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Commercial

The Increasing Complexity of Litigation Funding

As new jurisdictions discover the benefits of third-party legal funding, access to justice is increasing around the globe. As predicted, Litigation Finance is gaining acceptance among Big Law firms, corporates, and the public at large.

Bloomberg Law details that the 2021 Litigation Finance Survey shows that the industry has weathered the pandemic—and may even have been strengthened by it. At least 56% of litigation funders said that business increased during COVID. Even more—59%--claim they have even more business now than before the pandemic.

While litigation funding has been around since the last economic downturn, it has only begun gaining real traction in the last few years. More than two-thirds of funders who have researched or used third-party funding are more likely to approach funders now than they were even five years ago. Almost a quarter (23%) are more likely to seek out funding than they were last year.

In early 2021, Willkie Farr & Gallagher was the first major law firm to announce a partnership with a prominent funder—Longford Capital. These kinds of deals are likely to ripple through the industry, as many more large-scale agreements are forged.

As the industry grows, so does the roster of active participants. In addition to more traditional funding entities, multi-strategy investors find themselves entering the funding space with increasing frequency. Even insurers are getting in on the action—offering judgment preservation insurance.

As the industry grows, so do calls for increased regulation. We’ve seen corporates and governments on the receiving end of class action cases speak out against funding, calling it opportunistic or bad for the economy, as insurance rates rise and nuclear payouts occur. Disclosure continues to be a divisive issue as well. As funders look to invest in law firms, potential conflicts draw attention from lawmakers, yet courts and bar associations have thus far been leaning toward loosening regulations.

Only time will tell how these various issues will shake out. For now, funders, lawyers and investors in the space must navigate these various complexities with an understanding that things may change drastically from one moment to the next.

Commercial Regulatory Issues

New Zealand Law Commission Reviews Litigation Funding Regulations

At present, the New Zealand Law Commission is reviewing regulations regarding class action regimes and litigation funding. The expectation is that a new round of regulations could be introduced to the minister of justice by summer of next year. Lexology explains that there is no class action regime, nor are there rules specific to litigation funding in New Zealand. The High Court Rules govern class actions—which has proven incomplete to effectively regulate a complex process like third-party funding. Until recently, New Zealand had no cause to consider how, or even if, the civil justice system should take steps to accommodate litigation funding or encourage class actions. Because legislation is lacking, funders and courts have had to rely on other factors when making decisions on class actions or third-party funding agreements. This lack of regulation results in inconsistent rulings on vital issues, including:
  • Various aspects of disclosure
  • Securities for costs
  • Opt-in vs opt-out in class actions
  • General legal costs
Officially, New Zealand has not abolished champerty laws as much of the world has. This means the very legality of third-party funding is still being litigated on a case-by-case basis. As the official report is being developed, the Law Commission has released a basic report affirming the following:
  • Litigation funding is a net gain for increased access to justice.
  • Third-party funding should be permitted under the right circumstances.
  • There are specific concerns regarding funding that should be addressed.
  • A statutory class action regime should exist in New Zealand.
A widely publicized case involving Harditex building materials ended when funding was withdrawn mid-case after a ruling that hurt the plaintiff. This left claimants in a lurch after waiting 6 years for the case to reach the trial phase. Ultimately, the Law Commission has a duty to recommend regulations that work for funders, as well as claimants, in order to continue increasing access to justice. Final recommendations from the commission are expected in May of next year.
Case Developments Commercial

Binance Freezes Customer Withdrawals of Crypto Assets

Referencing a “large backlog,” Binance has put a temporary hold on customer withdrawals of crypto assets. The number one cryptocurrency exchange tweeted the announcement earlier this week. Crypto Briefing details that Binance resumed allowing withdrawals within minutes of the hold. Later that day though, withdrawals were again withheld. Meanwhile, other major crypto exchanges, like Coinbase, are still functioning normally. This is not the first time Binance has experienced overloads, and unintentionally shut customers out. The same thing happened in May of this year, leaving users without access to their accounts as prices fell dramatically. Liti Capital is now suing Binance on behalf of traders impacted in that shutdown. No word yet from Liti on whether this latest outage will factor into their claim against Binance, or whether the funder will launch an entirely new claim altogether.
Commercial Regulatory Issues

Litigation Finance Catches on in Canada

Like many places in the world, Canada’s cost of litigation can be prohibitively high. Even meritorious claims may not be worth what it costs to pursue them—leaving good people victimized and the unscrupulous free from dissent. Enter third-party litigation funding. That’s when everything changes for Canadians seeking justice. MONDAQ explains that Canadians are beginning to see that help from litigation funders can go a long way to bridging the gap between those who can afford proper legal representation, and those who need assistance. In addition to helping individual plaintiffs or group claimants, litigation funding in Canada is also a tool used by savvy GC’s to limit legal spending and even monetize existing litigation assets. Canadian common law prevented the practice of third-party legal funding, believing it would enable meritless cases. Recently though, courts came to understand that justice is better served when more people have access to the legal system, and to good legal counsel. Court approval is not required for a funding agreement in either private commercial arbitration or litigation. In fact, third-party funding is business-as-usual in these types of cases. Litigation funding is also used to enforce judgments or to monetize claims without adding to legal budgets. Insolvency is another area where legal funding is making a difference. The Bluberi case affirmed that the CCAA does allow for monetizing assets to provide interim financing when needed. In a case involving Crystallex International, courts determined that arbitration financing was permissible—even necessary to successfully restructure an outstanding debt. As legal funding becomes the norm in Canada, knowledge of funders and funding agreements is more vital than ever. Knowing how to select and approach an experienced legal funder can make or break a case—especially one against a well-monied corporation or government. Indeed, funding should be considered by every commercial litigator.
Commercial

A Looming Potential Risk of ESG Investment

Bloomberg predicts that by 2025, nearly a third of assets under management will consist of ESG investments. Representing advances and social justice in environmental, social, and governmental systems, sustainable investments sound like a great idea for all concerned. But are they? Dentons suggests that wrapping up investments in festive ESG packaging may have the opposite of its intended impact. The FCA penned an open letter earlier this year on the topic, expressing concern over purported ESG investments that have little to no relevant impact on ESG causes. ESG credentials are one way investors decide where to put their money. If investors are told they’re making sound investments that advance ESG goals, they may have a legitimate grievance if this turns out not to be the case. One may ask—what if the investor makes money? Surely, investors wouldn’t bring a suit over a profitable investment? In truth, making money would not negate a claim of fraud if the ESG claims made were knowingly false or intentionally misleading. At the same time, if the value of the investment has increased, it might make more sense for investors to simply sell rather than go through the time and expense of filing a legal case. Recent developments in the LitFin space may increase the risk of investor lawsuits regarding ESG claims. The opt-out class action model in use in places like England and Wales makes cases about investment disclosures potentially lucrative. Such cases may make use of the ‘same interest’ requirement, if the same platform and information were used in the transactions. Even without a financial loss, investors may experience distress at having invested in something that was not presented properly. Such damages are rare in civil cases, but ESG investing is a growing topic that may lead to new thinking about how distress should be compensated.
Commercial Regulatory Issues

Judge Considers Acceptability of ATE Insurance as Security for Costs

After-the-event insurance is a common means of covering costs by both defendants and plaintiffs in litigation or arbitration cases. Often, such insurance can also be used as security for the defendant’s costs. Recently though, Deputy Master Nurse found in Addlesee and Ors v Dentons Europe LLP that not all ATE policies are suitable as providing security for costs. Stewarts Law explains that in this instance, there was a strong likelihood that the policy in question could not wholly be used as security for costs, and that only half of the policy value could be used as such. This decision necessitated that the litigation funder provide an additional GBP 1.3-1.6 million in security in case insurers determined that the claims were exaggerated—and therefore not pay the full amount. The scuffle over costs was one of many in a class action over a gold dust investment scheme advanced by the now-defunct Anubus Holdings Limited. The defendant, a legal advisor for Anubus, facilitated the scheme and endorsed it to investors. Claimants are funded by Managed Legal Solutions Limited, with an agreement for an undisclosed portion of any award. As is now common among defendants in class actions, Dentons applied for securities for costs against the funders because they aren’t able to order security against individual claimants in a class action. All this back and forth typically results in higher legal fees and costs passed down to claimants. A similar case previously ruled that ATE insurance could represent 66% of security for costs, rather than the 50% suggested in this case. This seems to hinge on contract language, specifically the word “exaggerated,” which is vague at best and arbitrary at worst. Suffice to say that going forward, the language used in ATE insurance policies will be more important than ever.
Case Developments Commercial

Insurance Comparison Site Facing Antitrust Complaint

More than 20 million potential claimants believe they overpaid on their homeowner’s insurance because of overt bias on a price comparison website. Augusta Ventures is backing the claim for an undisclosed percentage of any potential award. Law 360 explains that Home Insurance Consumer Action, the group formed to advance the claim, asserts that the website abused the “most favored nation” clause. These made expansion and challenges by competitors more difficult and restricted 30+ insurers from offering lower prices elsewhere. Kate Wellington, director of Home Insurance Consumer Action, affirms that such sites play a vital role in helping consumers make informed decisions. This site allegedly did the opposite, and rightfully should refund their customers. According to the claim, plaintiffs are owed damages regardless of where they purchased their insurance. Again we see the value in litigation funding helping homeowners who could otherwise never hope to seek compensation from Comparethemarket.com individually. The site has already been fined $24 million, but has stated its intention to appeal.
Case Developments Commercial

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.