Tag Archives: risk management

Understanding the Advantages of Litigation Funding

The principal benefits of litigation funding have long been known. Such funding can spread the risk of adverse litigation outcomes and, in doing so, improve access to justice for litigants who lack resources of their own. But, beyond these benefits for less well-heeled litigants, there can be significant financial advantages for well-capitalized corporate litigants as well.

First, litigation funding offers significant benefits in terms of financial reporting and operations. When corporations obtain third-party financing to cover their own legal expenses, they can find immediate improvements in EBITDA and cash flow. In the conventional approach to funding litigation, a company must diminish its cash reserves to pay legal costs, creating a negative impact on the balance sheet. Litigation funding eliminates these impacts by removing costs from the P&L and the contingency from the balance sheet, and providing greater certainty and predictability over future cash flows.

Second, using litigation funding permits the company to re-direct resources into revenue-generating areas of the business. Thus, using third-party funding can drive profitability in the business by shifting the use of funds from legal costs and into core business activities that will generate profit and produce a higher return on capital employed. In short, litigation funding makes business more efficient.

Litigation funding also reduces risk. When a third-party investor funds a company’s litigation, the entire financial risk shifts from the company to the funder. Moreover, because the investment in non-recourse, the funder’s interests are fully aligned with those of the claimant. The funder will only receive a return on its investment if the claimant actually recovers proceeds from the litigation – whether through a judgment, arbitral award or negotiated settlement. Thus, the funder and the company can work hand in hand to optimize both of their interests.

Another important advantage of third-party funding is that it permits a corporation to pursue claims that it would not otherwise pursue due to budget constraints, at zero risk and at zero cost.  Thus, third-party funding makes it possible for a company to fully monetize its litigation portfolio. Even when it share the proceeds of its litigation with the funder, it can still achieve a more lucrative outcome than it would have without third-party funding.

Keywords: litigation finance, third-party litigation funding, EBITDA, risk management

Work Cited:  What Are the Operational Advantages of Litigation Funding, Lawyer Monthly (July 9, 2018) available at https://www.lawyer-monthly.com/2018/07/what-are-the-operational-advantages-of-litigation-funding/

The Benefits of Litigation Finance in Bankruptcy

Among its principal benefits, litigation financing is an effective means of spreading risk and maintaining liquidity.  Of course, in bankruptcy cases these virtues have particular value.  No wonder then that one observer has noted that litigation funding should be in every bankruptcy trustee’s toolkit.

The fiduciary duty imposed upon bankruptcy trustees requires them to maximize benefits and minimize risk for the bankruptcy estate, so that the estate’s assets can go as far as possible.  When a bankruptcy estate includes a litigation claim among its assets, trustees often have a challenge in determining the proper balance of risk and reward.  Pursuing the claim means spending the estate’s assets, diminishing its liquidity and creating a risk of loss.  Letting the claim go means losing a potentially valuable asset.

Litigation finance can help solve this conundrum.  Finding a litigation funding company to invest in the claim provides guaranteed cash for creditors and frees up other assets for distribution before the conclusion of the litigation matter.  To be sure, using litigation finance limits the potential upside of the claim; but, in many situations, accepting such a limitation can be a reasonable exchange for an assurance of at least some recovery.

In a recent bankruptcy case, which had been proceeding for nearly 15 years, the trustee won a $213 million judgment on a claim belonging to the estate.  When the losing party decided to appeal, the trustee and his counsel worried about preserving the estate’s liquidity during the appeal process, which could have gone for several years.  Thus, the trustee decided to find a litigation finance company who would guarantee cash for the estate in return for a share of the judgment after an appeal.

As the trustee explained his reasoning:

The sale will hedge the estates’ downside exposure on the appeal and any further proceedings against the defendants at a reasonable price; … provide much needed liquidity to the debtors’ estates; and guarantee that there will be funds available to pay long-suffering general unsecured creditors irrespective of the outcome of the appeal…All litigation is fraught with peril and unpredictability. Litigation claims are inherently speculative. Therefore, I believe it is better to monetize a portion of this speculative asset now when the estates are in the strongest position they have ever been in (i.e., holding a $213 million judgment after a jury trial that is fully bonded on appeal), than to gamble everything on the appeal.

This kind of sound reasoning will undoubtedly be adopted by more and more bankruptcy trustees as litigation finance continues to establish its place in the justice system.

 Topics:  litigation finance, legal reform, third-party funding, litigation costs, bankruptcy, risk management, asset maximization

 Works Cited:

 Alison Frankel, Litigation Funding in Bankruptcy “Should Be in Every Trustee’s Toolkit,” Reuters (March 15, 2017) available at http://in.reuters.com/article/us-otc-bankruptcy-idINKBN16L2HJ

Litigation Funding as a Tool for Better Business

Litigation creates problems for business.  Aside from the obvious risks associated with an adverse result, litigation is costly and disruptive for business.  But many of these costs, risks and problems can be reduced or eliminated when businesses finance their litigation costs from third-party funders.

The problems associated with litigation are well-known.  A company’s decision to start a lawsuit means that it will have to divert resources that would otherwise go to its own business operations.  In addition, the costs of litigation are substantial and hard to predict.  Of course, there are the direct costs, such as attorneys’ fees and discovery costs.  But the indirect costs can be just as burdensome, including information, monitoring, transaction, and decision costs.

Litigation financiers can solve or reduce most of these problems.  Most obviously, the litigation funder supplies the initial and ongoing investment to cover litigation expenses, eliminating the need for the company to divert its own capital (or credit capacity) from business functions. Moreover, litigation financiers will inform a business plaintiff about the relative strength of the company’s case and about realistic settlement options

Litigation financiers also have the capacity to reduce some of the potential conflict between the interests of the business and those of the law firm.  Litigation financiers often have leverage to encourage the law firm to accept a contingent fee, meaning that the law firm has the same incentive as the client to achieve a successful result and cannot count on profiting from a loss with a large hourly fee.

In the end, third-party investment in business litigation presents an enticing trade to business plaintiffs:  in return for surrendering the right to a portion of the potential gains from litigation, business plaintiffs can free themselves of all of the underlying risks and costs.  And there is little risk that business plaintiffs will be exploited in making this trade.  Because business plaintiffs are sophisticated parties with numerous options, it is unlikely that they will be taken advantage of in making an agreement with the investor.  To the contrary, both the litigation financier and the business can craft an investment relationship that can be mutually advantageous.

Topics:  litigation finance, legal reform , third-party funding, litigation costs, legal costs, law reform, economic efficiency, business practices, risk management, business capital

 Works Cited:

Joanna Shepherd and Judd E. Stone II, Economic Conundrums in Search of a Solution: The Functions of Third-Party Litigation Finance, 47 Ariz. St. L. J. 919 (2014)

Litigation Finance and Corporate Risk Management

Business enterprises of all kinds are looking for new and more sophisticated ways to effectively manage their assets and liabilities, especially with an eye towards minimizing risk.  Of course, litigation involves significant potential for incurring liabilities or acquiring assets.  But too often enterprises don’t effectively manage the upside and downside risks associated with litigation.  Third-party litigation finance provides a way to make that kind of risk management much more effective.

Litigation of all kinds, especially high stakes litigation, is becoming an increasingly prevalent part of reality for companies of all kinds.  In the United States federal courts, about a half million new cases are filed every year.  For businesses, some of these cases involve significant risks.  According to a recent survey of legal officers at public and private companies in the United States and United Kingdom, nearly a quarter of such companies had recently initiated a lawsuit with more than $20 million at stake.

As litigation exposure increases, it becomes more important for companies to manage their exposure to legal liabilities and realize the latent value in legal claims.  Litigation funding companies can offer solutions towards these ends.  The availability of third-party litigation finance is changing the way companies view legal claims and making it possible to treat them in the same way as other contingent assets and liabilities.

Financing arrangements related to commercial litigation can take many forms.  In the most commonly known form, a third-party advances funds to a company involved in litigation so that the company can cover its litigation costs without using any of its operating funds.  The funder receives a share of the litigation proceeds if the case is successful and receives nothing if the company loses.  When a company’s litigation budget is tied up defending lawsuits and fighting regulatory battles, the availability of litigation financing makes it possible for the company to pursue claims that would otherwise have been outside of its financial capacity.

Litigation financing can also allow companies to convert their legal positions into immediately available funds. For example, if a company has won a judgment but is waiting for appeals to conclude before cashing in, an advance from a litigation funder makes it possible for the company to convert a contingent, intangible asset into cash that can be redeployed into more productive uses.  And, at the same time, the risk of loss in the appellate process can be minimized or eliminated.

Topics:  risk management, litigation financing, third-party litigation funding, corporate law

 Works Cited:

Adam Gerchen, et al., Litigation: The Newest Corporate Finance Tool, Financier Worldwide Magazine (September 2014), available at https://www.financierworldwide.com/litigation-the-newest-corporate-finance-tool/#.WGQVErGZP_Q