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Podcast and Deck: Tax Aspects of Litigation Finance

Cadwalader, Wickersham and Taft LLP, sports a rich 225 year history, and is widely recognized as one of the pioneers in legal innovation. For example, Cadwalader won recognition for leading New York State in LIBOR regulatory contract legislation, receiving acknowledgement from the Financial Times North America in 2021. The Financial Times cited Cadwalader as one of the most innovative law firms in the category of “Creating new standards.”  Recently, Cadwalader’s Mark Howe sat down with Phil Balzafiore to discuss tax implications associated with litigation finance and what tax structures attorneys should consider whilst engaging litigation investment facilities. Howe and Balzafiore also discussed various third party funding products popular in the industry, highlighting potential tax consequences and considerations for risk mitigation.  A slide deck has also been published as a companion to the podcast. You can access the deck by clicking here.   

The Attorney’s Guide to Mastering Litigation Finance

The worldwide litigation finance industry is experiencing a renaissance of sorts. With $12B+ in litigation assets under management in the United States, many experts forecast double digit growth in various third party litigation products and services. Mastering a working conceptualization of the evolving litigation finance ecosystem first requires a solid foundational understanding of the industry's architecture.  Lake Whillans’ new white paper aims to provide a contextual guide for legal professionals looking to ‘master’ litigation finance. The white paper explores various litigation investment scenarios, helping indicate the industry's flexibility in organizing a wide variety of product structures to meet various client needs. One key guiding principle to mastering litigation finance, according to Lake Whillans’ insights, is developing strong, robust and innovative litigation portfolio instruments. As an added bonus, we have made 67 highlights to the white paper for your added reference.    

World Bank Group on Third Party Funding 

The World Bank hosted member states of the International Center for Settlement of Investment Disputes (ICSID), which approved a landmark set of rules meant to guide dispute resolution between international investors and State parties. David Malpass, President of the World Bank Group and Chair of the ICSID Administrative Council, signaled an appetite for streamlined systems that radically innovate international arbitration disputes. The World Bank hopes a new, evolved approach to litigation will cultivate international economic growth by expanding investment architectures.   The World Bank, for the first time in history, has issued guidance for third party funding as part of ICSID Conciliation Rules. We have organized the complete text concerning ICSID Conciliation Rule 12 titled “Notice of Third Party Funding” below:  Notice of Third-Party Funding  
  • A party shall file a written notice disclosing the name and address of any non-party from which the party, directly or indirectly, has received funds for the conciliation through a donation or grant, or in return for remuneration dependent on the outcome of the conciliation (“third-party funding”). If the non-party providing funding is a juridical person, the notice shall include the names of the persons and entities that own and control that juridical person.
  • A party shall file the notice referred to in paragraph (1) with the Secretary-General upon registration of the Request for conciliation, or immediately upon concluding a third-party funding arrangement after registration. The party shall immediately notify the Secretary-General of any changes to the information in the notice.
  • The Secretary-General shall transmit a notice of third-party funding and any notification of changes to the information in such notice to the parties, and to any conciliator proposed for appointment or appointed in a proceeding for purposes of completing the conciliator declaration required by Rule 16(3)(b).
 

Bloomberg Reports Litigation Finance Assets Reach $12.4B

Investments in litigation finance continue their forward momentum, according to a new report. Total third party funder assets under management reached $12.4B in 2021, up 10% from 2020. Additionally in 2021, 28% of litigation funding investment went to the top 200 law firms in the United States.     Bloomberg Law’s recent statistical data focusing on the litigation finance industry notes an investment of $2.8B in new litigation finance contracts in 2021. According to Bloomberg’s report, the largest law firm helped drive an 11% increase in third party finance industry growth, as compared to 2020’s metrics. Similarly, Bloomberg highlights that Big Law 200 firms gobbled up 41% of litigation finance investment in 2021. That is up 46% from 2020, according to Bloomberg.  Experts signal that a recessionary climate is the best climate for litigation funding to prosper over the near future. Bloomberg’s survey data captured self-reported facts and figures from 47 of the United State’s litigation finance investors and hedge funds, who are leaders in the space.

Chief Justice of Ireland Discusses Litigation Investment Access 

Ireland’s population has experienced a long history of affordability challenges when accessing the Irish court system. The Chief Justice of Ireland’s Supreme Court has issued new guidance that hints at an open-minded approach to innovating third party funding facilities as tools in accessing the rule of law. This new perspective is a product of a conference held last year by the Chief Justice’s Working Group on Access to Justice.  Independent.ie reports that Chief Justice Mr. Donal O’Donnell has suggested that reforming access to third party funding and litigation investment is a top priority for Ireland’s regulatory innovation. Chief Justice O’Donnell appeared to signal a fresh approach to implementing improvements in facilitating access to justice. The Chief Justice urged a mindful approach to evolution in the industry, calling for careful inspection of regulatory innovation systems and processes now in place.   Scholars in Ireland also support broader access to litigation funding instruments in business, including insurance firms, bankruptcy managers, liquidators and trustees who seek innovative ways of boosting asset liquidity and the general bandwidth available to creditors.  

Canada’s Supreme Court Considers Advancing Award Costs 

Canada’s Supreme Court (SCC) issued historic guidance for First Nation Indian tribes, ruling that the Beaver Lake Nation’s “pressing needs” may include not having adequate capital for litigation. SCC’s ruling further includes a provision for Beaver Lake to qualify for advance costs to finance litigation fees as necessary. The SCC decision signals pathways to reconciliation between tribes and governments who potentially may stand to navigate complicated, lengthy negotiations and millions of dollars in litigation investment.  BLG.com reports that Beaver Lake questioned if the government of Canada along with the province of Alberta compromised the tribe's capacity to enjoy their traditional way of life. Various government factions of Canada are accused of pillaging Beaver Lake tribal lands with industrial resource projects that forever tarnished hunting and fishing ecosystems. Having already spent $3M on litigation fees, SCC estimates that Beaver Lake will need to invest $5M more in litigation costs for the trial.  The contentious question of whether Beaver Lake had adequate capital to fund litigation was first approached by a case management judge, who ruled the impoverished First Nation lacked adequate funds for quality litigation. Alberta’s Court of Appeal overruled the trial judge’s assessment. The SCC effectively ruled in favor of the case management judge’s assessment.   

Tracking Third Party Funding Partnerships 

Big Law litigation fees have a solid tradition of generating sticker shock for clients and spectators alike. To help mitigate such surprise, Fortune 100 firms have started to consider bundling litigation assets into portfolios with the hope of leveraging third party investment as a finance vehicle that generates profitable returns. Meanwhile, modern entrepreneurial strategy has begun to embrace third party funding partnerships as a tool beyond fear and the financial burden(s) associated with litigation.  Attorney at Law Magazine (AALM) reports that investment in the United States litigation finance marketplace totals more than $11B. AALM’s insights unpack statistical Bloomberg Law data to track a positive outlook for third party funding market sentiments. AALM suggests that Big Law is starting to track third party funding as an innovative business development exercise, allowing for greater firm successes over the near and long terms.  Furthermore, AALM signals that third party funding powers greater associate and partner success stories, which provides ancillary talent retention benefits for Big Law associates and partners alike.  

Key Takeaways from the LITFINCON Event

LITFINCON’s inaugural conference kicked off last week at the Post Oak Hotel in Houston, Texas, with attendees flying in from all over the globe. Guests had a front-row seat to several thought-provoking conversations about the growing asset class from a variety of industry experts.

The LITFINCON event featured a variety of timely and insightful panel discussions. Below are some key takeaways from the two-day conference:

Day 1 highlighted current trends, the state of the industry, best strategies when seeking litigation finance, and the relationship between corporate legal departments and litigation finance.

The day kicked off with the “Views From The Judiciary On All Things Litigation Finance” panel, which was certainly a crowd favorite. Three distinguished judges shared their insights: The Honorable Charles R. Eskridge, III, of the United States District Court for the Southern District Court of Texas, The Honorable Andrew M. Edison, of the United States District Court for the Southern District of Texas, and The Honorable Lauren Reeder of the 234th Judicial District, Harris County. They offered their unique views, as only active judges can, on a variety of issues affecting litigators, funders, and plaintiffs.

Day 2 highlighted what investors should know about this asset class, when and how to use a broker when looking for funding, technology trends in the legal field, and expert insights on fund formation. Day 2's lunch break was something special, as it featured Chief Comedic Officer of Making Lawyers Laugh, LLC Sheng Weng, who most recently was seen touring with Ali Wong and was a featured stand-up on HBO’s “2 Dope Queens” special. Sheng also wrote for the ABC show “Fresh Off the Boat.” He kept guests entertained and roaring with laughter - a unique addition to the conference agenda.

Guests enjoyed rare in-person networking opportunities, and the opportunity to establish new business relationships. The attendee list included industry-leading firms, such as: Omni Bridgeway, Yieldstreet, Liti Capital, Law Finance Group, Polsinelli, Schulte Roth & Zabel, CAC Speciality, Parker Poe, 4 Rivers Legal, Critchfield, Critchfield & Johnston, Roche Freedman, Women of Litigation Finance (WOLF), Global Litigation Consultants, D. E. Shaw & Co., Arran Capital, Law Office of Philip A. Reale, Dunning Rievman, and Kerberos Capital Management.

Overall, attendees were delighted by how the event turned out. We received some sparkling reviews, a smattering of which is offered for you here:

“LITFINCON was a very positive experience. The range of speakers and panelists was impressive and a great deal of ground relating to the current trends in the industry was covered. The attendees were a good representation of the main industry players, namely funders, attorneys and advisors/brokers. Texas is still a relatively nascent third-party funding market and there are without doubt some exciting opportunities there, particularly in the energy and IP sectors. Siltstone did a great job in setting this up and I am already looking forward to the 2023 renewal!”

  • Peter Petyt (CEO and Co‑Founder, 4 Rivers)

“It was a pleasure to discuss how corporate legal departments can utilize litigation funding at the inaugural LITFINCON. The diversity of viewpoints and experiences of my distinguished co-panelists really contributed to a candid, free-flowing discussion of what more can be done to acclimate corporate legal departments to the exciting possibilities offered by litigation finance.”

  • Gaston Kroub (Partner, Markman Advisors)

"The litigation finance industry is growing rapidly, which makes networking at events like LITFINCON both important and exciting. We are building something together. It is particularly important that we share best practices and that we find ways to communicate those to stakeholders who may not be knowledgeable about them, such as litigation clients and members of the judiciary. LITFINCON did a great job of convening a diverse group and sharing that information.

I particularly enjoyed the “Crypto” panel, “How Will Blockchain, Cryptocurrency, And Other Technological Innovations Impact Litigation and the Legal Field.” It is nice to attend a conference that offers new information and perspectives."

  • Lauren Harrison (Vice President/Investment Counselor, Law Finance Group)
According to Siltstone Capital, the organizer of the event, LITFINCON was such a rousing success that the second installation is already being planned.

“Our entire Siltstone Capital team was humbled to host industry leaders at our inaugural LITFINCON. LITFINCON attracted a global array of speakers and attendees to help promote best practices for the growing and still malleable field of legal private credit. Hosting the conference in Houston, Texas also helped advance the legal private credit field to one of the biggest legal markets in the country. We can’t wait to host LITFINCON II in March 2023.”

  • Mani Walia (Managing Director & General Counsel, Siltstone Capital)

“The inaugural LITFINCON was a tremendous success. It received rave reviews. I want to thank all the sponsors, panelists, and attendees, who came in from all over the world – London, Geneva, New York, Miami, San Francisco, and Austin. LITFINCON highlighted the growing field of litigation finance and the importance of Texas as a hub that unites all participants in the legal field. Siltstone Capital is excited about continuing the momentum and advancing the litigation finance field by hosting LITFINCON II in March 2023. We expect the event to be two to three times bigger!”

  • Robert Le (Founder & Managing Partner, Siltstone Capital)
We are equally excited for the 2023 version, and look forward to bringing you a recap of that event next year as well!
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Burford Capital Welcomes Patrick Dempsey as Director

Patrick Dempsey has joined Burford Capital’s New York office as a Director, with a focus on growing new business with law firms and corporations across the United States.   Burford Capital notes that prior to joining the funder, Dempsey served as Therium Capital Management's United States Chief Investment Officer, where he also served as a Board Member. At Therium, Dempsey developed single case financial structures while also architecting portfolio compositions for a range of clientele. Dempsey also served as a litigator at Proskauer Rose LLP and Hogan Lovells.  Mr. Dempsey graduated with a bachelor’s degree from the University of New Orleans, and earned his law degree from Tulane University Law School.