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Consumer Special Features

Fair Pre-Settlement Funding – An Oxymoron or a Viable Alternative?

The following article was contributed by Julia DiCristofaro, program administrator at The Milestone Foundation. “I have a good client who is in need of pre-settlement funding, which I almost always advise against. But she is desperate, and this case will settle soon. Do you think you can help?” As program administrator of The Milestone Foundation, the only nonprofit providing pre-settlement funding to plaintiffs in need, I often hear this sentiment. Non-recourse, pre-settlement funding companies market themselves as quick cash options for plaintiffs who are awaiting their settlements.  It’s an easy lure for an individual who has undergone a catastrophic incident, one that has likely left them injured and unable to work, or facing mounting medical bills; someone who knows they will eventually receive a sum of money to live off of, but in the meantime, might not be able to afford groceries or rent. Pre-settlement funding, also referred to as litigation finance, has grown exponentially in the past decade and is now estimated to be a nine-figure industry. For many plaintiffs, this funding is a necessary lifeline to financially stay afloat as their case resolves. Yet, there are few regulations for this type of funding, often referred to as the “Wild West” of the lending industry. Murky contracts comprised of complex language, confusing terms, hidden fees, and complicated interest calculations are common features of these advances. When an individual is desperate to make ends meet, terms like “compounding interest,” “quarterly fees,” and “capped at three times the principal” fade into the background, as “cash in less than 24 hours,” “no credit checks,” and “if you don’t win your case, you don’t owe anything” catch their attention and provide a glimmer of hope. As many attorneys can attest, once a case settles and the payment is due to the lender, this lack of transparency often renders plaintiffs shocked to see that they now owe as much as $30,000 on the $10,000 advance they received. Plaintiffs can feel duped or betrayed, and oftentimes look to their attorneys to solve the problem by negotiating “haircuts” with the funder, or even waiving their own fees. An attorney practicing in New Mexico shared: “I had a client who recently received a $50,000 settlement. She owes $16,000 on a $5,000 advance she took out, and is panicking at how little money she’s actually going to receive. I think I am going to have to waive my fees on the case just to help her stay afloat.” It’s no wonder so many attorneys discourage their clients from taking these advances, though for many individuals, these funds are more critical now than ever. Plaintiffs have long been at a disadvantage when pursuing justice against deep-pocketed corporations that can make lowball offers in mediation, or await the time it takes to go in front of a jury. As with many facets of life, the Covid pandemic has played a role in shaping the civil justice landscape, as social distancing guidelines resulted in overloaded dockets and delayed court dates for civil cases. As a result, the advantage held by insurance companies and other defendants in personal injury cases has increased, as they continue to accept premiums and pay out less in settlements. Meanwhile, as government programs such as stimulus checks and eviction moratoriums expire, inflation continues to skyrocket, and savings dwindle, the majority of Americans are barely making ends meet; at the end of 2022, 64% of the U.S. population was living paycheck to paycheck, an increase from 61% in 2021 according to a recent LendingClub report. Much to the dismay of many experienced attorneys, these contrary factors - lengthened trial timelines and increased financial need - make non-recourse funding a necessary component of the civil litigation landscape. Given the oftentimes exploitative nature of non-recourse advances, many states have introduced legislation or enacted regulations to rein in the industry. For instance, in Colorado, some courts have voided or re-written individual litigation financing agreements as traditional loans subject to low-interest rate ceilings. While this helps plaintiffs avoid unfair and predatory rates, it also discourages many funders from assuming the risk that is inherent in non-recourse funding, leaving few options for these injured parties, who will then pressure their attorneys to settle their lawsuits – often to the detriment of their awards. Trade organizations such as The Alliance for Responsible Consumer Legal Funding (ARC) and American Legal Finance Association (ALFA), often lobby state legislatures to prevent restrictions on the litigation finance industry. They argue that the non-recourse nature of the lending requires their members to assume a high level of risk that justifies their practices, as the plaintiffs are only required to repay these advances using the proceeds from their lawsuit; in the instance of an unfavorable result, the lender does not recoup their advance. ARC states that they support legislation that “enacts robust consumer legal protection for consumer legal funding and maintains consumer access, because good legislation does both.” Both ARC and ALFA champion industry best practices and sponsor legislation to reflect these practices. ARC’s best practices range from recommending that contracts reflect all costs and fees - showing how much the consumer will owe every six months, and the maximum amount a provider may ever own of a recovery - to prohibiting attorneys from receiving referral fees or commissions from the companies their clients receive their funding from. To date, six states have enacted ARC-backed legislation, while other bills are being reviewed in states like Kansas and Rhode Island. While the activities undertaken by ARC and ALFA are adding regulatory measures to the industry, some might argue that they are not going as far as necessary to truly benefit plaintiffs who are utilizing this funding. Maximum payments and fees are listed in contracts, but they are generally not easily found on websites, making it difficult for plaintiffs to compare shops, or truly understand what they will owe until they go through the strenuous application and underwriting process. Additionally, these trade organizations do not make recommendations on interest rates or maximum repayment amounts, which enables their members to continue to charge exorbitant rates and fees. But that’s not to say there are no ethical lenders in the space. Some companies are instituting policies such as capping repayment amounts at two times the principal, offering advances with simple interest that is applied every six months, helping to identify government support, and introducing innovations like debit cards that enable borrowers to pay for basic necessities. Another viable alternative to unethical lending is The Milestone Foundation, formerly known as the Bairs Foundation, which was created six years ago to provide a plaintiff-focused option in the pre-litigation space. The only nonprofit providing low, simple interest pre-settlement advances, the foundation has helped more than 600 plaintiffs by advancing more than $4.8 million and is looking to expand its reach to serve more clients across the country. Steven Shapiro, partner at Ogborn Mihm LLP in Colorado, has seen firsthand the benefits, as well as the pitfalls, of pre-settlement funding. “My job as an attorney is to get my clients the award they deserve. If they don’t have the resources to pay their rent or buy their groceries, they are going to feel pressured to settle, and I won’t have the time I need to bring the case to a fair resolution.” Shapiro has at times seen clients with no alternative other than to take out advances with 30 to 40 percent interest rates; while painful at the time, these clients were able to see their cases through to a reasonable conclusion. He’s also seen The Milestone Foundation at work. He recounts his client Olga, a Russian-American woman disabled in a car accident, who was in need of funding. He referred her to The Milestone Foundation. “The foundation was able to provide Olga a reasonable advance at a reasonable rate, that enabled her to afford her living expenses for the duration of the case, which took about two years to settle and resulted in a seven-figure award. The contract was transparent and really the most wonderful thing. I would always opt to refer my clients to The Milestone Foundation rather than other lenders whose practices tend to be much more opaque.” While pre-settlement funding is often condemned by principled attorneys working to protect the best interests of their clients, ethical lenders like The Milestone Foundation are working to give the industry a new reputation. As the only nonprofit in the industry, The Milestone Foundation protects the interests of plaintiffs over profits, and hopes to inspire other entities to implement a similar approach toward pre-settlement funding.
Commercial Deals

IMN Announces Date for 2nd Annual Litigation Finance Forum in London

The Information Management Network (IMN) has announced the date for its 2nd Annual International Litigation Finance Forum, which will return to London on 19 October 2023. The event’s inaugural showing last year brought over 375 attendees together, representing senior executives from some of Europe’s leading funders, law firms, institutional investors and more. Along with the announcement of the date, IMN released the outline of the agenda for this year’s forum, with a wide variety of topics being covered across a full day of panel discussions and live Q&A. Recognizing the evolving discourse around litigation finance over the past year, this year’s conference will include a discussion on ‘Ethics, Disclosure, Regulation and Outside Equity Investments’ and a deep dive into ‘Tax Implications of Deal and Fund Structuring’. The sponsors for the 2023 event include Harbour Underwriting, Schulte Roth & Zabel, AON, the Consumer Attorney Marketing Group (CAMG), Factor Risk Management, and Exton Advisors. Those looking to attend the event are advised to register early, with Super Early Bird Registration being available until 25 August, with a discounted price of £895. To register for the event, click here.
Case Developments Commercial

Coinbase Scores Victory with Supreme Court Ruling on Federal Arbitration Act

Litigation Finance Journal recently reported that Coinbase became the first US-based cryptocurrency company to argue a case in front of the Supreme Court. The June decision has been announced, and with a 5-4 majority in favor of Coinbase, the high court ruled "that an interlocutory appeal about one matter (arbitrability) bars the district court from proceeding on another (the merits)." CoinDesk says the ruling is a distinct legal victory for Coinbase, one that could impact future lawsuits against all companies in the United States. For over a century, the Federal Arbitration Act (FAA) has been part of user agreements to protect corporations from risk and expense associated with court battles to resolve customer claims. The decision does not represent any high-court conclusions on cryptocurrencies, outside of Coinbase being one of the associated parties.   A lower court decision from the U.S. District Court for the Northern District of California denied Coinbase's arbitration agreement approach. On appeal, the Ninth Circuit denied Coinbase's motion to halt hearings while appeal is in progress.  The Supreme Court's decision in favor of Coinbase effectively stays any trial proceedings while appeal is in progress. 
Case Developments Commercial

Malaysian Government Acknowledges Need for Legitimate Litigation Funding Whilst Calling for Accountability 

The ongoing saga of the Sulu heirs arbitration case against the Malaysian government, which stands out as one of the high-profile cases of litigation funding in an international dispute, continues to evolve. After the Paris Court of Appeal ruled that the previous arbitral panel did not have jurisdiction to make its award, top officials from the Malaysian government have continued to speak in public about the perceived injustices of the arbitral process and the role that third-party litigation funding has played in it. An article by New Straits Times reports on the latest comments by Azalina Othman Said, a government minister for law and institutional reform, who continued to criticise the perceived failure of arbitrations and stated that "a strict code of ethics for arbitrators will cut any sham arbitration - that could go so far as to try to cripple sovereign nations - at its knees". Azalina also raised the issue of forum shopping, stating that claimants are able to do this and engage in an “endless pursuit” because “they are funded by a litigation fund with seemingly deep pockets and investors backing their pursuit.” In a separate interview with El País, Azalina Othman Said elaborated on her position regarding third-party funding and the need for more regulation of the practice, stating that whilst she appreciated there was a need for “legitimate funding”, it is also true that “there must also be accountability.” Regarding previous statements that the Malaysian government would pursue legal action against Therium for its role in funding the Sulu claimants, Azalina clarified that they were not threatening the funder, but if they find “an intention to subscribe to unlawful strategies or activities” then the government will “do what we need to do to defend our reputation.”
Commercial Regulatory Issues

Dutch Implementation of the EU Representative Actions Directive Sets Criteria for Litigation Funding

Analysis of new regulations which affect litigation funding in the European Union has largely focused on the negative impact of potential reforms that may be implemented as a result of the Voss Report. However, in the more immediate future, we will no doubt see how different countries within the EU will implement the Representative Action Directive, which may have an equally significant impact on the proliferation of third-party funding on the European continent. In a piece of analysis published in Lexology, Jeroen van Hezewijk, Jelle Drok, and Marco Vogels of Freshfields Bruckhaus Deringer, analyse the Netherlands’ implementation of the Directive through the ‘Dutch Implementation Act’. Having entered into force on 25 June 2023, the Freshfields authors examine the scope of the Netherlands’ implementation, as well as its specific regulations around issues such as qualified entities and litigation funding. With regards to litigation funding, the authors note that the new act has expanded upon previous legislation that governed the criteria for third-party funding of collective actions. These include prohibitions on actions brought against “a defendant that is a competitor of the funder or against a defendant on which the funding provider is dependent.” From a disclosure and transparency standpoint, the implementation act requires that when funding is involved in cross-border representative actions, the qualified entity must disclose its funding source on its website. Further disclosure of information around third-party funding may also be requested.
Announcements Commercial Regulatory Issues

New report warns: Restrictions on legal finance would leave EU businesses and consumers more vulnerable

European businesses and consumers could be left without access to a vital financing tool providing access to justice, experts warn today.

A report by the International Legal Finance Association (”ILFA”), which analyses proposed regulation on legal finance recently endorsed by the European Parliament, warns that if implemented, this could create a legal environment in Europe that would prevent many meritorious cases from being pursued.

This would be to the detriment of businesses — including startups and SMEs — and consumers alike, and it would only grant a licence for wrongdoers to continue to harm EU citizens and smaller, less well-resourced SMEs.

Legal finance provides the necessary resources in what are often lengthy and expensive legal endeavours, which empowers consumers and businesses, large and small, to seek the remedy they are due. Many funded matters are “David vs. Goliath” in nature, in which a smaller company is engaged in litigation against a larger well-resourced adversary. For EU citizens, it has helped bring cases in Europe on behalf of individuals and collective rights’ claims against a number of corporate entities.

However, in October 2022, an own-initiative report from Member of the European Parliament (MEP)  Axel Voss made recommendations which would significantly undermine the availability of legal finance within the EU.

The proposal put forward by Axel Voss MEP would make it more difficult for small and medium-sized enterprises (SMEs) to mitigate risk and keep capital in their business, and for consumers to have the necessary resources to seek redress and defend their rights. It includes the introduction of a fee cap for funders and a controversial forced disclosure provision for claimants, all of which would drastically reduce the economic viability of legal finance.

Now, experts in legal finance, collective redress, and consumer rights speak out about the dangers of the EU turning Voss’ recommendations into law. ILFA challenges the assumptions in the Voss proposals, as follows:

  • Lawmakers across EU member states are already struggling to implement the Representative Actions Directive (RAD) - aimed at strengthening the collective interests of consumers and ensuring a right to redress via representative actions. Limiting legal finance risks undermining the positive steps being made to create a collective redress regime that works for consumers.

  • Legislating the recommendations of the Voss Report would embolden large companies to engage in intellectual property (IP) theft from Europe’s SMEs. Without legal finance, Europe’s SMEs cannot defend themselves against malfeasance by multinational corporations or well-resourced Chinese companies.

  • Legal finance could be a vital component in the future battles on data, artificial intelligence, and new technologies involving analysis of complex issues and new legal concepts which will require resourcing to ensure that the EU’s “Brussels Effect” is realised. There are currently few, if any, resources available to fund meritorious litigation with scant evidence in the Voss Report that public funding or bank loans could assist.

  • Legal finance is an emerging market in Europe. The steady growth of legal finance in Europe is not only beneficial to European companies and consumers, but to the European economy.  Sophisticated and well-established investors, including pension funds and institutional investors, are continuing to see investments in legal finance as a worthy addition to their portfolios, driving important investment into the European economy during turbulent times.

Gary Barnett, Executive Director of ILFA, says: “Legal finance empowers businesses, large and small, to mitigate risk and maintain sufficient capital so they can grow and innovate. Without access to this financing, many meritorious claims, including those brought by small and medium-sized enterprises (SMEs) and consumers, would not go forward. Legal finance providers are experts in finding the most meritorious, and often important, cases that the courts need to hear and are willing to invest the time and money into issues that serve the public good.  The EU should be finding ways to increase access to this vital resource that benefits the EU legal system and its citizens.”

Prof. Dr. Ianika Tzankova, First European Chair of Mass Claim Dispute Resolution, partner at Birkway, says: “One of the big advantages of the Representative Actions Directive in my view, is that it explicitly recognises the importance of the principle of equality of arms, meaning a fair balance in the opportunities given to both parties. Legal finance takes seriously the idea that financial equality of arms is required for effective collective redress and consumer protection. In fact, without the availability of that funding source I doubt there would be any meaningful collective redress in the EU right now.”

Thomas Kohlmeier, Co-founder and co-CEO of Nivalion AG, a provider of Legal Finance Solutions in Europe, says: “The Rule of Law in Europe needs the support of funders who understand the law and are willing to share in the risk and invest in meritorious cases. The question that has not been answered to date is what happens to all those important cases that will go unheard in the courts if the special interests get their way? It seems almost cynical to restrict access to justice on the basis of unproven allegations and misunderstanding of key economic principles.”

The report is released as the deadline for European Member States to implement the Representative Actions Directive has passed on 25 June. The EU Commission will begin enforcement action against a number of member states given their failure to transpose the RAD after a two-year hiatus meaning important cases against corporate malfeasance could be jeopardised.

ILFA recommends that any further EU legislation should await the full implementation of RAD and comprehensive consultation with key stakeholders, such as consumer rights groups and SMEs Executive Agency, and ensure that any regulatory proposals are based on facts, data, and real-world experience.

Consumer rights experts are concerned that further legal finance regulation will affect the realisation of the Representative Actions Directive (‘RAD’), Europe’s first class action law.

The full report from ILFA, Resourcing the Rule of Law, is available here.

Commercial Regulatory Issues

Law Professors Argues Funders are Not “Passive Partners” in Mass Tort Lawsuits

Critiques of third-party litigation funding tend to focus on two main issues: the perceived lack of transparency around funders’ involvement, and the potential for these funders to unduly influence the litigation process. A new academic paper suggests that a major issue is the involvement of litigation funding in mass tort lawsuits, arguing that funders will control the litigation in order to drive up their own financial returns whilst leaving the actual victims worse off. An article by Bloomberg Law features an interview with Samir Parikh of Lewis & Clark Law School, who recently published a paper entitled ‘Opaque Capital and Mass Tort Financing’ on the Yale Law Journal Forum.  In the interview, Parikh claims that there are no real restrictions on outside capital taking control of mass tort lawsuits, despite the fact that litigation funders almost unanimously assert that they do have control over the litigation process or on settlement decisions. Parikh’s essay states that funders are never “passive partners” and that the reason these investors are pursuing mass tort cases so actively, is because they are aiming “to dictate outcomes.” Parikh compares the situation to other investment markets, claiming that “it’s a playbook we’ve seen private equity funds run in distressed debt situations all the time. And the truth is it could be happening in cases that we don’t know about.” Parikh’s theory centers around his concept of “the Alchemist’s Inversion”, where funders will look to create mass tort cases without doing proper due diligence on all the claimants, then they will look to increase the value of the claims before dictating the timing and details of any settlement. Parikh believes that these kinds of situations already exist, but with the alleged danger posed to the actual claimants in mass torts, he argues that “even if it’s happening on a small scale, the point is the explosion of the practice should be anticipated.”
Announcements Commercial

Manolete Partners Releases Audited Results for FY23

Manolete (AIM:MANO), the leading UK-listed insolvency litigation financing company, today announces its audited results for the year ended 31 March 2023.  Steven Cooklin, Chief Executive Officer, commented: "The annual results for FY23 mask a picture of two very different six-month periods for the Company: the first half of the trading year was subdued, as the Company had only just begun to emerge from the ending, in April 2022, of the temporary suspension of certain important insolvency laws that the UK Government had instigated in June 2020 in response to the COVID-19 pandemic. While normal insolvency laws resumed at the start of the financial year, there is always a natural time lag between insolvencies commencing and the associated litigation claims being referred to Manolete, as Liquidators and Administrators need time to conduct their regulatory investigations before they can assemble cases for consideration by us. The second half saw a strong resumption of the growth that the Company had exhibited prior to the pandemic, as the UK Insolvency Market returned to normal operations with a strong recovery in cases being referred to us.  Given the fact that we enjoyed only the latter six months of more "normal" trading, the results are highly commendable given the loss made in H1 and recovery in H2. We had a record number of 798 new case enquiries and a record number of 263 new case investments; gross cash receipts from completed cases were at a record level of £26.7m and a new record was also set with 193 cases being legally completed in the 12-month period. We ended the year with another record number of 351 live cases in progress and the Company returning to profitability in the second half. These positive KPIs have continued into the current FY24 - with signed cases for the first two months of FY24 being 154% higher than the first two trading months of the FY23. Consequently, we have added, and continue to add, to our expert in-house legal and financial analyst teams to address the increased level of demand for our insolvency litigation solutions. With prevalent headwinds of inflation and significantly higher interest rates facing the UK economy, the Company is well set for continued growth over the foreseeable future". Financial (statutory and non-statutory) highlights:
  •     Realised revenues on completed cases were £26.8m, an increase of 76% (FY22: £15.2m) although FY23 contained an exceptionally large funded case completion of which £4.9m was recorded in realised revenue (total settlement £9.5m).
  •     129% of total revenues represented by realised revenues on fully completed cases (FY22: 77%) offset by negative unrealised revenues.
  •     Increase in the valuation of the cartel cases contributed £1.2m to gross profit in FY23 (FY22: £5.1m).
  •     EBIT reduced by 159% to a loss of £(3.1)m (FY22: £5.3m) a result of pressure on valuations in H1 FY23 on existing cases and a single rare larger case loss at trial.
  •     The Company made a loss before tax of £(4.0)m (FY22: £4.5m profit).
  •     Gross cash receipts from completed cases were £26.7m, an increase of 72% (FY22: £15.5m).
  •     The Company's retained share of gross cash receipts from completed cases (after all legal costs and payments to Insolvent Estates) was £13.1m, an increase of 47% (FY22: £8.9m).
  •     Cash generated from operations (after all completed case costs and all overheads but before new case investments and taxation) was £8.0m (FY22: £4.4m).
  •     Gross cash of £0.6m and borrowings of £10.5m (FY22: £2.2m and £13.5m) as at 31 March 2023 and £14.5m unutilised funds available on the Revolving Credit Facility with HSBC.
  •     Final dividend of nil per share. 
Operational highlights:
  •     New case investments in UK insolvency cases, an increase of 65%: 263 in FY23 (FY22: 159).
  •     Based on unaudited internal management information: ROI of 125% and Money Multiple of 2.2x from 689 completed cases since inception
  •     Based on unaudited internal management information: 193 cases were completed in FY23 (FY22: 139 cases), with an average duration per case of 15.5 months (FY22: 13.2 months), generating a Money Multiple of 1.9x (FY22: 1.87) and an IRR of 131% (FY22: 132%)
  •     Average case duration across the full portfolio of 689 completed cases is 12.8 months
  •     29% increase in live cases: 351 in process as at 31 March 2023 (272 as at 31 March 2022)
A copy of the annual report and accounts will be available on the Company's website shortly and will be posted to shareholders in due course.
Consumer

Supporters of Louisiana Litigation Finance Disclosure Bill Discuss Route Forward After Governor’s Veto

Efforts to increase the amount of regulation around litigation financing within individual states has been on the rise throughout the last year, with state legislatures across the US introducing new legislation. A recent attempt in Louisiana, which placed a large emphasis on increasing transparency requirements for third-party funding, suffered a major setback as the Governor vetoed the bill which had been approved by the legislature. Reporting by the Louisiana Record provides an update on efforts by supporters of Senate Bill 196 to push forward with seeing these increased disclosure measures implemented. Lauren Hadden, general counsel for the Louisiana Association of Business and Industry (LABI), stated that if the state legislature is able to reconvene later in June, “we would obviously love to see SB 196 among the list of bills taken up.”  However, as it is currently uncertain whether the legislature will come back for a veto-override session, Hadden suggested that the bill’s supporters “stand ready to work with all interested parties to once again develop legislation that addresses this issue during next year’s legislative session.” Hadden argued that SB-196 was not an attempt to outlaw or restrict third-party litigation funding, instead it was designed to be “a balanced transparency measure that would have simply balanced the ledger in litigation.” The decision as to whether or not the legislature will hold a veto-override session will likely not be motivated by the litigation financing bill itself, as Republican lawmakers in the legislature have discussed it primarily in relation to the Governor’s plans to veto a more contentious bill passed by House Republicans.