The Many Forms of Litigation Funding

A recent scandal involving the University of Louisville Foundation provides another illustration of how necessary third-party litigation funding can be – and of why it is not a threat to the integrity of the justice system.  Although this situation does not involve conventional third-party investment in litigation, it does demonstrate how and why it can be a good thing for outsiders to provide financial support for litigants who lack the funds to pay for their own legal fees.

In 2016, an inquiry revealed potential financial misconduct by the executive management of the Foundation, which manages the University of Louisville’s endowment.  Wasteful spending and mismanagement significantly depleted the Foundation’s assets, diminishing the University’s endowment.  As a result of the initial findings, James Ramsey, president of both the University and the Foundation, was fired, along with his top assistant.  In addition, the Foundation’s chief financial officer was placed on leave for several months before also being fired in June 2017.

Not surprisingly, the university’s leading donors expressed unwillingness to make any more contributions until the Foundation had identified its problems and had taken remedial action.  Towards this end, the Foundation commissioned an audit report by a forensic accounting firm, Alvarez & Marsal (“A&M”).  When the estimated cost of the audit reached $2.2 million, two charitable foundations, the James Graham Brown Foundation and the C. E. and S. Foundation, combined to contribute $2 million towards the audit’s cost.

The audit results suggested that legal action by the Foundation might be warranted.  The Kentucky Attorney General recently indicated that its criminal division would investigate the Foundation in the wake of the A&M audit, requesting material from the University, including emails and documentation authorizing the compensation of Ramsey, his chief assistant, and the Foundation CFO.  The University also is considering civil litigation, but the Government Contract Review Committee voted to reject UofL’s request to double the amount it spends from its general budget on a legal services contract.  This prompted the suggestion that some of the $2 million donated for the audit could be redirected to legal fees in civil litigation.

Such a use of the donated funds would be nothing less than a form of litigation funding.  In the absence of a change in budgeting decisions, he University seems to lack the resources to pay for litigation expenses.  Turning to the funds donated for the audit report would be akin to seeking third-party litigation financing. To be sure, the donors don’t expect and won’t receive any return on their donation.  But the Louisville situation demonstrates that having a meritorious claim and having the funds to pay for litigation costs are two different things; and getting the funds from third parties is often necessary to protect legitimate interests and serve the public good.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, University of Louisville, alternative litigation finance

 Works Cited:  Joe Sonka, Finance Cabinet Could Overrule Contract Committee, Allowing U of L to Spend More on Legal Fees as It Weighs Litigation Options, Insider Louisville (August 15, 2017) available at https://insiderlouisville.com/metro/finance-cabinet-could-overrule-contract-committee-allowing-uofl-to-spend-more-on-legal-fees-as-it-weighs-litigation-options/

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