Posted February 22, 2016
For richer or poorer: divorce lenders help you ditch your wealthy spouse – at a cost
Many ‘non-monied spouses’ are increasingly signing up for legal assistance loans instead of settling – but some question whether the litigation is worth it: ‘Sometimes people with wealth just fight for the sake of fighting’
By CAREN CHESLER
For the 12 and a half years Gwen* was married, she lived the good life. She and her husband lived in Beverly Hills and spent weekends at their Malibu mansion. She had a closet full of designer clothes and drove an expensive car. She had all the comforts one can afford when one’s husband is earning $2m a year as a television producer.
That is, until one day in 2007 when Gwen’s husband emptied their joint bank accounts, closed the credit card accounts and served her with divorce papers.
“His company was in his name, so he was able to freeze me out of everything,” she said. Gwen was left without access to any of their shared assets, including cash. She was, in an instant, broke.
Gwen was a 21-year-old model when she got married and quit her job soon after the pair wed. Gwen had little money of her own, which made it hard to hire a decent divorce lawyer.
“I called every bank. I had all these private fancy bankers. I even called hard money lenders. But none of them could help me,” she said.
Finally, a lawyer she consulted went online and found a company in New York that was willing to essentially finance her divorce. The company, BBL Churchill, was willing to make her a $250,000 loan, to pay her legal fees and some of her living expenses.
They charged her an interest rate of 18% to 20% a year – similar to that of a credit card – none of which had to be repaid until the divorce was finalized.
BBL Churchill is one of a new breed of financiers who are capitalizing on the high US divorce rate by lending money to the “non-monied spouse” in order to finance premium representation.
“We step into the gap and provide funding to these asset-rich/cash-poor clients for payment of their legal fees and living expenses,” said Brendan Lyle, CEO of BBL Churchill. “The advantage of our product is, they don’t need to make repayments until their case settles. That’s unlike using their Amex card, which may or may not have been cut up by their husband.”
The main players in the “divorce lending” industry are BBL Churchill, Balance Point Funding in Los Angeles, and Novitas, a UK company that has opened branches across America and bills itself as “a specialist finance provider for individuals in the divorce process”.
The divorce funders have different business models. While BBL makes loans and charges interest, Balance Point Funding takes a cut of the marital assets that are won in the end. As such, it is choosy about the situations in which it invests: there must be at least $5m in the marital estate, and if there is a pre-nuptial agreement, it must leave their client at least $5m.
A former divorce lawyer, Lyle said he launched his business in 2011 after witnessing countless situations in which a man and woman marry, and while the woman leaves a career to raise a family, the man rises through the ranks of, say, Wall Street, and starts earning a multimillion-dollar salary. When the couple divorces, the assets are often in the husband’s name, enabling him to hire top-notch legal representation while the wife, or the so-called non-monied spouse, struggles to come up with a retainer.
“We’re trying to ensure that our clients aren’t starved into an early settlement,” Lyle said.
Those clients aren’t just women. Kevin McDonough, a divorce attorney in New York, has a male client whose wife earned more than he did. She continued to work at her real estate brokerage firm while he stayed home to raise the family. Their divorce involved divvying up their $20m estate, and while she had the means to hire a top-notch attorney, he did not – until he got a $500,000 loan from BBL.
“He recognized from the beginning that he had a difficult spouse and that he wanted a certain level of representation,” said McDonough.
Without a loan, the non-monied spouse can petition the court to have the monied spouse pay their legal fees, but those motions are not always granted, McDonough said – and even when they are, they don’t always cover all the legal fees and on a timely basis.
As the proceedings go on, the non-monied spouse’s lawyer can be owed a substantial amount of money while the monied spouse’s lawyer is being paid regularly, and that can put pressure on the non-monied spouse to settle.
“The non-monied spouses generally feel pressure if they see all sorts of unpaid professional bills accruing, and they don’t know how they will ever be paid,” he said.
Legal fees aren’t the only bills that can accrue. There may be accounting fees, appraisal fees and investigative fees. With financing, the poorer spouse can hire a private investigator or an accountant to do an analysis of spending, to find undisclosed assets.
Ostensibly, a divorce loan should provide a spouse with freedom to see the proceedings through on his or her own terms. But some have raised questions about the ethics of the divorce lending industry, such as how much involvement divorce financiers should have in the divorce negotiations.
According to McDonough, before his client chose BBL, he talked to Balance Point Funding but decided not to work with them in part because they wanted decision-making authority. “They wanted a more authoritative role,” McDonough said. Balance Point disputes McDonough’s claim and says his client chose BBL entirely for economic reasons.
There are also concerns about potential conflicts of interest, if the divorce lender is brought to the client by the divorce attorney, says Jonathan Gorman, a forensic accountant in Orlando, Florida who is often called in to divorce cases.
“I was at a conference attended by attorneys and CPAs, and an attorney brought in a brochure that was sent to his office on divorce lending. He called it “a malpractice suit waiting to happen”, Gorman said.
“The attorney was concerned enough by reading the brochure that there were ethical hurdles an attorney would need to consider before offering the service. He wanted nothing to do with it.”
Attorneys may be concerned that they are promoting the idea that the client take on debt and high-rate interest charges to pay their bills – a potential conflict that could be abused, Gorman said. Attorneys may also be concerned that lenders want information about the case that would breach attorney-client privilege, he said.
“It can get complicated pretty quickly. When a lender is asking the attorney for information about the case that isn’t public, the attorney will consider whether that information is privileged or could somehow become a point of discovery for the other spouse,” Gorman said.
Also, non-monied spouses often have unrealistic expectations of what the settlement will be, and if they have access to a large amount of capital, they may aggressively pursue such settlements anyway.
For example, someone might spend an extra $20,000 in legal fees and wind up with a settlement that is $10,000-$50,000 more, but they’re not going to wind up with a multimillion-dollar windfall, he said. The final outcome is usually not far from the early settlement on the table, right after discovery.
Stacey Napp, who owns Balance Point Funding, says she has heard of a case in which a client of a divorce funder wound up owing more to their lender than they made in the divorce because the case went on longer than expected, at an annual interest rate of 20%. That kind of thing would never happen at her firm, she said, because she doesn’t make loans.
“It is impossible for a client to earn less than Balance Point on a marital asset claim payout, because our percentage never even approaches 50% of the resolution amount,” Napp said.
Lyle says he has only had one instance in which a client wound up owing more than they received, and it was an extenuating circumstance caused by one of the parties dying in the course of the divorce proceedings. The protection his clients have is that he won’t lend them more than 25% of what he anticipates the value of the settlement to be. If he lent them more than that, he’d be putting himself at risk, he said.
Besides, his business relies heavily on referrals. Unhappy clients aren’t good advertisements, he said.
“You don’t get business by entering into deals that screw people over from day one,” he said.
In the end, the issue may not be whether clients are borrowing too much. It may be whether they should be borrowing at all. John Slowiaczek, president-elect of the American Association of Matrimonial Lawyers, questions whether these companies actually prolong the divorce process, by giving people the money to battle it out in court rather than reach a settlement.
“Some people say if you have litigation assistance, it encourages needless litigation. There’s some wisdom to that,” Slowiaczek said. “Sometimes people with wealth just fight for the sake of fighting.”
*Not her real name. We have withheld her name to protect her privacy.
Note: This article was updated on Thursday, February 25 after Balance Point contacted the Guardian to dispute McDonough’s claim about the reasons for his client not wanting to do business with the firm.