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Commercial

Investment Fund Loses Millions Backing Litigation Finance in Chinese Courts

As Litigation Finance grows in popularity, more new players are entering the playing field. Some fields, like IP litigation, are considered especially lucrative and are a popular focus for upstart funders. However, success in this landscape is far from a sure thing. TechKee details how a litigator, Rasheed McWilliams, and investor Brian Yates, formed iPEL in 2017. Their intention was to buy up patents and file infringement lawsuits against big companies. iPEL borrowed millions in a startup loan from Direct Lending Investments (DLI). Yates assured investors that patent lawsuits in China would lead to huge awards in the $100 million range. He also promised cases against recognizable names in tech and electronics. Yates’s claims were met with skepticism by many in the patent-enforcement industry. Verdicts in the hundreds of millions do present themselves in the United States occasionally, but in China, IP cases rarely net awards over one million dollars. In November of last year, DLI revealed that it expected to lose tens of millions on its iPEL investment. This led to criminal charges against DLI's chief executive—alleging that he inflated parts of the funding portfolio. DLI has since been sued by the SEC for providing manipulated data. Bradley Sharp, a consultant appointed by the court, sued DLI consultant Duff & Phelps after investigating the fund. Sharp stated that iPEL changed its focus to Chinese patent cases after its US strategy was revealed to be ineffective. DLI also provided funds to Parabellum Capital, another prominent litigation funder. DLT is now in receivership, while iPEL is still actively pursuing cases.
Commercial

Litigation Basics from Longford Capital VP

More people than ever now understand the broad strokes of what Litigation Finance is and what it can offer. Investors fund cases through funding entities that are then owed a share of any recovery or award in the case. Litigation funding is non-recourse, so funders can take a higher percentage in exchange for the enhanced risk. Bloomberg details the litigation funding basics with input from Andrew Stulce, vice-president at Longford Capital. In a funded case, the client still maintains control over decision-making, while the duty of the lawyer remains to the client. Funders are passive investors, and while they do have a financial interest in the cases they fund—they are not permitted to make decisions that impact the outcome. In a traditional funding model, lawyers sometimes take a reduced fee so that lawyers and funders both receive a share of any recovery. In a monetization model, funders make payments to the claimant—to cover legal costs and other expenses while a case is adjudicated. Return structures can vary and will be spelled out in the funding agreement. When it comes to due diligence, funders will have very specific requirements that must be met in order to provide funding for a case. This includes having an experienced litigator go over the case to determine its suitability for funding. The strength of the case and the defendant’s ability to pay damages can all enter into the decision-making process for funders. Meanwhile, claimants are encouraged to select funders carefully—understanding their sources of capital, for example, and how the process can affect the timeline of their case. Rules regarding non-disclosure and confidentiality agreements can vary from one jurisdiction to another. But funders will often need privileged information that falls under the heading of confidentiality when deciding whether to fund a case.
Commercial

Bad News for Funders That Attempt to Control Cases

A recent order in a case between Laser Trust and CFL Financing is turning heads. The English High Court has made three cost orders against CFL. The court determined that the funder exerted an excessive amount of control over the case it had funded. Pinsent Masons explains that litigation funders can be exposed to adverse costs orders if they overstep boundaries to exercise control over-funded cases. Justice Marcus Smith stated that ordering a non-party to pay costs is highly unusual, and would not typically happen to funders. However, if third parties exert excess control over a case, they may be required to do so.  Michael Fenn of Pinsent Masons suggests that this judgment should be considered a reminder to all funders to beware of the influence they exert in the cases being funded. Monetary consequences can follow if too much control is exercised by third-party funders.
Commercial

State Bars Weigh in on Litigation Finance

As the number of jurisdictions embracing litigation funding grows, bar associations are following suit. Lawyers utilizing third-party funding as an option for clients would do well to note guidance offered by the state bar association on funding agreements and professional ethics obligations. While more state bars are expected to lend their opinions on the practice, New York and California have their own approaches to litigation funding. Above the Law details that litigation funding agreements have been enforced in New York for years—including those between funders and law firms. The Professional Ethics Committee of the New York City Bar made a formal statement regarding Rule 5.4 of the Professional Conduct guidelines with regard to portfolio funding arrangements. Rule 5.4 prohibits sharing fees with non-lawyers, and would therefore preclude the use of portfolio funding agreements. This 2018 opinion inspired intense dissent and led to the formation of a Litigation Funding Working Group, whose report was released in 2020. In it were suggestions including changing Rule 5.4 to welcome litigation funding and portfolio agreements, as well as recommending no mandatory disclosure of litigation funding. In California, concern about legal ethics is a major focus of the State Bar of California Committee on Professional Responsibility and Conduct. Their formal opinion states that third-party litigation funding is permissible under California law. However, it reiterates the importance of counsel to respect the duty to the client before any obligation to funders. If a funder has any control over decision-making in the litigation, clients must be informed of that. Of course, reputable litigation funders already know that it is inadvisable to exercise control over the cases they fund.
Commercial

Interview with Liti Capital Co-Founder: Jonas Ray

Editor's Note-- a previous version of this article stated that Liti Capital is the first to tokenize litigation finance. In fact, LawCoin Inc first tokenized litigation finance several years ago.  We regret the error.  Litigation funding has a new landscape to conquer—cryptocurrency. Liti Capital has tokenized litigation finance shares, creating an equity token that is asset-backed—which is unusual in blockchain. Using tokens allows a wider swath of investors to participate, as the entry threshold is lowered. Korea Times recently spoke to Liti Capital’s co-founder, managing director, and head of strategy, Jonas Ray, about how crypto and litigation funding coexist. Ray begins by introducing the Liti Capital team. It includes those with litigation finance experience, of course. But also those who specialize in blockchain, financial tech startups, intelligence, and enforcement. For the most part, investing in litigation finance is something only institutional and well-heeled investors can take part in. By using blockchain and tokens, anyone with a computer or smartphone can utilize investment tools that simply weren’t available previously. In a sense, a litigation funding token accomplishes the same goal for investment that funding does for pursuing legal cases—it increases access for those who need it most. Getting involved in Liti Capital can be as simple as buying a LITI token—which is a share of Liti Capital SA. In addition to occasional dividends, shares afford owners voting rights and participation in Liti’s annual general assembly meeting. Or wLITI tokens can be bought. These do not offer voting or participation rights, but wLITI tokens are fully tradable. Ray also explains that between 5-10% of company profits will be dedicated to finding and stopping crypto scams. Liti encourages community members or LITI holders who have been victims of crypto scams to inform Liti. All of this offers more flexibility and perks than traditional investing could—particularly in regard to litigation funding. Currently, asset-backed equity tokens are rare in the crypto space. Liti offers a tangible way to make a difference using small blockchain-based investments—while supporting endeavors to make crypto and blockchain safer for all users.
Commercial

Recent UK Decision May Impact Future Insolvencies

Are insolvency claims about to become more expensive and time-consuming to pursue? Some have suggested yes, after a ruling in Manolete Partners Plc v Hayward and Barrett Holdings Ltd 2021. It’s said that the recent ruling impacts those who assign insolvency claims, as well as insolvency practitioners themselves, by increasing the cost of claims, and may require two separate sets of proceedings regarding the same set of facts. Why? National Law Review details that there are significant differences between filing a hybrid claim under the Insolvency Application Rules and filing under Part 7 of the Civil Procedure Rules. One main difference is the court fee—which is much smaller under the standard rules. Another is that a hybrid claim may have to be adjudicated as two separate claims. Claims like breach of contract or breach of duty cannot be addressed with an Insolvency Application. So claims under the Insolvency Act must now be tried separately from cases under the Civil Procedure Rules. To sum up, an officeholder may file transaction avoidance proceedings under the Rules (Insolvency Application). But claims for breach of duty or other claims that don’t come under the purview of the Rules must then be filed using Part 7 of the Civil Procedure Rules. Assignees are not creditors, official receivers, liquidators, or contributors. As such, malfeasance claims are not something an assignee can pursue. If the incorrect procedure is used, courts can require applicants to pay the higher Part 7 court fee if they wish. But there is no requirement for courts to allow this, making it particularly unlikely if they suspect abuse of process. A safer option is to be certain where and how claims should be filed. While this case will make insolvency proceedings more difficult, costly, and time-consuming—it does not keep meritorious claims from being pursued.
Commercial

Jurisdictions Expanding Funding Access for Offshore Asset Recovery

As parts of the world seek out post-COVID normalcy, a predicted spike of legal claims is en route. Insolvencies are increasing, as are claims of fraud, breach of contract, and breach of fiduciary duty. With that in mind, a group of practitioners who deal in fraud, insolvency, and enforcement held the Asset Recovery Americas Conference—focusing on enforcement law in Latin America and the United States. Validity Finance details that several prominent jurisdictions are adopting policies more welcome to litigation funding in insolvency matters. Adding needed clarity to the use of third-party legal funding is a boon to clients and lawyers—but also to investors. The newly passed Private Funding of Legal Services Act, adopted last month in the Cayman Islands, makes several important changes in the law. First, champerty and maintenance laws were stricken. Contingency fee agreements and conditional fee arrangements are now permitted—with caps on how much lawyers can be paid above their normal fees. Finally, it allows for the use of third-party litigation funding agreements, with specific stipulations on how payments are calculated. The British Virgin Islands have accepted litigation funding since the late 1990s when they abolished champerty laws. The practice of third-party funding is seen as a vital part of ensuring access to justice. Meanwhile, Brazil allows funding, but has no laws in place governing the practice. Funding has yet to become mainstream there—which means that new laws may be on the horizon as legal and financial practitioners embrace the practice. The potential for growth is enormous, though a clearer legal framework is needed. Similarly, Argentina has no legislation directly impacting litigation funding—so restrictions are minimal. Legal fees are high in Argentina, and scandals are common. As such, there’s a widely held belief that litigation funding should be mainstreamed to provide citizens better access to the legal system.
Commercial

Litigation Funding in Asia—What’s the Holdup?

Litigation Finance has long been increasing in popularity and sophistication in places like Australia, the UK, the US, and Germany among others. Yet despite this run-up, much of Asia seems slow to adopt the practice. Law.Asia suggests that now that Hong Kong and Singapore have opened their doors to the practice of third-party legal funding, other Asian jurisdictions may follow suit. Both Singapore and Hong Kong allow litigation funding for international arbitration—including mediation and enforcement. Hong Kong extends this to liquidators, affirming that liquidators do not need court approval in order to enter a funding agreement. Harbour Litigation Funding founder Susan Dunn explains that banks, big business, sovereign wealth funds, and government entities are all making use of third-party funding—believing it to be a strong solution for runaway legal budgets. Dunn details that the straightforward nature of a funding agreement is highly attractive to businesses in particular. For investors, litigation funding is a way to diversify investment portfolios with assets uncorrelated to larger markets. Of course, this kind of investment requires experienced funders with a solid track record of picking winners. Portfolio funding can help diversify the risk involved. The funding industry has been spurred toward major growth during the COVID pandemic. Financial turmoil led to business closures and cash shortages across most major markets. And alongside this development, many new players have entered the legal finance space. Robin Darton, insolvency and restructuring partner at Tanner De Witt, explains that COVID has also brought with it a glut of insolvencies, breach of contract, fraud, and breach of duty claims. This presents more opportunities for funders and investors. Litigation funding in Asia presents an array of opportunities—time will tell how Asian jurisdictions will respond.
Commercial

The Cayman Islands Refines Litigation Funding Regulation

Last month, the Private Funding of Legal Service Act 2020 (AKA the Act) became law. The Act brings codification to the rules governing the practice of third-party litigation funding—which had been addressed on a case-by-case basis previously. Like many jurisdictions, champerty and maintenance laws had to be abolished before litigation funding could be supported by the law. This was a key element of the Act. Mourant details that the Cayman Islands recognizes three types of litigation funding agreements:
  • Conditional Fee Agreements—where clients pay slightly more than standard legal fees if the case wins, and nothing if the case doesn’t.
  • Contingency Fee Agreements—where lawyers receive a set percentage of any award given, but clients pay nothing if the case is lost.
  • Third-Party Funding Agreements—where funders and clients agree on terms by which funders will cover case costs in exchange for payment after the case wins. Funding agreements are generally non-recourse, so clients pay nothing if the case is not successful.
Other vital aspects of the Act include allowing contingency fee agreements except in the case of criminal proceedings, or any case under the purview of the Children Act. Conditional fee arrangements are also permitted, with set limits imposed on how much attorneys can add to normal legal fees. Total amounts paid to lawyers may not exceed 33% of the total judgment or award. If lawyers want to enter a fee agreement with different terms, that may be possible with court approval. With regard to third-party funding agreements, the Act requires that funding agreements must be in writing, and comply with existing law. The Act leaves room for further regulation to be imposed later, as needed. Such rules could include disclosure requirements or the acceptance and regulation of new types of funding agreements. Overall, the Cayman Islands has created a welcome environment for funders and investors.