Things to Keep in Mind When Considering Litigation Funding

As people often say that litigation finance is confusing and it is hard to understand what the terms are or should be, this post lays out some good questions to keep in mind when considering litigation finance for an upcoming case.

The best place to start is having an idea of what the case budget is and how much money are you asking for in an investment.  Things to think about here include: what is the cost of bringing this case through trial? What about if there’s an appeal? There is no way to know exactly what a case will cost, even the best attorneys and litigation financiers cannot tell you that but this is a good time to seek advice from experienced professionals that you trust so you can have a realistic idea.

Are there due diligence fees included in the arrangement? Due diligence is a key component of any funder’s process to deciding to fund a deal but due diligence takes time and resources.  So it’s important to know if the funder is seeking to recover any due diligence fees.

What if costs exceed the case budget? Who will be covering those costs? If its you as the plaintiff and you don’t have much capital to cover anything extra or any surprises that may arise you might want to factor in more buffer room in your original estimate of what the case will cost.

It’s also important to think about the realistic value of your case.  By that I mean, will your case make you money? If the maximum amount of damages that you are likely to receive from a claim is only slightly higher or the same as what you’re estimating the case may cost, then it may not be a good fit for litigation finance.

Of course, arguably the most important question is what returns with the lawyers and funder receive? Ideally, you want to find a deal that would secure you a good return after the funder’s and lawyer’s interests are paid out.  Again, this can be difficult sometimes to know exactly, particularly if the terms are contingent on how long the case takes but its good to have an estimate early on.

All of these questions are things to think about on your own but to also ask potential funders and your legal team to hopefully make the best decision for everyone.

Topics:  litigation finance, alternative litigation finance, third party funding

Works Cited:  Julia Gewolb, The Art of Litigation Funding Deal, Law360 (February 8, 2018).

Litigation Finance and Case Monitoring

On this platform we talk a lot about trends in litigation finance, and sometimes how we determine what cases to invest in, and even the economics of litigation finance. But this blog post is devoted to what happens after a litigation finance company decides to fund your case.

As we’ve mentioned before, to help the case run smoothly and abide by all rules, regulations, guidelines, and ethics concerns when a litigation finance company agrees to fund your claim they should not be directly involved in litigation.  The claimant has attorneys for a reason and they are the ones fighting the battle in court or during settlement negotiations or during a hearing.  However, once I litigation finance company has agreed to invest in the case they now have a special interest in how the case comes out.  Therefore, litigation finance companies most often will monitor any cases they are involved in.

Not only does case monitoring allow the funder to know how the case is going and whether or not they are likely to receive payment on their investment.  Monitoring also allows the financier an opportunity to be passively involved and create relationships both between the financier and the claimant as well as the financier and the attorney or law firm.

Monitoring a case may look different for every litigation finance company but it will often involve receiving docket notices and reviewing pertinent filings.  It may also include tracking court deadlines so the funding team knows what the attorneys and court are doing at different times.

It is also likely that the funding team will track the legal spending of the money.  Particularly when capital is provided early on it can be helpful to see what money is being spent as what stage of the proceeding.  As that is the litigation finance company’s investment it is important to know how it is being managed.

Beyond these things, some litigation finance companies may offer advice or more practical help to the lawyer or team of lawyers without of course being directly involved in the proceeding.  It may also depend case by case how much the funding team is involved.  If you would like to know more about how TownCenter Partners specifically monitors our cases please feel free to reach out to our team.

Topics:  litigation finance, alternative litigation finance, third party funding, case monitoring

Works Cited:  Christopher Catalano, After We Say “Yes:” How Case Monitoring Works, Burford Capital (May 1, 2018).

Litigation Finance and Breach of Contract Lawsuits

Contracts are made all the time in today’s society.  Usually, they are made with the best of intentions.  But more often than we’d like, things get in the way and contracts are broken.  One of the ways to recover from a breach of contract may be to file a lawsuit.  Whether or not a lawsuit is a viable option will depend on many factors but one of which is the character of the breach, if the breach is minor, material, or fundamental.

However, the ability to recover on a breach of contract is limited to those who can afford to bring suit and continue to stay in the suit as long as it may take.  This means it is often an expensive way to reach justice against someone who has wronged you.  It used to be that people who did not have the resources to stay engaged in a lawsuit would have to take a settlement offer and often not get as much as they deserved.

But now, litigation finance can help to close those barriers by providing necessary capital in contract dispute cases.  This capital can help you stay in litigation longer if that is the best course of action.  Or if they best option is to settle, having more capital will give the plaintiff better prospects for negotiation to get the best deal for them instead of getting pennies on the dime. Litigation finance is no longer just for personal injury claims but rather can be used in a myriad of claims including meritorious contract claims.

Additionally, in a legal system that is innocent until proven guilty having more capital in litigation can help to provide for the best resources.  Including the best expert witnesses or the best discovery to get the evidence that you need.  In addition to of course the best attorney that can fight for you, so that you receive justice.

If you think you may have a contract case or another case that may be eligible for litigation finance be sure to visit www.yourtcp.com to apply for litigation finance or contact one of our team members today.

Topics:  litigation finance, alternative litigation finance, third party funding, breach of contract, contract disputes

Works Cited: How to Finance Breach of Contract Lawsuits: Litigation Finance Through LexShares, Law360 (April 11, 2016).

Litigation Finance in the Asia-Pacific Market

As litigation finance continues to gain traction all over the world this blog post focuses specifically on the industry’s growth and development in the Asia-Pacific region.

Singapore: In March 2017, Singapore’s Civil Law Act went into effect, abolishing champerty and maintenance and officially permitting the use of third party funding in arbitration.  While right now the act only permits third party funding in arbitration, it lays the groundwork to expand it into other types of dispute resolution. With the new act allowing third party funding in arbitration, Singapore is seen as the leading seat of arbitration in Asia.

Hong Kong: In June, Hong Kong followed in Singapore’s footsteps and passed an amendment allowing third party funding in arbitration under Hong Kong law once the act is implemented.  The act was not implemented immediately as there was no regulatory framework to support such an act.  However, this is a step towards Hong Kong competition with other prominent jurisdictions to be a cost-effective seat of arbitration in the future.

Korea & Japan: While the main focus has been on legal reform in Singapore and Hong Kong recently there is a trend towards more established corporations in Korea & Japan seeking forms of legal finance.  Many companies are asking about portfolio-based legal finance to help relieve legal budget pressures and its potentially negative effect on share price.

All of these new developments point towards growing legal markets and particularly litigation finance industries in this area.  While right now legal finance is mainly used in the arbitration context, I doubt it will be much longer before we see it expanding even more into other forms of dispute resolution to help both individuals and companies.

Topics:  litigation finance, alternative litigation finance, third party funding, Asia, Asia-Pacific, Singapore, Hong Kong, Korea, Japan

Works Cited: 

James MacKinnon, Legal Finance Market Focus: Asia-Pacific, Burford Capital (February 13, 2018).

Tax Implications of Alternative Litigation Funding

One area that is not as often talked about in the world of litigation financing is tax implications.  While its hard to exactly define the tax implications for both the investor and the plaintiff because it is likely to depend some on details of the agreement that we do not have, hopefully this blog post can outline generally what may be relevant to think about related to litigation finance and tax implications.

First we need to establish that there are two sides to every litigation finance deal, each advance, each payment, and any final non-payment will have tax implications for both the investor and the plaintiff.

Starting with the plaintiff, it would be important to know if the advance must be reported as income or if it would fall under some other category? If it is income, is it ordinary income or should it be treated as the proceeds from the sale or exchange of a capital asset? Also, if it is income, is there an exclusion that makes the receipt non-taxable?

From the investor’s point of view, is the payment an expense that can be deducted immediately, or at a future date? Is the payment treated like a loan and therefore, not deductible because there is an expectation of repayment in the future? Is the advance properly treated as the purchase of an asset? If so, is the asset a capital one or is the asset one used regularly in the investor’s business whose subsequent sale (which would be repayment) at a gain, produces ordinary income?

It is also important to note that the investor and the plaintiff may not want to view the transaction the same.  It is very possible that a favorable result for one of them would produce a less favorable result for the other.  Therefore, it may come down to who has more bargaining power in the agreement or who understands more about tax law.  Without tax counsel it may be hard to understand and negotiate a deal that is good for you (whether you are the plaintiff or the investor).

While none of these questions have answers an all are likely to depend on the details of the funding agreement they are important to keep in mind and to ask your counsel if you ever find yourself as an investor or as a plaintiff involved with litigation finance.

Topics:  litigation finance, alternative litigation finance, third party funding, tax, investors

Works Cited:  Alan B. Morrison & Randy Haight, Article: The Tax Treatment of Alternative Litigation Funding: Some Answers but Mostly Questions, Pittsburgh Tax Review (Fall 2014).

Litigation Finance and In Camera Review

Class action lawsuits are an area of the law that is consistently growing in its use of litigation funding.  With this growth have come many calls for disclosure of when a member of a class action suit is using a third party funder.  However, the federal rules do not currently require disclosure of third party funding agreements before certification of the class. This blog post considers one of the main suggestions for litigation funding disclosure in class action cases: in camera review.

The Honorable Jack Weinstein first proposed in camera review.  This rule would impose an affirmative obligation on parties with third party funding agreements to disclose the agreements to the court for in camera review at the start of litigation or whenever the agreement is formed if it is formed after litigation starts.

This is suggested as a happy middle for both litigation finance companies and adversary parties because it would allow the judge to ask questions about the funders involvement in the case and potentially uncover if there were any conflicts of interest while also maintaining the plaintiffs right to privacy under the work product doctrine.  In camera review would be a Rule amendment to Rule 23(g)(1)(c) which already authorizes courts to disclose information about fee arrangements when considering appointment of class counsel.

However, there are some potential issues with in camera review.  For one, it sacrifices clarity that a rule of mandatory disclosure or a rule of nondisclosure would provide because now there is information known by the judge and the judge has decisions to make.  A judge could find that work product doctrine is not applicable and disclose the agreement to the other party or the judge could limit review of the funding arrangement to in camera review and require class counsel to send opt-out notifications to all the potential plaintiffs with certain information about the funding agreement.  This leaves a lot up to the judges’ discretion when it may not be known how a judge feels about litigation finance.

So far there have been no final decisions made about regulation or disclosure in litigation finance but it is important to weigh all the options and be informed.

Topics:  litigation finance, alternative litigation finance, third party funding, disclosure, in camera review, regulation, class action lawsuits

 Works Cited:  Aaseesh P. Polavarapu, Comment: Discovering Third-Party Funding in Class Actions: A Proposal for In Camera Review, University of Pennsylvania Law Review Online (2017).

Litigation Finance: Helping Break the Glass Ceiling

In today’s world, discussions of gender-gaps and gender equality are relatively common.  We’ve seen great progress being made for women in lots of areas and the legal world is no exception to that.  In fact, at law schools and among law school graduates there is becoming more and more equality in the ratio of men to women, which is a great thing.  However, Aviva Will, former assistant general counsel at Time Warner Inc. and now managing director of a large litigation finance company suggests that there is still a large gender gap in legal leadership. But Will suggests litigation finance could step in to help solve the problem.

From what the data shows, women are going to law school and graduating law school and entering into legal jobs but then they are disappearing.  Presumably this is still because of the traditional role that women feel they must play in motherhood.  But this means that the overwhelming majority of leadership in the legal field is all men and at the rate things are going this will not change for decades because there has only been a slight increase in women holding leadership positions year-over-year.

But as Will points out, litigation finance is available equally to everyone.  Therefore, she suggests four specific ways female attorneys can use litigation finance to their benefit in their practice:

  • First, women attorneys can use the support of litigation finance to convince the firm’s contingency fee committee to accept a case that they would usually decline.
  • Secondly, they can present litigation finance to their client as a way to fund their litigation without adding much pressure or risk to the client or their business.
  • Women attorney’s can use litigation finance to land new clients by showing that she already has a plan in place to successful take on their case.
  • Lastly, an in-house attorney can use litigation finance to transform her team for a cost center to a profit center for the organization.

In each of these suggestions it’s not exactly what is being done that is impressive for women attorneys but rather it presents impressive skills and understanding to both colleagues and clients.  Using litigation finance in these ways shows that the female attorney is driven, an innovative thinker, ambitious about landing new clients, that she is financially aware, and ultimately that she possesses leadership ability.  It is by showcasing these skills and abilities that women will hopefully begin to be recognized by their peers, supervisors, and clients that they are leaders in the workplace just like men.

Topics:  litigation finance, alternative litigation finance, third-party funding, gender-gap, women in law

 Works Cited:  Aviva Will, Litigation Finance Can Help Break the Glass Ceiling, Law360 (July 15, 2015).

The History of Litigation Finance

As litigation finance has only continued to grow as an industry in the United States it seems like a good time to understand the history of litigation finance companies in the United States as well as the current status of alternative litigation finance.

Litigation finance companies are thought to have started in the U.S. in 1998 by Perry Walton in Nevada.  The model used by Walton in his early business years is not that different than what is often used today.  Even then this type of capital was not a loan but rather an advance that only had to be paid back if the litigation resulted in a successful outcome.  Walton saw how effective this could be and began teaching others about the new industry.  By 2000, 400 people had attended Walton’s seminars and litigation finance companies began multiplying.

Today it is hard to know exactly how many litigation finance companies exist as there is no registration requirement except in Maine and Nebraska.  The American Legal Finance Association (ALFA) is the industry’s lobbying arm and currently has 33 member companies.  This organization provides resources for the public and a Code of Conduct that its member companies abide by, serving as a form of regulation for those companies.

Together it is estimated that litigation finance companies advance approximately $100 million per year and have a total invest portfolio in excess of $1 billion.  However, all of these organizations do not just provide capital to single individuals in personal injury cases.  The large amounts of money come from highly complex commercial litigation.  It is usually in large commercial cases that litigation finance companies work directly with law firms, including some of the largest and most profitable law firms in the United States and abroad.

While it is not necessarily common practice, some banks do loan money to litigation finance companies.  Including large banks such as Citigroup, Commerce Bank of New Jersey, and Credit Suisse.  But more commonly, litigation finance companies work directly with accredited investors to fund their cases.

Hopefully this background on the industry in the United States serves to explain what a booming industry this is as well as some of the growth that the industry has already seen its in few years here.

Topics:  litigation finance, alternative litigation finance, third party funding

Works Cited:  Terrence Cain, Symposium: 1. Fringe Economy Lending – The Problem, Its Demographics, and Proposals for Change: Third Party Funding of Personal Injury Tort Claims: Keep the Baby and Change the Bathwater, Chi-Kent Law Review (2014).

Proposed Changes to Litigation Finance Agreements

One of the common complaints against alternative litigation funding is that it is very confusing as it can take different forms for different cases and contracts can be difficult to understand.  This is part of why there have been many proposed regulations to the industry and people calling for change.  This post considers one of those proposed changes, a shift in how litigation finance deals are structured.

Some have said that legalizing the assignment of proceeds from lawsuits and banning interest bearing litigation loans would help to provide justice in litigation while regulating the alternative litigation finance industry.  The thought behind banning lawsuit loans that charge interest and legalizing the assignment of proceeds is that it would restructure the market and streamline transactions.

Right now most agreements say that the plaintiff receives the capital upfront but then must repay the principal plus an interest rate.  But a market approach where a plaintiff assigns rights to proceeds for he exchange for funding just takes away the interest from the equation. Therefore, it wouldn’t matter how long the litigation proceeding took because there would be no compounding interest continually adding to the plaintiff’s costs.

It has been suggested that this market approach would put the plaintiff’s and funder’s interest at odds with one another during negotiation when the funder has more bargaining power to convince the plaintiff to agree to his or her terms.  However, that is natural in any negotiation process, the two parties are rarely, if ever, exactly on the same side.  But in this type of negotiation the plaintiff presumably has an attorney that is more than likely a skilled negotiator and can help to make sure a fair deal is struck between the to parties.

This post is not meant to take a side one way or another on this type of proposed changes to the structure of litigation finance agreements.  However, it is simply meant to shed light on a possible idea that may or may not grow in popularity as time progresses.  Because whether you are for or against something it is usually a good idea to be aware of the possible changes that may come.

Topics:  litigation finance, alternative litigation finance, third party funding, reform, transparency

Works Cited:  David Tyler Adams, Note: Laissez Faire: The Case for Alternative Litigation Funding and Assignment of Lawsuit Proceeds in Georgia, Georgia Law Review (Summer 2015).

Litigation Finance and Attorney Work Product

Just earlier this year, the District of Delaware shocked the litigation finance world with a ruling that emails and other documents provided to a litigation funder in connection with their due diligence process are categorically not attorney work product.

As previously discussed on the blog, attorney work product has been a common question that’s come with the increased demand for litigation finance in the United States.  However, it seemed as though everyone was on the same page.  Litigation funders were only contacted in anticipation of litigation because why would you need funding for litigation if you didn’t anticipate it in the first place.  Therefore, any communication between funder and claimant or claimant’s attorney should be covered by work product doctrine.

At least that’s what we thought until the District of Delaware said in Acceleration Bay v. Activision Blizzard, that the documents were prepared with a primary purpose of obtaining a loan and that they were prepared for a nonparty to the litigation.  However, it is important to consider the facts of the case when looking at this decision.  First, the plaintiffs had previously represented to the court that the documents at issue did not existed and that they were not claiming any privilege if the documents did exist.  Additionally, the communications at issue seem to have been exchanged before any agreement was reached, even a nondisclosure agreement.  These facts make this case very unusual because it is general practice to obtain a nondisclosure agreement and a signed term sheet before engaging in any due diligence.

So while even though it appears Acceleration Bay is an outlier case.  It is still important to note that prior federal authority is uniformly against the decision from the District of Delaware.  In fact, the District of Delaware had even previously ruled that documents disclosed to a prospective litigation funder are protected work product in Ioengine LLC v. Interactive Media Corp.

There have been cases were a work-product objection was raised and litigation funding documents were ordered to be produced.  However, in these cases there was a threshold finding that the documents were in fact attorney work product; it was just that the defendant showed a substantial need under the circumstances.  Usually in that situation, the documents are produced in redacted form.  Therefore, I believe that documents shared between litigation funders and claimants or attorneys will continue to remain protected work product as long as they are handled the correct way.

Topics:  litigation finance, alternative litigation finance, third party funding, case law

Works Cited:  David Gallagher, Put The Brakes On Acceleration Bay Litigation Funder Ruling, Law360 (February 15, 2018).