What about financing class actions?

Seahold: We don’t finance class actions for two reasons. First, it’s far more difficult to evaluate the complexity of a class action, as opposed to a motor vehicle accident or a slip-and-fall accident. Second, it’s far more expensive, with costs ranging from $150,000 to $1 million worth of funding. We have a limit of $75,000 per case. But one of our competitors does class actions.

MJLH: What role does Seahold Investment play in the evolution of the case? Either in trial tactics, settlement offers or otherwise?

Seahold: Absolutely none. We do not get involved in the case at all. The only time we do is if they’re in a settlement conference and there may not be enough funds to cover the loan. In this case the lawyers will call us and negotiate what can be achieved as far as a payout goes.

MJLH: What kind of action is taken in that case?

Seahold: We recently have started a non-recourse system, so that if it turns out there aren’t going to be enough funds to cover the loan, the client is not going to be responsible for covering it once we agree on a specific amount.

MJLH: So essentially they pay what they can at that point and everything else is written off?

Seahold: Yes. Not a preferred option for anybody, but that’s the way the real world works. This is a high-risk lending sector. There’s a number of reasons why we might tend to lose money on an account, but we don’t tend to lose too many accounts in a given year. Maybe a dozen or so. Less than 20, generally, per year. But they tend to be large amounts. Like $100,000 or $50,000, from accounts that are very old, typically if clients have been seriously injured and needed a long time to recover. Time is our enemy in the lending business.

MJLH: What collateral is put up by the plaintiffs in your cases?

Seahold: There isn’t any. We take clients who do not have enough assets to be eligible for regular bank loans. We are lenders of last resort for people who cannot access the regular banking system. We deal a lot with young people, single parents… people who do not have outside sources of support.

MJLH: What happens when the legal costs and the cost of the loan are so large that they consume almost all of the settlement – say $50,000 out of a $52,000 settlement?

Seahold: This is about the only time we are ever involved in the settlement negotiations in any capacity. If a lawyer calls me to say “We received a $100,000 settlement negotiation, but the client owes me $40,000 and they owe you $40,000, so the client would only get $20,000. They aren’t willing to settle for $20,000, but I think this is the best offer we’re going to get.” At that point we negotiate with the lawyer to see whether they will reduce their fees, and we reduce our loan, and try to find enough financial room for the client to be happy with the best offer.

MJLH: Speaking of access to justice, what do you say to critics who point out that access to justice in this case runs in only one direction – you can make money from a plaintiff, but not from a defendant. What do you think about that?

Seahold: We only deal with plaintiffs in these cases. The defendants our clients face are typically multi-million dollar corporations like insurance companies or hospitals. They’ve got lots of money for legal fees, their own teams of lawyers. This is a David and Goliath situation, it’s as simple as that. We’re helping David get a shot at winning here. If we had equal access to justice in this country, I wouldn’t have a business and I’d be happy about that. But we don’t. Under the current system, offers typically get bigger the closer you get to trial, and since rich people can last longer on their assets, they can hold out for larger settlements than poor people. This helps the average Canadian get a larger settlement.

MJLH: If a lot of your clients are involved in motor vehicle accidents, doesn’t that take Goliath out of the picture, so that it’s one average Canadian against another?

Seahold: Goliath is the insurance companies. The insurance companies are the ones being sued, and they’re running a business. So they try to minimize their losses, while the plaintiff is there to maximize their settlement. The insurance companies have deep pockets and so they have no time pressure to settle these claims generously early on. The plaintiffs are the ones trying to feed the kids and pay the rent, so they are under tremendous pressure to settle the case early. This takes some of the pressure off of the plaintiff. The insurance companies have historically made low-ball initial offers, and in many cases these offers have been accepted by people who couldn’t afford to wait for a better deal closer to trial. Our service allows them to hang on.

MJLH: What do you think of the argument that loans like these encourage people to bring frivolous lawsuits before the courts and flood our already over-burdened system?

Seahold: I don’t see that as an issue here, as compared to the United States, since the provincial governments are regulating that problem directly. Furthermore, we don’t want frivolous claims to go forward any more than the courts would, since those cases would get thrown out and we’d lose our money. I’d also point out that we come in to the picture after the case is already underway, so I don’t think we have any influence in the decision to start the case at all. We’re there to help people who are already in the legal system but having trouble staying afloat financially. As I said before, we’re not out there drumming up business in the community.

MJLH: What regulatory framework does your company fall under?

Seahold: We have to be compliant with securities regulations in each province because we have investors in each province, and we have investors coast-to-coast. Because we have an investor pool we are compliant with securities regulation in every province.

MJLH: How does your company deal with appeals, both by the plaintiff and by the defendant?

Seahold: We have no control or influence over the decision to appeal, obviously. Appeals are also very rare for us, since most of our cases are settled before trial. 85-90% of these cases do not go to trial. Only one or two cases had any consideration about an appeal, but neither one of them moved forward. We would probably evaluate the case and if the lawyer felt we could win on appeal, we would extend additional financing.

MJLH: How does Seahold decide which firms and individual lawyers to form partnerships with?

Seahold: Our relationship with the lawyer is critical, since we’re depending heavily upon the lawyer’s judgement about the case’s likelihood of success. We’re looking to deal with pre-eminent firms, people with a good track record. We’re looking to deal with lawyers whose primary area of practice is personal injury. If they’re only doing it a small percentage of their practice, we’re not as interested.

MJLH: Do lawyers get any incentives for referring clients?

Seahold: No, absolutely not.

MJLH: Some have argued that this kind of lending introduces a conflict of interest in to the lawyer-client relationship. What do you say to that?

Seahold: Actually, the history of these loans is that many lawyers were lending money to their clients, which is a clear conflict of interest [and banned under professional codes of conduct in all provinces – MJLH]. When we started 11 years ago, several of the law societies across the country had taken a stand on this issue, and were campaigning to end lending by lawyers to their clients. So law firms that had been doing this started looking for other ways to help their clients make ends meet, and we arrived at the right time to provide this service. There was a conflict, but it was because lawyers were lending. We helped remove that conflict from the equation.

MJLH: … because you aren’t involved in the conduct of the trial itself?

Seahold: Exactly.

MJLH: Do you ever do Workers’ Compensation cases?

Seahold: Unfortunately we did a few. And don’t intend to do any more [laughs]. We lost our money every time. The nature of the WCB system is a long, complex, drawn-out affair that rarely, if ever, resulted in a sizeable payout. There is no opportunity for a business case there, because it takes a long time, so the cost is high, but the payouts are uncertain and fairly small, and paid out on a monthly basis. So there’s no room to lend money out of their monthly income.