What’s Good for the S&L Is Good for the Plaintiff
When a personal injury plaintiff obtains funding from a third-party to pursue its litigation, theoretical and ethical objections are easy to come by. But maybe this is because of the simplicity of the transaction between the plaintiff and the third-party investor. When a plaintiff finds a more financially sophisticated way to obtain funds for its litigation costs, objections are much harder to find.
An example of this phenomenon comes out of the savings-and-loan crisis of the 1990s. In this case, a financial institution obtained legal claims and then created “certificates” that gave investors the right to participate in the proceeds of the claim. The investment proceeds were used to keep the issuer afloat while the cases proceeded. And no-one batted an eyelash.
In July 1995, California Federal Bank (“Cal Fed”) acquired four failed savings and loan associations from a government trustee in the wake of savings-and-loan crisis. Under federal legislation drafted to bring about recovery from the crisis, there were new rules about providing sufficient capital for savings and loan institutions. Cal Fed sued the federal government, alleging that the new capitalization rules were unconstitutional and breached the contracts associated with the acquisitions.
To support its litigation against the federal government, Cal Fed issued “Participation Right Certificates” related to its claims. These Participation Right Certificates entitled holders to a share of approximately 25% of the net proceeds if ever realized, and they were issued directly by Cal Fed, with Cal Fed retaining control of the claim. In this respect, Cal Fed created its own investment syndicate as a means of funding its litigation.
If Cal Fed had a slip-and-fall claim for a broken ankle instead of an abstract claim arising from a complex transaction associated with the savings-and-loan crisis, the investment vehicle might have been characterized as champertous. Of course, this financing arrangement met no such criticism. So if Cal Fed can do this with a complex financial instrument, why can’t the plaintiff with a broken ankle do it with a simple contract? To any fair minded person, the question answers itself.
Topics: litigation finance, securitization, incorporation third-party funding, litigation costs, legal costs, law reform
Works Cited:
Maya Steinitz, Incorporating Legal Claims, 90 Notre Dame L. Rev. 1155 (2015)
