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Kleiman v Wright Bitcoin Case Kept Alive by Litigation Funding

Can a marketing rep of average financial means successfully mount a civil case against a billionaire? A few decades ago, probably not. But now that third-party legal funding is on the scene, a complex civil suit is finally reaching the trial phase after years of delays. CoinGeek details that Kleiman sought funding for years before securing it. Evidence exists suggesting that Kleiman offered substantial interest in “the Bitcoin space” to potential funders in exchange for bankrolling the lawsuit on behalf of his late brother’s estate—a brother he describes as being the co-creator of Bitcoin. In his disclosure of interested parties in the case, Kleiman listed “BTCN 1610-491 LLC.” This implied that Kleiman obtained legal funding from either BTCN 1610-491 LLC or a related funder, Parabellum. Kleiman was not forthcoming about the specifics, but eventually, lawyers affirmed that BTCN 1610-491 LLC is owned by Parabellum—and that Parabellum was the funder of record on the case.   In the case itself, parties have agreed not to bring up the issue of litigation funding, so long as neither side puts the issue in question. At the same time, it’s been suggested that third-party funding prevents defendants from confronting their accusers. This may be even more true in the case of Wright—a well-known name in blockchain currency. One significant factor here is that if the case does not go Kleiman’s way, Wright may be able to recover his legal costs from the funders, according to Florida law. This happens in instances where funders allegedly maintain control over the claim in the form of “value-added” services that clients may utilize along with their funding. Given the length and complexity of the case, legal expenses on both sides are bound to be staggering.
Consumer

Legal Funder Accused of Misusing $10 Million

Litigation lending has a reputation for unscrupulous, or even predatory behavior. One such lender, KrunchCash, was recently accused of squandering a large investment, hiding relevant information, and using threats to intentionally amplify risk to that investment.

Law 360 details that a complaint filed in a Florida federal court alleges that KrunchCash, its subsidiary, and owner Jeffrey Hackman have repeatedly threatened investors with sabotaging the litigation they invested in. Over the course of two years, KrunchCash also allegedly hid recoveries and misappropriated funds.

Earlier this year, investor Pursuit Special Credit Opportunity Fund LP learned of the actions of KrunchCash and hired lawyers to protect its investment. By this time, KrunchCash was cash poor and had become a one-man operation. Jeffery Hackman, the suit alleges, had become secretive, aggressive, and unpredictable.

Pursuit invested more than $10 million that was intentionally put at risk of a complete loss. When Pursuit wanted to move funds into an escrow account—Hackman refused to do so, according to the complaint.

The claims in the case include breach of contract, unjust enrichment, breach of fiduciary duty, and constructive fraud. In addition to seeking $10 million in damages, Pursuit also seeks penalties under Blue Sky Laws—a Florida legal provision designed to protect investors from just this kind of misappropriation.

Consumer

Attorney Under Fire for Missing Oral Arguments Claims Sabotage by Opposition

Attorney Farva Jafri has been ordered to show cause as to why she should avoid disciplinary action for missing oral arguments in a recent case. The Seventh Circuit panel had ordered Farva to appear in court on the matter of costs. Farva did not. Law 360 explains that Farva, in her statement to the Seventh Circuit, asserted that counsel for Oasis Legal Finance and Gary Chodes (former CEO) had settled their issues and sought to end the appeal. She further claimed that attorneys for Oasis misrepresented a conversation in which they agreed to convey relevant details of the settlement on behalf of all involved. The court also pointed out that Jafri did file a motion to dismiss the appeal. But it was filed late Friday night—too late for the court to consider the motion. The court claimed the motion was also incomplete. Even though the dismissal was agreed to by both parties, it was missing vital signatures and did not address issues relating to costs. In an amended motion, Jafri explained that the parties agreed to settle with no payments of any kind. Instead of relaying that to the court during oral arguments, Jafri says opposing counsel made statements that were intentionally misleading and designed to paint her in a negative light. Opposing counsel also reversed its position on costs, saying that appellants should cover costs. According to the motion, Chodes accepted the agreement to forgo a request for fees. Jafri lives in New York and argued that it was not practical or necessary to fly to Chicago for an appeal that had already been dismissed. Barry Irwin, lead counsel for Oasis, agreed to convey this to the court at the oral arguments hearing. He did not, and has since asserted that Jafri’s assertions are inaccurate. Jafri characterized the actions of opposing counsel as a “sandbag.”
Commercial Regulatory Issues

Discovery of Funding Source Allowed by Court in Nunes Farms Libel Action

Recently, Magistrate Judge Mark Roberts released his decision in the NuStar Farms action, regarding discovery of the identity and terms of the third-party legal funder supporting the plaintiffs. Citing “unusual” circumstances in the case, Judge Roberts determined that disclosure was necessary in this instance. Reason details that the plaintiffs in the defamation case never hid the fact that they were using third-party legal funding. Thus far in the case, plaintiffs have only incurred $500 in charges. One plaintiff, Anthony Nunes III, also the corporate representative, is not even aware who is paying plaintiff lawyers. The circumstances in the case elevate the defense’s inquiry into funding from guesswork to a more concrete suggestion of potential conflict. As such, this case differs from say, a personal injury case, or a case where the defendant petitioning for disclosure cannot identify how funding could impact credibility. The question of malice is a vital factor in any defamation case. The government adopted a specific standard so as not to give public figures or politicians an unfair advantage over those they serve. In a defamation allegation, public figures are usually required to prove malicious intent. On that note, it's not yet known whether there has been collaboration between Congressman Nunes and the rest of his family. But the inquiry into the funder’s identity could establish coordination or a lack of it. Why is the identity of the funder even relevant here? If Anthony Nunes III does not know who is paying lawyers for the plaintiffs, this could mean that entities related to NuStar Farms have a financial interest in the case—and would therefore be relevant to an investigation of potential conflicts. Defendants also asserted that a witness in the case may be closely connected to the funders. That would create an obvious conflict of interest and should be disclosed to the court.
Commercial Legal Innovation

Hemp Vendor Apothio Launches Blockchain-Based ILO Token

Blockchain-based token offerings are finding their way into the Litigation Finance sector. Apothio, an Indiana grower and distributor of hemp, has launched the initial litigation offering in the hopes of raising $5 million. Law 360 reports that Apothio is suing California’s Department of Fish and Wildlife, alleging that it illegally destroyed hundreds of acres of farmlands during the hemp growing season. Those who invest in the blockchain tokens will earn revenue if the suit is successful—based on a multiplier of how many tokens are held, and for how long. This will be payable after contingency fees are paid to Roche Freedman. Tokens are being hosted on the Avalanche blockchain, currently being managed by Ava Labs. Investors on the Republic platform can buy into the ILO, which is governed by crowdfunding rules. According to Republic’s website, the litigation offering allows low-level investors to invest in assets, not unlike those a litigation funder would have in its portfolio. That said, single case funding is inherently more risky than portfolio funding. There is a pending motion to dismiss. If Apothio loses the motion, investors will get back 80% of their investment. If the case loses at trial, the investment is lost.
Commercial Regulatory Issues

Australian Parliament Introduces Litigation Funding Reforms

This week, the Australian Parliament has introduced the Corporations Amendment Bill 2021. It’s designed to promote what’s described as a “more fair” distribution of awards from class actions. Mirage News details that court oversight over the dispersal of class action proceeds will increase if the bill passes. Courts will have authority to approve or alter the allocation of awards or settlements—ensuring that the interests of class members supersede those of third-party litigation funders. The Corporations Amendment Bill will also require consent from plaintiffs in order for funders to collect fees or commissions. This is meant to encourage responsible book building, and ensures that funders have support from actual claimants.  
Commercial Regulatory Issues

Litigation Finance: The Cost of Class Actions

Litigation funding expenses are fundamentally related to the cost of doing business—so says a federal district court judge in their rejection of a request to recover expenses. In Perez v Rash Curtis & Assoc, the judge held that if funding expenses were recovered from a class settlement fund, that it would undermine necessary transparency—particularly in cases in which funding agreements were not pre-approved by the court. Lexology details how this ruling affirms that litigation funding expenses should be treated the same as other financing agreements used in class actions. As such, expenses resulting from a funding agreement should not be recoverable from any settlement. Take this case involving the Telephone Consumer Protection Act. Class counsel and a third-party funder agreed to enforce the recovery of a judgment of more than $250 million. Additionally, the funder paid $10 million to class counsel, and more to a separate legal firm to assist. When it came time to divide the award, counsel attempted to recover $300,000 for payment to the broker who arranged the funding agreement, plus $15 million to the funders—amounting to a return of $5 million on a $10 million investment. It could be argued that the funder and broker made the $75 million (the final settlement amount) possible. The district court, however, insisted that funding expenses must not be charged to claimants. No regulation affirms that expenses relating to litigation funding are recoverable. As the court concluded, such fees are directly related to the cost of doing business—and not a recoverable expense relating to litigation. Of course, this might all go differently if counsel sought court approval of their litigation funding agreement. This could open a Pandora’s Box of questions regarding disclosure and the standards of scrutiny the courts apply to funding agreements.
Consumer

Former Oasis CEO Fails to Appear in Court for Oral Arguments

Can a former CEO simply not show up for a court date? Not without consequences. Earlier this week, former Oasis CEO Gary Chodes was required to appear before the Seventh Circuit Court for oral arguments. These pertained to a resolved trademark dispute and the allocation of appeal costs. Judge Easterbrook presided, stating that there were valid reasons the motion to vacate could not be approved. Law 360 explains that the court was not happy that Chodes declined to appear. The court had been informed that the parties involved wanted to forgo the appeal, but did not approve a subsequent request to vacate oral arguments. Chodes is no longer CEO of Oasis after being fired for unspecified reasons in 2013. He was embroiled in a case addressing whether he had infringed on the name of his former company when he founded Oasis Legal Finance Group and Oasis Disability Group. Chodes maintains that he owns multiple Oasis trademarks that include using the word “Oasis” with regard to Litigation Finance. Oasis argued that Chodes had taken multiple steps to connect the two companies in the minds of potential litigants. A representative from Oasis stated that the appellant should cover the costs, especially since she (the Oasis rep) appeared in court as required and was ready to proceed. In March of this year, a district court judge awarded $3 million to Oasis for attorney fees.
Commercial Regulatory Issues

Privilege & Litigation Funding in the United States

The purpose of attorney-client privilege is to allow clients and their legal teams to discuss cases privately without fear of disclosure to other parties. Yet third-party funders require information about cases in order to vet them for potential funding. How is this dichotomy addressed? MONDAQ details that normally, the presence of a third party invalidates the privilege between attorney and client. If this was applied to third-party funders, it would have a profound and damaging impact on clients, cases, and indeed—justice. What client would be willing to risk privilege for any reason, even funding? The Excalibur decision resulted in a judge affirming that Litigation Finance is a feature of modern litigation. That is to say, the practice is mainstream and must be accommodated in order to facilitate access to justice. How then, do courts recognize the validity of the funder’s due diligence without destroying the basics of privilege? Currently, courts cannot agree on whether sharing information with a funder is a waiver of privilege. Surely the client’s intent should matter? Courts have largely concurred that the work product exception can apply to both due diligence documents and funding agreements. At the same time, some jurisdictions—notably New Jersey—have passed more stringent legislation requiring disclosure of funding agreements and their terms. In the Leader case, a judge determined that funders and plaintiffs did not share a common interest strong enough to extend attorney-client privilege. The court held that common interests must not be solely commercial, and should be identical interests, not merely similar. More broad interpretations of common interest and work product are also common. Many courts have held that a common enterprise is also a common interest. As of yet, there is no consensus as to the precise definition of what common interest is. Until that happens, venue selection will be vitally important in funded cases.