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Ask the Experts: What to Do When Deals Go Wrong

September 29, 2022

Ask the Experts: What to Do When Deals Go Wrong

In the final panel of the conference, Michael Kelley, Partner at Parker Poe, moderated a discussion on lessons that can be learned from past deal issues. Panelists included Chip Hodgkins, Managing Director of Statera Capital, Tracey Thomas, CEO of IP Zone, and Erika Levin, Partner at Fox Rothschild. This panel highlighted several stressors and break points that occur in funding relationships and transactions. One issue that often comes up is that communication problems arise. For example, there can be reporting requirements that firms forget to bring up at the start of a relationship. It’s often difficult to communicate all of the various burdensome filing requirements. Another issue that can arise is economic inefficiency. Sometimes an inversion occurs, where a lack of attention to the budget arises, or a secondary counsel comes in and there’s an issue there. These things can cause obvious problems, given that lawyers just aren’t that great at budgeting, according to the panel’s perspective. The panel recommends transparency, and addressing issues instead of burying them, which is often the temptation. For example, on budgetary issues, often counter-parties might not even be aware of where they are in the budget, so a lot of times avoiding problems just comes down to sharing information before a dislocation occurs. Another interesting point: sometimes the relationship between law firm and funder becomes too cozy, and it’s no longer aligned with the client’s best interests. Tracey Thomas of IP Zone pointed out that in such situations, they’ve had to terminate the relationship, and they’ve found that termination is in their best interests in such circumstances. On case management, sometimes funders can try to take control of the budgetary decisions of the case. One example that was brought up was when a funder told a client to ‘shut up and dribble,’ and follow their lawyer’s advice on where to spend money. While that may have been in the best short-term interests of the case, it fractured the relationship. Not to mention the fact that it was borderline unethical. At the end of the day, the relationship between a lawyer and client should be sacrosanct. Once funding enters the relationship, things can get murky, and this can present ethical considerations that are very problematic. So this will be an ongoing source of contention as the litigation funding industry continues to mature.

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Commercial

Funded $7 Million Preference Claim Against Australian Tax Office Fails on Insolvency Proof

The Supreme Court of Western Australia has dismissed a A$7 million unfair preference claim brought by LCM Recoveries against the Commissioner of Taxation, finding that the company behind the claim had not been shown to be insolvent when the disputed payments were made.

As reported by Murrays Legal, the proceeding — *LCM Recoveries Pty Ltd v Commissioner of Taxation [No 2]* [2026] WASC 327 — concerned $7,005,329.27 paid to the Australian Taxation Office across 86 transactions between December 2012 and June 2013. LCM Recoveries pursued the claim as assignee of the liquidators' causes of action rather than as a funder standing behind the liquidators.

The court was not satisfied that the company was insolvent on the date relied on to trigger the statutory presumption of insolvency, or during the preference period that followed. It found the company faced liquidity problems but that the evidence did not establish an endemic shortage of working capital, noting that its books and records were incomplete and that internal reports relied on by the applicant's expert were too unreliable to establish insolvency. The Commissioner also succeeded on a good faith defence.

The judgment is likely to draw attention for its observations on the economics of assigned claims. On the figures before the court, even a full recovery would have returned roughly $206,916 to unsecured creditors after liquidator remuneration and costs, while the assignee retained the substantial balance. The court described as serious the question of whether an award in favour of an assignee that produces no benefit to the general body of creditors is consistent with the purpose of the preference regime.

Commercial

Civitas Report Calls for Beneficial Ownership Disclosure and Sanctions Screening in UK Funding

The think tank Civitas has published a report on the UK class action and third-party litigation funding market that calls for funders to trace their ultimate capital ownership to named individuals, arguing that the reforms government has committed to so far leave structural gaps unaddressed.

According to Litigation Nation: The growth of a class action claims culture, written by Danna Brown and published this month by Civitas: Institute for the Study of Civil Society, the Civil Justice Council's 2025 review of the funding market produced 58 recommendations for reform, of which the government committed to accepting only two. The report argues that this approach leaves both the industry and the wider system exposed.

The report sets out three changes it says should be made to third-party litigation funding: a disclosure obligation to trace ultimate capital ownership to natural persons; sanctions screening conducted as a procedural prerequisite rather than a discretionary step; and robust checks to establish that a funder is financially fit to bear the risk it assumes when financing a claim. It concludes that implementing these safeguards "would give the market the institutional legitimacy on which the rule of law depends."

Civitas frames the paper as a contribution to public debate on legal culture, collective proceedings and regulatory reform in England and Wales. The report carries an explicit note that no company, law firm, funder, claims management company or individual named in it is accused or suspected of wrongdoing, and that identifying gaps in the regulatory framework should not be read as an allegation of misconduct against any party.

Commercial

ARC Holds Up Kansas Law as a Model for Foreign-Funding Restrictions

The Alliance for Responsible Consumer Legal Funding has pointed to Kansas as a template for legislators who want to close off foreign involvement in litigation finance without curtailing consumer advances, arguing that the two categories should be regulated separately.

As reported by The Washington Times in a letter to the editor from ARC President Eric Schuller, concerns that foreign governments may use litigation financing to reach sensitive information or advance strategic interests against American companies "deserve serious attention" — but consumer legal funding, he writes, "is not commercial litigation financing and policymakers must distinguish between the two."

The letter uses H.B. 2518, the Transparency in Consumer Legal Funding Act, as its illustration. The Kansas statute bars consumer legal funding companies from accepting money from a "foreign government or foreign adversary" as those terms are defined under federal law. It also defines consumer legal funding as a non-recourse transaction for household or personal expenses and expressly excludes costs tied to prosecuting the claim itself, alongside prohibitions on funders controlling litigation or settlement decisions and on using advances to pay attorney fees, court costs or filing fees.

Schuller notes the bill passed unanimously in both the Republican-controlled Kansas House and Senate before being signed by Democratic Governor Laura Kelly, and frames that record as evidence the approach travels across party lines.

His closing argument turns on scale. A typical recipient, he writes, is someone injured in a car accident who needs $3,000 or $4,000 to cover rent or groceries while a claim resolves — a transaction he says "bears little resemblance to multimillion-dollar commercial litigation."