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Commercial

Reading a Legal Funding Agreement: Five Tips

Legal funding agreements are not yet standardized. Before signing, it’s essential to read a funding agreement carefully and ask questions about anything you don’t understand. Validity Finance’s Joshua Libling shares his insights for reading a term sheet for a litigation funding agreement.
  • Collateral. In this context, collateral is the case itself. Take note of any rights of refusal or mention of future litigation. The description of collateral is often broad so the funder is a party to relevant awards or settlements.
  • Budget Risk Responsibility. Funding isn’t a bottomless well. If a case goes beyond the expected budget, someone must pay the difference. It’s essential that the claimant know who that is.
  • Calculation of Return. How the division of a payout is calculated is very important and should be thoroughly understood before the deal is reached. Understand terms like waterfall, deployed vs committed capital, and net vs gross in the calculation of the funder’s return.
  • Fees. In addition to a percentage of an award, funders may charge structuring or transaction fees—usually based on a small percentage of the committed amount. Be sure you ask when fees are due and if the funder gets a return on the fee.
  • What’s Missing. Not every eventuality will be covered by the funding agreement. That’s not necessarily cause for alarm.
Commercial Deals

How LitFin Drives Profits for Investors and Lawyers

Those attorneys who represent venture capital or private equity firms understand that it’s common to make big decisions about whether or not to invest in litigation—even when the case is strong and the outcome potentially lucrative. Still, encouraging clients to pursue litigation can be a steep hill to climb. Omni Bridgeway explains that many firms are reticent to spend on litigation when their capital is needed for operating expenses, expansion, or product development. Complex litigation is risky. The timelines and outcomes are largely unpredictable. One adverse ruling could erase years of careful planning and shrewd investment. What’s the solution? Litigation Finance. Lawyers for private equity or venture capital firms greatly benefit when they offload their legal spending to a third-party. Non-recourse funding means that the risk is essentially transferred to that party in exchange for a portion of an eventual recovery in accordance with the funding agreement. Funding agreements vary depending on the case, funder, and other factors. In addition to the long-term benefits present when cases are won, legal funding carries with it several immediate financial benefits. The legal expertise funders bring to the table is substantial. Funders can vet cases and focus on which ones have the greatest probability of success. In single case funding, legal expenses can be removed from the books as soon as they’re incurred. Portfolios are typically funded with a large one-time deployment, or in several lump sum payments on a predictable schedule. This cash can be used for legal expenses, but may also fund operating expenses. The capital infusion itself is a financial asset, as is any revenue from successful claims. The process begins with selecting the right cases for the funding portfolio. Strong merits, a large expected recovery, and a defendant with the ability to make good on an award are all vital factors funders consider when vetting any portfolio of cases.
Commercial Deals

IPOs Dominate as Legal Firms Pursue Post-COVID Growth

Are we about to see a deluge of IPOs? A recent survey of 200 law firm partners in the UK suggests as much. Of those surveyed, 31% said their firm is actively considering an IPO sometime over the next year and a half. Another 44% said their firm is contemplating a stock market listing with no time frame given. Harbour Litigation Funding details that a whopping 78% of partners came from firms actively pursuing a credit infusion to supplement its own equity. The reason? For about half of respondents, ambitious plans for growth was the catalyst. Meanwhile, 86% of partners stated they felt pressure to reduce costs.
Commercial Regulatory Issues

New Possibilities in Litigation Funding

As the Litigation Finance industry grows, attorneys, insurers, corporates, and even small businesses are seeing the benefits of non-recourse third-party funding. As regulation adapts to these new realities, new opportunities are arising. Bloomberg News reports that one main driver of litigation funding growth is the search for non-correlated assets with the potential for high returns. Consumers are fueling the advancement of funding with claims portfolios, individually financed cases, class actions, and corporates reorienting legal departments as profit centers by monetizing existing legal assets. At its finest, litigation funding is a win-win proposition. Claimants receive the funding they need and could not otherwise afford. Law firms can reduce risk and add to operating budgets—allowing them to take on more contingency and even pro-bono work. Meanwhile, investors receive the large returns needed to encourage further investment, helping even more people who need assistance funding litigation. Debate about the transparency and discoverability of litigation funding agreements will continue. Courts have already explored what happens when lawyers advise clients to use legal funders, but no cross-jurisdictional consensus has been reached. So too are issues of privilege, as vetting by potential funders necessitates access to information typically held between lawyers and clients. So far, courts seem ambivalent on the common interest privilege. As more players enter the Litigation Finance space, we can expect more access to funding, a wider range of funding solutions for clients to choose from, and investment opportunities for smaller investors. As legal funding evolves, law firms are likely to rethink compensation models for partners and associates alike—especially when adopting flexible payments structures combining contingency and hourly billed models. As some jurisdictions relax restrictions on non-lawyer ownership of firms, compensation and bonus structures are likely to evolve further. Courts, financial specialists, and bar associations will have to rise to the challenges that the expansion and maturity of Litigation Finance will bring.
Consumer

Novitas Loans Announces Cessation of New Client Acceptance

Despite an announcement that assets reached more than GBP 200 million in 2019, Novitas Loans recently announced that it will stop funding new customers. The statement affirmed that the company will continue to manage current cases. Applications for extension funding will also be considered. Law Gazette reports that Novitas’ owner, Close Brothers, stated that the current profile of the company was not in line with the long-term strategy or tolerance for risk. For the fiscal year ending July 2020, Novitas’ assets were up more than 50%, though profit before taxation decreased to GBP 10.3 million. Director dividends were up from 6.1 million to 8.3 million. Still, COVID negatively impacted Novitas’ profitability, though Novitas did appear to have adequate resources for the next fiscal year. In July of this year, Novitas was ordered to end a funding agreement with a client, and required to cap her liability at under GBP 2,000. This was after the Financial Ombudsman Service found that the client was duped over a GBP 45,000 loan. Novitas was also impacted by three collapsed loan facilities that together owe Novitas nearly GBP 2 million.
The LFJ Podcast
Hosted By Steven Shinn |
In this episode, we sat down with Steven Shinn, Founder and CEO of FinLegal. FinLegal offers a third-party tech solution to litigation funders, law firms, and others in the Legal Services market. Steven discussed his company's points of differentiation, how his technology background supported FinLegal's launch, and what the future looks like for FinLegal and the Legal Tech space in general. [podcast_episode episode="9028" content="title,player,details"]
Commercial Resources

Webinar on Increasing the Value of Insurance Claims with LitFin

A free online webinar will cover the fine points of utilizing Litigation Finance to unlock the value of insurance claims. It is possible for insurers and policyholders to make use of non-recourse funding when pursuing matters of bad faith, reinsurance, coverage issues, subrogation, and more. Chambers and Partners details that the upcoming webinar will offer insight on these issues from leading litigation funders and lawyers with experience working with funders. Topics include:
  • Funding reinsurance and insurer subrogation claims.
  • Funding policyholder claims and using bad faith claims to resolve third-party actions.
  • Explanation of how non-recourse finance is secured by potential litigation awards or settlements.
The panel of speakers is scheduled to include:
  • Linda Kornfeld, Partner Insurance Recovery-Blank Rome. A prominent insurance recovery lawyer in predominantly high-stakes litigation. Her specialties include risk mitigation and maximizing recoveries.
  • Gavin Beardsell, Investment Manager and Head of New Zealand – Omni Bridgeway. Based in the Sydney office, Beardsell’s experience in managing insurance matters spans over 25 years.
  • Maurice Thompson, Senior Equity Partner – Clyde & Co. Thompson has nearly three decades of experience advising clients in the natural energy industry, and founded the Global Drones Group.
  • Simon Christian, Editor – Chambers and Partners. Editor of the High Net Worth Guide, Christian has an LLB from University College London and studied for the BPTC at City Law School.
Commercial Regulatory Issues

New Jersey Disclosure Rule Puts Undue Burden on Litigants

Much has been made of the US District Court of New Jersey’s Local Rule 7.1.1, which requires disclosure of any non-recourse legal funding used to support a case. Some have suggested that this “harmless” rule will encourage transparency and increased oversight. But does it? Law 360 explains that the rule necessitates burdensome filings requiring tens of thousands of attorney work hours—leading to increased expenses for clients. At what point should we ask what purpose this serves, and whether or not it’s worth the extra resources. After all, it can be argued that transparency is a vague, even arbitrary goal. Why should legal funders and their clients be subjected to it, given all the good that funding does? Commercial litigation funding works to ensure that litigation focuses on merits rather than legal games meant to frustrate parties with fewer resources. Funded plaintiffs cannot be pushed into lowball settlements or stalled until they run out of money. This, of course, leads to increased fairness—which should be everyone’s goal. This is emphasized by the fact that funders only take on cases with merit. A solid claim backed up by compelling evidence and a clear illustration of damages is what funders are looking for. The cacophony of accusations of ‘frivolous litigation’ simply cannot be supported by evidence. Confidentiality is an essential part of any case. Any legal professional should view intrusions of confidential information with suspicion. Protecting attorney-client privilege is a vital part of that relationship. It’s worth noting that other legal services are exempt from mandatory disclosure, such as consultants or strategists. Perhaps the most sinister part of Rule 7.1.1 is how easily it could be weaponized against clients who use legal funding. Defendants concerned about a losing case, or frustrated with untenable settlement offers, could make spurious demands for funding agreements, even when no suggestion of impropriety is present.
Commercial

Australian Funding Partners Declares Bankruptcy

Once hailed as the team behind the Banksia class action, Australian Funding Partners has gone into administration. In October, Supreme Court judge John Dixon found that the litigation funder and five lawyers involved in the case had committed fraud, and made dishonorable attempts to charge unnaturally high legal fees to Banksia claimants. Lawyers Weekly details that in 2018, AFPL reached a settlement with Banksia Securities over an investor loss of AU $660 million in 2012. Later, a class action participant challenged the nearly $5 million in legal fees and a further $12 million+ in funder commissions. The Victorian Court of Appeal did not approve them. As a result of the actions of AFPL and the attorneys involved, Norman O’Bryan and Michael Symons were ordered removed from the roll. Prosecutions may soon follow for the pair.