Nadine is a claim in a drawer in the funding office I own in Evansville, Indiana. She is 58. For 11 years she broke pallets at the grocery distribution center on the north side of town, and the flat of tomatoes you bought in September came off a pallet her L4 disc took in February. She worked it 9 more days, because the shift is $21.40 an hour and the doctor is a form you fill out. When she finally stopped, the doctor agreed with her.
She had a lawyer and no money, which is the same condition in two words. He is on contingency: 33% of whatever arrives. She needed $2,600 for the facet injections her doctor ordered in June, so she could sit through her own depositions without crying in the hallway, and her lawyer does not fund clients, and a bank does not fund discs. So she came to me. I own the desk that bought her, and I am proud of what the desk bought. Her back, her signature, and whatever nerve she had left at the depositions, for $18,000, in 4 tranches. I would do it again this afternoon, and I have. The Lord keeps His portion. I keep mine.
You may have read Malpass and Carter in the National Review this week, warning Congress that the United States produces about a quarter of the world’s output and more than half of its litigation funding, and asking for a rate fix on the foreign money. (Read them here.) Bessent told the House Financial Services Committee in September that third-party litigation funding is a “malignancy within our legal and financial system,” and Representative Flood told him about the sovereign wealth funds and the nuclear verdicts. They are correct about the market and they are wrong about what would hurt me. A rate is not what I sell. Let me show you what I sell, because you have already paid for it. Your carrier settles my letters out of the same pool that prices your renewal, and when your homeowners number comes up in March, part of the increase is my yield. You should see the schedule before you decide the Hern bill is a technicality.
Read the check stub twice.
The case settled in July for $310,000, gross, before anyone argues about who is owed what. Her lawyer takes 33%: $102,300, ordinary income, taxed at 37% like a man with a job. The hospital has a $41,000 lien for the MRI and 3 nights, and the lien is senior to everything, including me. My costs are $22,800, billed back at my schedule, off the top, before the lawyers divide the rest. My contractual share is 32% of the gross: $99,200. Nadine receives $44,700.
| Destination | What the code calls the payment | Rate | Kept |
|---|---|---|---|
| Nadine’s hands, as her recovery | §104(a)(2) damages | 0% | $44,700 |
| Her lawyer’s firm, as his fee | ordinary income | 37% | $64,449 |
| Mine, as my contractual share | capital gain | 20% | $79,360 |
| My limited partner in Riyadh | the same gain, one jurisdiction over | 0% | $99,200 |
One number, four destinations. Set them beside each other and don’t flinch.
You see it. Nadine is the only person in that table the code was written to protect. Her pain is untaxed, on purpose, by design, in writing. She signed the protection to me for $18,000, and the code has not noticed, and the code is not going to.
Now the part the hearing did not reach. The contract recovers the greater of 3.5 times invested capital or 32% of the gross, whichever is larger. That is not a trap. It is a convention. You’re reading the clause the way my counsel reads it, and it took him a seminar to stop flinching at it. Every dollar I advance to her body is a dollar that does not compound into the multiple. So when she asked for $2,600 — not for the case, for the injections, so she could sit — the answer was no, and the no cost me nothing at all. The $2,600 is a rounding line on the fruit in the lobby in March. Nobody eats the fruit.
Cyris is one rung down the same stair. He is a roofer in Joplin, Missouri, a rotator cuff, and I advanced him $9,000 in 4 tranches while his lawyer worked the file. Then the MRI came back with 40% pre-existing degeneration in it, and my model moved from 2.9 times to 0.8, and a model that moves is a model that stops. I declined to fund further. He had quit his weekend job to sit for depositions. The case settled for $22,000 and I kept my $9,000, which is the whole of my loss in Joplin. He did not keep his weekend job. The option is the product: heads I take 32% of the gross, tails I am a secured lender who was never there.
Tilden is one rung down again, and he is not on my ledger at all. He is on a list. He runs an HVAC company in Kankakee, Illinois, and in April he received a letter: $85,000 demanded for a trip and fall, with an ER visit and no treatment after it. He never met the claimant. He never heard of me. He has heard of the letter. The claim came to me in a bundle. I buy signed retainers from marketing shops at $700 a head, 300 at a time, and I bought 300 of them on a Tuesday for $210,000. His carrier paid $61,000 in nuisance value in August, because defending it costs more than paying it, and his renewal renews at 14% higher. That 14% is a real number in a real county and it will be spread across about 4,000 households, none of whom will ever see my name. I’m grateful to your carrier, by the way. It never asks where the letter came from.
Now take the arrangement where I sit on both sides of the ledger, and watch how little changes. I own the line. I own the fund that’s suing it. Della is a board on the e-waste line I own outside Allentown, Pennsylvania. Her blood carries 61 micrograms of lead per deciliter, which is past the number where the federal standard I don’t follow says I must send her home with pay. I haven’t sent her home. The phone you charged last night has a board in it that came off her belt. The board paid her $0.0028 a pound. The board paid me the difference. The lead in her blood is the difference. The God who put the copper in the ground put the lead in the same ground and priced neither. The pricing was the part He left for me.
The federal standard says her blood should have been tested in March. The test is $41. The lab is 4 miles from the yard. I don’t pay for the test. I won’t pay for the test. That $41 is the only part of this story the government already knows how to price. The rest is where I’ve been careful. Her lawyer needed money for the experts, the way lawyers always need money for the experts. The money came from my fund. The fund is in the Cayman Islands. The capital is a sovereign wealth fund’s. It pays no U.S. tax on capital gains. That’s not a strategy. That’s the statute. The fund took 30% of the recovery, which is what funds take. The recovery was $3.4 million.
The same $3.4 million has three prices. Free for pain. Full for labor. Nothing for capital. And the capital is the same pain, bought in a jurisdiction where pain doesn’t count. Her lawyer worked for his 40%. Della worked for her 30% with her blood. My 30% didn’t work at all. It waited. My share is called carried interest. That’s the tax code’s word for waiting.
Slow down for this one.
I am the defendant in the case my fund financed. I am the plaintiff’s patron. I am the counterparty. There’s no one else in the transaction. The only blood in it was Della’s. She was paid the same as the man who waited. That man is me.
Widen the frame. The liability is mine on both sides of the table. The insurer pays the verdict. The verdict is priced into the premium. The premium is priced into the phone. The phone comes to you, and the price comes out of your paycheck, and the lead stays in Della. Everyone in that sentence has been paid except Della. Della still has the lead. I’m told the circle closes with me. I haven’t opened the settlement file since it closed. The file is thick. The monthly statement is green.
This is where you would like to quarantine me. I will spare you the effort. I am not a man with a drawer. I am a curriculum. I’ve taught the greater-of clause as module 7 at Warden for 11 years, and the best student I ever graded now prices cases for a fund in London three times the size of mine. He sends me his models. He has improved mine twice. I am proud of him the way a man is proud of a son. He writes that the docket is full. I write back that mine is too. I tell you this so you understand what you are arguing with. You are not arguing with me. You are arguing with a graduating class.
Pull the frame back one length. The code has had two prices for the same money longer than there’s been a code. In 1958 the Supreme Court held that a man who sold the right to his future oil payments for a lump sum still owed ordinary income: Commissioner v. P. G. Lake. Capital treatment is the exception, narrowly construed against artful devices. That was a man selling his oil. This is a fund buying a share of a woman’s blood. The Court had the answer in 1958. What the Court did not have is my contract. Assignment is older still. A man sells the right to collect a debt for a fraction of the debt, and the buyer collects, and that is the oldest trade in the ledger. It has never before required somebody to break. I have added that ingredient. It prices beautifully.
Here is the principle the case was only an example of. The code prices capital below labor because the men who wrote it believed money works harder than bodies. Money has never worked a day. It’s still the favorite child.
George Fitzhugh, in 1857:
The negro slaves of the South are the happiest, and, in some sense, the freest people in the world.
He was pricing a different kind of body in a different kind of ledger. The arithmetic is the arithmetic. Della is the freest woman in my yard. She’s the only one who’s been paid for the lead. The other 212 have the same lead and no lawsuit.
Paul’s rule is plain. If any would not work, neither should he eat. I’ve taught it in module 4 for 11 years. Work is the qualification. Nadine worked 11 years and her qualification expired in February. Della’s is still current; her blood is doing the qualifying. I have not worked a day in my life. I am not idle. I am exposed, and my seminar reads exposure as labor. I have never checked the Greek. I have not needed to.
The columnists end by asking you to tax my share the way you tax her lawyer’s. Kevin Hern has a bill with a name too long to say twice, and I’ve read it the way I read all legislation: the parts that apply to me. The parts that apply to me are the parts my students will draft the exceptions to. That’s what we teach in the seminar. The exception is the lesson; the rule is the décor. If the bill passes with the withholding in it, the fund withholds 24% at the source, files quarterly, and my spread compresses from 17 points to 13. I repriced all 412 open files this morning before the coffee was poured. The fund’s after-tax is unchanged. That is the sentence I want in the minutes.
You want a villain you can vote out. I’m not the anomaly. I’m the curriculum. The lecture was written before the country was. Only the vocabulary changes: the fund, the carry, the domicile. Regulation was the brief, expensive interruption, and it’s ending. The United States does a quarter of the world’s business and more than half of its lawsuit funding. The market was $19 billion in 2024. It’ll be $50 billion by 2032. The bill will pass or it won’t. Every bill has an exception, and my students write the exceptions. I have not opened the file on what a 13-point spread does to the size of the advance I offer the next woman with a disc. The file is on the desk. The desk is tidy. Bessent called this a malignancy into a microphone in September. The microphone was excellent. The deposit cleared Friday.
Simone is the next one. She’s Della before the settlement. Same belt, same dust, no test on my ledger, and the fund’s underwriter has already priced her. The price is in the binder. She hasn’t been told. I’m in no hurry. The lead isn’t going anywhere.
Nadine got her $44,700 in August. She is having the injections now. She is paying for them herself: $610 a session, and she has cancelled 2 of the 6 to cover October’s electric bill. Her recovery was untaxed. The injections are not deductible for her, and she does not know that yet, and she will find out in April.
The office closes at 6. Her file is in the drawer. The drawer is not locked.
Sterling A. Varice holds the Hayek-Friedman Chair and serves as Dean of Instruction at Warden University’s College of Business and Economics in Richmond, Virginia. He is the author of three textbooks: Divine Mandates for Labor Utilization, Social Obligations for Profit Maximization, and Calibrated Deprivation: A Manager’s Guide to Employee Motivation.