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Cesar Bello of Corbin Capital Discusses Litigation Funding as an Investment

September 27, 2021

Cesar Bello of Corbin Capital Discusses Litigation Funding as an Investment

On the most recent episode of the Litigation Finance Podcast, Cesar Bello, Partner and Deputy General Counsel of Corbin Capital, explained how he evaluates litigation finance investments, what his ROI expectations are, and how funders can mitigate risk. Below are some key takeaways from the discussion. What about the funding industry drew your attention and your interest? The stock answer here is that it’s non-correlated compared to a lot of other alternative assets. What else can you say about this asset class that really draws your interest—especially when compared to other alternative assets. Obviously that’s a big part of it. It’s differentiated—it’s particularly attractive in times of market volatility. When you expect more fat tails, we think there’s a good chance that that type of environment will persist in the near term. We’ve seen over the last year those kinds of spikes with meme stocks, heightened government intervention, obviously the pandemic, political climate, etc. So it was nice for us, we had some good outcomes last March and April when everything else was not working so great. So it really helps the portfolio. Beyond the uncorrelated nature of it, obviously the opportunity to earn outsized returns. Single case risk is generally structured to make a 3-5x return—so you’re getting paid well for the risk. Private lending for the more credit-oriented type of LitFin plays—you’re still getting paid, or overpaid since the sector is still largely underbanked—although increasingly less so. The underlying collateral is not well understood by traditional lenders. Back to the market as a whole, it’s still, I think, growing. The legal services industry is a $1 trillion industry worldwide. Litigation Finance has grown a lot. There’s a growing awareness among mainstream corporates, if they have assets on their balance sheets that they can monetize, Fortune 500 companies are awakening to this possibility of using Litigation Finance to bring cases without sucking up the budget or disrupting their cashflows.  How important is ESG to investors such as Corbin, and also to your LP investors?  Obviously, we do a lot more than just Litigation Finance, but with respect to Litigation Finance in particular, the easiest way to think about it is not necessarily equal access to justice in our legal system. Right? Litigation Finance helps level the playing field, so David can go after Goliath. That’s obvious and simple to understand. But it kind of flows through and manifests itself in different ways. Take mass torts—environmental cases, for example—there’s a long history of poor minority communities being used as toxic dumping grounds. We have opioids, we have sexual abuse cases, etc, so from an environmental, socioeconomic, social justice perspective—there’s a clear angle there. But back to how we think about it more broadly, our approach to ESG is focused on the thoughtful application of ESG factors to enhance our business and it takes a lot of work. We’ve been working on it over the last 2-3 years. With the help of leading experts in the space and consultants to help us navigate what remains of a pretty fragmented information environment. We believe in meaningful integration of material ESG factors that can lead to a more complete picture of risk and opportunity, driving more informed decision-making with the opportunity to get better risk-adjusted returns.  Let’s say I’m a commercial litigation funding manager. I approach you for an investment opportunity. Is there anything you wish these fund managers did more of or less of? Any advice you can give to them? I think it’s important to have a real understanding and self-awareness of where you sit in the marketplace and to be commercial—it’s hard to raise money. The safe thing to do is to give money to the bigger players, particularly if you’re just starting out. We’ve seen a lot of people try to raise funds with unrealistic expectations, and refusing to partner with people in creative ways because they want a fund and don’t want to do co-investments—not thinking about the long game, and not realizing the best path to unlock capital may not be the one that they came into the meeting with. So really listening and trying to figure out where that happy medium is, to find a way to work together. Back to the point about most of the money coming in is going to established players, that’s the nature of the asset management industry as a whole. So we also like people who can talk through a bad outcome—lessons learned—that buys some goodwill. … Find a way to get in the door, build trust, and hopefully everybody gets more comfortable and it becomes easier to build a relationship.  When you look at this industry, what opportunities are you seeing down the road for the funding industry? How do you see this industry developing in the coming years? Good question. I think everybody would tell you it’s probably going to grow and there’s probably going to be some price compression as the asset class matures. Maybe something you won’t hear as much—I really would like it to evolve into having a more active secondary market, which would help with the duration issue. As anything that helps generate liquidity, we would view as a positive. And obviously, it would help with valuation price discovery as well. So there’s a lot of activity now in private equity funds and private credit funds in terms of secondaries and continuation funds, as some of the older vintages are getting long in the tooth. It would be interesting to have some growth there, and I think similarly there’s a good amount of the bigger funds that are running up against the end of their fund life and they’re going to be motivated to sort of solve for that. I think there are some characteristics here that are going to make it harder for secondary markets to flourish in the marketplace. This stuff is idiosyncratic and hard to underwrite. You’re not buying IBM bonds. But it’s doable, and I think it’ll happen eventually. When it does I think it will be a very positive signal for the asset class.

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Case Developments Commercial

Delaware Chancery Court Dissolves Litigation Funder Amid Partner Deadlock

By John Freund |

The Delaware Court of Chancery has ordered the dissolution of a litigation funding operation after its two principals reached an irreconcilable impasse, offering a rare look at what happens when the business relationships behind funding ventures break down.

As reported by Law360, the court ruled to wind down the partnership between a hedge fund manager and a Florida-based personal injury attorney who jointly operated the funding business. The dispute involved Priority Responsible Funding and Settlement Funding LLC, entities that had been providing capital for litigation matters.

Rather than assigning fault to either party, the Chancery Court determined that the partners' falling out did not involve wrongdoing that would prevent an orderly dissolution. The ruling permits the business to be wound down under the court's supervision, a resolution that allows both sides to move forward without the protracted litigation that often accompanies contested partnership breakups.

The case highlights a less-discussed risk in the litigation funding industry: the internal dynamics between business partners and co-investors. While much of the regulatory and media attention around litigation finance focuses on funder-client relationships and disclosure requirements, the Delaware case underscores that the operational structures behind funding entities carry their own set of governance challenges.

The decision may serve as a reference point for other litigation funding ventures navigating partnership disputes, particularly as the industry continues to attract new entrants and capital from diverse financial backgrounds. The full decision is available through the Court of Chancery.

Commercial Regulatory Issues

Joint ILR-LCJ Letter Calls on Advisory Committee on Civil Rules to Adopt Third-Party Litigation Funding Disclosure Rule, Recommends Rule Text

By John Freund |

Today, the U.S. Chamber of Commerce Institute for Legal Reform (ILR) and Lawyers for Civil Justice (LCJ) submitted a joint comment letter to the Advisory Committee on Civil Rules of the Judicial Conference of the United States Courts (Advisory Committee) urging the body to promulgate a uniform rule requiring disclosure of third-party litigation funding (TPLF) agreements in federal courts and proposing the text of the rule. The comment letter comes ahead of the Advisory Committee’s April 14 meeting where it is expected to discuss the results of its listening tour. The comment proposes new rule text, which would amend Federal Rule of Civil Procedure 26(a)(1)(A) and require the disclosure of third-party funding contracts, in addition to basic information on funders. An original copy of the letter as submitted is available here and here.

The Advisory Committee formed a subcommittee to consider the need for a TPLF disclosure rule in October of 2024, after ILR and LCJ submitted a comment calling for the initiation of the rules process. Since that time, the TPLF subcommittee has conducted a listening tour to gather information on whether a rule is necessary and what it may require. LCJ’s analysis of actual TPLF contracts demonstrates that funders—who are nonparties to the litigation—not only share in the proceeds of litigation, but also have the ability to influence or control litigation and settlement decisions.

The joint letter argues a rule is necessary because the lack of TPLF disclosure causes a series of serious problems for America’s courts, including:

  • Conflicts of interest between funder and parties to the case and/or witnesses remain hidden
  • Time wasted in negotiations between parties who do not have the authority to make dispositive decisions about the resolution of the litigation. 
  • “Zombie” litigation in which litigation continues at the behest of funders despite the parties’ desire to settle.
  • Inability to manage settlement conferences effectively because parties are not empowered to make dispositive decisions. 

The comment letter also explains that courts face a serious rules problem because they are responding to disclosure requests on an ad hoc basis and are doing so in an inconsistent manner. Absent uniformity that only a rule can provide, some judges are rejecting disclosure requests under relevance standards governing the discovery process in Rule 26(a). Other courts are utilizing in camera or ex parte review in ways that are not in keeping with regular procedures regarding motions for protective orders. Some courts are ordering disclosure of TPLF. The comment letter concludes “This lack of uniformity is a rules problem because similarly situated parties in different geographic locations are getting starkly different interpretations of the FRCP and access to much-needed information.”

To solve the problem, ILR and LCJ offer specific language for a new rule that adds to the list of required initial disclosure[s] in Rule 26(a)(1)(A): 

(v) the name, address, and telephone number of any non-party individual or entity (other than counsel of record) that, whether directly or indirectly, is providing funding for the action and has a financial interest therein and, for inspection and copying as under Rule 34, any agreements or other documentation concerning the funding for the action or the financial interest therein.

The letter draws a direct parallel between the situation facing courts today surrounding TPLF with that of insurance contract disclosure before 1970. At that time, courts were split between granting disclosure of insurance contracts and denying such requests, often on the same lack of relevance basis that some courts today are denying TPLF disclosure requests. The Advisory Committee considered courts’ patchwork of approaches and ultimately decided a rule requiring insurance contract disclosure was necessary under Rule 26 to help all parties make a “realistic appraisal of the case.” The letter argues that the Committee should require TPLF disclosure given that, similar to insurance contracts, TPLF contracts can give non-parties a stake in the litigation as well as control over its resolution.

Lawyers for Civil Justice (LCJ) is an advocacy organization whose members support reform of procedural litigation rules to further “the just, speedy, and inexpensive determination of every action and proceeding.” Through collaborative engagement by in-house and outside counsel, LCJ develops and advocates for reform proposals that improve the efficiency and fairness of the U.S. civil litigation system, including through its AskAboutTPLF campaign, which advocates for a uniform rule requiring the disclosure of TPLF.

A program of the U.S. Chamber of Commerce (the “Chamber”), ILR’s mission is to champion a fair legal system that promotes economic growth and opportunity. The Chamber is the world’s largest business federation. It directly represents approximately 300,000 members and indirectly represents the interests of more than 3 million companies and professional organizations of every size, in every industry sector, and from every region of the country.

Commercial

Pennsylvania Supreme Court Committee Proposes Third-Party Litigation Funding Disclosure Rule

By John Freund |

Pennsylvania could become the latest state to require transparency around third-party litigation funding arrangements, with a proposed rule that would mandate disclosure of funding documents during discovery.

As reported by the PA Coalition for Civil Justice Reform, the Civil Procedural Rules Committee of the Pennsylvania Supreme Court has issued a notice of rulemaking for a new Third-Party Litigation Funding Rule. The proposal would require parties to produce documents pertaining to third-party litigation funding as part of the discovery process in civil cases.

The committee framed the initiative as a matter of parity. Under current rules, defendants are already required to disclose insurance policies that may fund verdicts or settlements, but plaintiffs backed by third-party funders face no comparable transparency obligation. The proposed rule aims to close that gap by bringing litigation funding arrangements into the same disclosure framework.

The move adds Pennsylvania to a growing list of states grappling with how to regulate the role of outside capital in civil litigation. Several states, including Georgia, Kansas, Indiana, Louisiana, Montana, West Virginia, and Wisconsin, have already enacted laws requiring some degree of funder disclosure. At the federal level, the Advisory Committee on the U.S. Federal Rules of Civil Procedure is separately considering potential rule amendments that would require uniform disclosure of litigation funding in federal cases.

The Civil Procedural Rules Committee is accepting public comments on the proposed rule through April 22. Comments may be submitted to Karla M. Shulz, Deputy Chief Counsel, at civilrules@pacourts.us.