This past Thursday, July 30th, Litigation Finance Journal held a special digital conference covering the key issues facing the commercial funding industry. Moderator Ed Truant (ET) of Slingshot Capital helmed a roundtable discussion which included panelists William Farrell (WF), co-founder of Longford Capital, Robert Hanna (RH), co-founder of Augusta Ventures, and Molly Pease (MP), Managing Director of Curiam Capital. Mick Smith, co-founder of Calunius Capital, whose new venture Almatura is now being launched, was slated to join, but unfortunately a power outage at his home left him unable to attend the virtual event. Below are highlights from the event which covered a range of topics currently facing the sector: ET: Does the level of activity, at least in the US Federal Court System, surprise the panelists? Would you have expected to see the same number of cases? WF: This data that you’re describing is not surprising at all. We’re in a tremendous time of economic uncertainty and volatility following the COVID-19 pandemic. And that environment is expected to create controversies and stimulate litigation. At Longford Capital, we have also seen the results of that with an increase in interest among law firms and among corporate litigants for litigation financing in some of the same areas your data suggests have seen an uptick in litigation—namely corporate litigation, corporate contract disputes, and insurance, namely insurance recovery for business interruption or property damage. RH: I think there was an increase in the number of inquiries we were seeing anyway. Slowly, lawyers are generally accepting litigation funding more than they have in the past. As a result of our friends at Burford, they’ve always been a very high-profile poster child for the industry which has made the corporate world, certainly in the UK, aware of litigation funding. Come the virus, all of a sudden, we decided that we thought maybe the cases were going to take longer to reach a resolution. So we, like a lot of other funders did, added six months to the life cycle of the case when valuing our portfolio. Interestingly, I was speaking to a high court judge the other day and she was saying we’ve seen more resolutions year-to-date than we saw in the high court the whole year 2019. Thanks to the virus, you’re getting resolutions in many cases quicker than you might otherwise have seen. There is definitely a positive influence on litigation. There is going to be more and more litigation, more insolvency that will create opportunity. Immediately what we’re seeing is a search for liquidity. MP: I definitely agree with what Bill and Robert have said. I think looking at the Lex Machina numbers, I think it’s probably even an underestimate. I’m sure there are plenty of cases that were filed that may have been initiated for COVID-related reasons but the complaint itself might not actually mention COVID. I think with any downturn people tend to be more litigious and may take on suits that they may not otherwise have decided were worth it in an environment where things were moving up and looking positive. We’ve definitely seen a lot of activity at Curiam, and I think there are people who are considering filing litigation if they can get the right financing in place and have the economics make sense, who may not have considered it. It’s just something that seems more worthwhile to them in the context of the economy right now. ET: To what extent do you think Litigation Finance will get involved on the insurance litigation side? Is that deemed a good case type to pursue? Is there some concern about going up against well-capitalized insurance companies, or is litigation finance particularly well-suited to those pieces of litigation? RH: I think we’re a little bit different in the UK. The FCA (financial conduct authority) has actually taken some test cases in this space. Everyone is waiting, rather nervously on the insurance side of things, to see the result of those. Certainly from our point of view, we haven’t taken on business interruption cases just yet. We’ll see what the result of the FCA cases, then there will be plenty of time to react accordingly. ET: Is that the Hiscocks case everyone is looking at? The class action? RH: That’s the one everyone is talking about, absolutely. So it’ll be interesting to see what happens there. WF: There have been thousands of insurance claims filed and lawsuits are following once the insurance companies have been denying claims. And I think that number of insurance recovery lawsuits will increase into the hundreds of thousands in the United States. Many companies are looking at their business interruption provisions of their insurance policies and their property damage provisions and asking lawyers to apply the circumstances to their particular policies. Some that we’ve seen are asserting claims based directly on the COVID-19 pandemic. What we find is a lot of policies have exclusions or disclaimers against coverage for pandemics or other types of health issues. So as a result, I see other claims being filed that are basing the damage on something else—either properly damage, or interestingly, government authority intervention. It’s going to be difficult for the insurance industry to deal with this massive influx of claims. And I’m sitting back evaluating policies on a case by case basis. Our conclusion is that many cases do not rise to the level of confidence that we need to pursue a case. I’m also interested to see if the US Government will in some way intervene—as a stimulus or some sort of economic package to help the insurance industry. You asked if these would these insurance recovery cases be interesting to funders because the defendants—these big insurance companies are very well funded. In our experience at Longford Capital, the defendants in the cases in which we’re involved are typically well-funded. And we like that attribute because it eliminates other concerns like credit worthiness or collectability risk. So that’s not a detriment to our involvement. It’s a positive when the corporate defendant or other type of defendant is able to hire the very best lawyers and come to reasonable commercially-minded outcomes. And then if they’re unsuccessful in their defense, that they’ll be able to pay a judgement. ET: We’re at a point in time over the next coming months we’re probably going to see a significant increase in insolvencies unfortunately. Do you view this as attractive part of the marketplace and is it something where your firm is focused? WF: We at Longford Capital have identified the bankruptcy arena as a very fertile ground for us to be able to help law firms and companies that are in distress of one sort or another. The example that I see every week is a company that moves into bankruptcy has shuttered its doors perhaps and is suffering tremendously on top line revenue and perhaps its greatest remaining asset is a meritorious legal claim. And when companies are in a distressed situation it has seemed to be that they end up being the victims of fraud and breach of contract even more often than usual. So I suspect that our industry will be able to assist in those situations. RH: When we started Augusta, we were convinced that we were going to see an awful lot of insolvency claims coming to us. I think the problem is that what you’ve got in the UK, is you’ve got a very closed group of IP agents who are very familiar with valuing risk. Hence, as a funder, if you’re shown a claim by an IP agent, then you’ve got to be very careful and understand why they’re showing this to you and not funding it themselves. We were surprised at how unsuccessful we were at getting access to good insolvency cases, and so we’ve funded a number but not the number we thought we were going to do. ET: Survey results that were published by Above the Law, taking a look at Litigation Finance Perspectives in the legal community. There we saw some very positive trends that came out of the survey as it compares to 2019. The survey response references 70% usage versus 41% last year, with probably a disproportionate amount of that usage coming from smaller sole practitioners and smaller law firms. I’m curious as to the panel’s perspective on how the survey results impact how you originate and create relationships within the legal community? RH: Surprisingly, we still get the vast majority of our cases from lawyers and law firms that we’ve built relationships with. I’d say it’s 70-75% we get from lawyers. We are seeing more and more claimants aware of litigation funding. Some of them do come to us direct. But typically they will go to their trusted lawyer and say ‘I want to know about Litigation Finance, tell me what it’s all about, tell me what you think I should do.’ The lawyers and funders have always had a sort of love-hate relationship. They’ve always been very wary of funders. They always think that we’re going to interfere with the relationship between them and their client. But now they’re being forced to really work with us funders because their clients are asking them to do that. I think that’s the big trend. MP: For the most part we still get the majority of our opportunities, or at least the good opportunities, from law firms. So I agree on that. I think that there has been a trend for quite a few years now for in-house counsel and clients being under pressure to control the costs of outside law firms. And I think that being concerned about how the billable hour is going up and budgets are increasing significantly and GCs are being asked to do more with less and have to work with their law firms to try to come up with alternative fee arrangements or some way to keep the costs of outside counsel under control. That push supports interest and a move toward litigation funding. I think for a while now clients have been saying to firms, ‘what can we do to try to keep this under control, to make sure that the budget doesn’t exceed what we’re expecting.’ ET: Do you think the industry has a bit of a PR problem? And the US still remains one of the few countries that does not have an industry trade association at least on the commercial side, they do on the consumer side. What are your thoughts about trade association in the context of the US?   WF: I like the idea of an industry trade association. I particularly like the idea of a multinational trade association so that we can continue to share ideas and best practices across jurisdictions. I like speaking to Robert, for example, to learn from his experiences in the UK. I think we would benefit as an industry from that. When I was in private practice we spent significant time representing trade associations and see great benefit to those. I suspect that in short order that we as an industry will take steps to put that in place. ET: I heard Burford make some comments about a global trade organization coming in, so we’re just waiting on that official announcement. Robert, from your perspective, you have an industry association in the UK, and I believe you’re active in it. How has that been working out? And do you suffer any of the same PR issues in the UK as compared to the US? RH: I think ALF has a very good role in the industry. It’s there to self-regulate the industry. It’s done that well, I believe. What it isn’t, necessarily, is a mouth piece. It’s not a PR machine. So I totally agree with Bill. I think there is room for an international trade association to get both sides of the story out there. I think there is a need for a more vocal PR mouthpiece for the industry. Litigation funding is not rocket science, but it is there to level playing fields if necessary. Sure it’s there for large corporates to take liabilities off balance sheets and use other people’s cash. But it’s a very transparent process and a very valuable one. At the lower end of the scale it provides access to justice which is really important. And that message should get through.

COVID continues to impact the business world in ways few were ready for. The already evident spike in insolvency and bankruptcy litigation is expected to grow in the coming months and beyond. Burford Capital spoke with industry experts to get their thoughts on these developments. They include Margot MacInnis of Grant Thornton, Jason Yardly of Jenner & Block, Derek Lai of Deloitte China, and Thomas Janover of Kramer Levin. When asked what types of cases would be most prevalent in the near future, Lai predicted that fraud cases may increase. He suggested that when businesses are scrambling to make up for losses, fraud may follow. Margot MacInnis brings up insurance claims, which are already contentious, as insurers look for ways to hold back payouts related to COVID closures. Jason Yardley explained that the issues that caused the 2008 financial crisis were never fully resolved. This means that insolvency cases, including disputes over the value of assets, will be huge. Thomas Janover echoed that sentiment, saying that he expects more litigation involving breach of contract suits and endless valuation testimony. When asked how to best address the needs of clients in financial distress, MacInnis states that insolvency lawyers must have detailed discussions with clients about their options. Only through informed decision making can businesses make good choices on how to proceed during a pandemic. Lai suggests reaching out to clients to develop relationships and assuage their fears while streamlining risk management. Being able to help clients in crisis with swift, decisive action can make all the difference.  As with most things, the keys to financial survival in the time of COVID include strong communication, solid information, and flexibility.

After gaining considerable steam during the economic crisis of 2008, the Litigation Finance industry has only increased in popularity since. Predictions suggest that by 2027, the litigation funding sector will be worth more than double what it is now. The Edge Markets explains that lit fin is an attractive option for investors for a few key reasons. First, litigation funding doesn’t correlate with the rest of the market. Individual claims may vary in value—particularly when a defendant’s net worth drops drastically. Litigation funding also has a slower investment cycle, since cases can take years to resolve. At the same time, when funders become involved with cases after specific milestones are met, the time between investment and payout becomes much shorter. Jay Greenberg of LexShares details that unlike other alternative asset classes, Litigation Finance has a clear resolution and ending. Cases eventually reach a resolution that typically comes down to a clear win or loss. Litigation funding is generally considered a risky venture—especially if the funding is for a single case or class action. Investing in a litigation portfolio may mitigate this risk, but also limits potential rewards. Funders, by law and ethical standards, do not have a say in decision making in the cases they fund. That means a client may decide to accept a lowball settlement, leaving funders eligible to receive less than they put in. A trend toward funding for smaller and mid-size cases can also lead to less risk for investors. If this continues, investors may find opportunities to make less risky lit fin investments that still increase access to justice for those who need it most.

Burford Capital recently joined forces with InterLaw Diversity Forum for a study on ways to improve diversity in large firms. To that end, a panel of experts gathered to discuss the issue. Included were: Burford’s Elizabeth Fisher, Rothschild’s Sarah Blomfield, Patti Kachidza at M&G Prudential, and David Jackson from Barclays. Burford Capital reports that the major focal points should include corporate culture within firms, recognizing family responsibilities that impact women more than men, work-life balance, origination credits, implicit and unconscious biases, and factoring in why women are less likely to self-promote in the workplace. Because most large law firms are run by men, the tendency is to train, develop, and promote men to the partnership track. The intricacies of billing and compensation for lawyers means it’s more difficult to discern whether all staffers are being treated equitably. More transparency would lead to more fairness—if only because others would be watching. Gender biases can punish women with the same qualities that are praised in men. Ambitious women are called “pushy,” a woman expressing dissatisfaction may be called “overly emotional” or “moody.” Accepting this as a factor is one thing—finding strategies to combat it may be far more difficult and complicated. Origination credit is at once a solid marker for success at a firm, and also a foundation for a long-lasting equity gap in compensation. Surely those doing the actual work for a client are more deserving of compensation than those who aren’t. It was suggested by several experts that clients could have an impact on this, simply by asking the firm about origination credit. It’s disappointing to realize that 80% of those surveyed state that their firms have no official policies in place to improve diversity. Diversity isn’t just about numbers—it’s about having a team that can better represent clients both demographically, and in terms of bringing a varied skill set to the table.