Victory for Consumer Legal Funding in Recent Minnesota Case
The common law doctrine that bans champerty has been around since the middle ages. This dark age law prohibiting funding for legal cases by outside parties (who then receive a share of a winning award) is still in place in some parts of the world. But Minnesota is no longer one of those places—earlier this week, the Minnesota Supreme Court abolished the champerty doctrine. Bloomberg Law explains that this is a major win for litigation funders, as it affirms its positive impact on the legal world. This follows the trend of other states either refusing to recognize champerty laws, or outright legalizing third-party legal funding. Texas, Ohio, New Jersey, New Hampshire, Massachusetts, Illinois, Hawaii, Connecticut, Colorado, California, Arkansas, and Arizona are all on board with lit fin as a growing field. This recent decision began with a personal injury case wherein an injured party made an agreement to receive funding from Prospect Funding Holdings LLC. The plaintiff agreed to pay Prospect Funding about $14,000, but her lawyer refused, saying the agreement was invalid because of the state-wide ban on funding. The funder sued, and lost in district court—the agreement was declared unenforceable because it was not technically legal to begin with. The Minnesota Supreme Court ruling reversed this decision. Eric Schuller, President of ARC—the Alliance for Responsible Consumer Legal Funding, expressed satisfaction with the decision. “The Minnesota Supreme Court got it right. We hope that this decision will allow the opponents of the industry to finally put the issue of champerty to rest.” Schuller goes on to explain the necessity of Litigation Finance, “Consumer Legal Funding is a financial product that allows consumers to get the proper outcome of their legal claim when they don’t have the financial wherewithal to meet their day-to-day obligations like mortgage, rent, or just putting food on the table.”
INVESTOR INSIGHTS
Overall, the industry has been positively impacted by the financial effects of Covid-19 with 64% of respondents experiencing an increase in origination activity. 
In some cases, the increase in origination activity has been dramatic, with originations in excess of 25% being experienced by approximately half of respondents. 
The largest impact in terms of the type of activity is equally split between law firm portfolio financings and single case financings. However, since portfolio financings are inherently larger, it stands to reason that a much larger dollar volume of financing will be required for these financing types. 
In terms of the source of originations, it appears to be a combination of existing relationships, mainly from law firms, and new relationships, mainly from law firms and directly from plaintiffs. It is encouraging to see new relationships continuing to be formed at this stage of the evolution of the industry. 
A natural consequence of demand for litigation finance is a demand for capital commitments by the litigation funders. Accordingly, it appears that the demand impact of Covid will have the effect of accelerating plans for new fundraisings, with about half of respondents indicating their fundraising plans have been accelerated. Accordingly, investors in search of good risk-adjusted and non-correlated returns should expect to see more opportunities in the marketplace. As always, diversification is critical to successful and prudent investing in the litigation finance marketplace. 
As it relates to the impact that the current financial crisis will have on the expected return profile, almost 50% of respondents suggested it is too early to tell. However, for those who did have some visibility or were confident in making an estimate, it appears that the expectation is that their existing portfolios may be negatively impacted, which is consistent with what I would have expected given the extent of this economic crisis. I was personally forecasting that durations would be longer, simply due to the effect that court closures would have on existing cases, where the timing of settlement discussions are ultimately impacted by the timing of the court process. In this light, I would expect to see portfolios maintain longer durations which may equate to lower internal rates of return, but this depends on the escalator clauses within their funding agreements, which may see funders obtain larger multiples of invested capital if the delay breaks through timing thresholds. I would also expect that the threat of collectability risk might put pressure on plaintiffs to accept lower settlement amounts, and defendants will use liquidity concerns to their advantage by low-balling settlement offers. However, this phenomenon could be situation-specific, and more prevalent in certain industries. 
As previously stated, one of the reasons I would have expected return expectations to be increasingly negative is due to defendant collectability risk. In this vein, it seems that most managers are focused on the impact this risk will have on their portfolios, with most managers indicating that collection risk has increased, which is expected given the impact the crisis has had on certain industries, and the impact it has had on corporate liquidity. 
Edward Truant is the founder of 
About Augusta Ventures:- Established in 2013, Augusta is the largest litigation and dispute funding institution in the UK by # cases. Augusta’s scale enables us to make decisions in market-leading timeframes and fund cases of any size.
- Augusta is organised into specialist practice groups: Arbitration, Class Action, Competition, Consumer, Intellectual Property and Litigation, and sectors: Financial Services and Construction & Energy.
- By the end of 2019, Augusta had funded 227 claims. Contact: Leor Franks, Chief Marketing Officer, 
