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Consumer

Legal Funder Under Fire for Cash Advances in NFL Concussion Case

Craig Mitnick, a New Jersey lawyer who represented hundreds of NFL players in a concussion settlement, has asked a federal judge to vacate the award to a litigation funder. Balanced Bridge Funding (formerly Thrivest) provided advances to former players while they waited for settlement monies. Mitnick has been ordered by an arbitrator to repay more than $2 million in loans. Legal Newsline details that in his filing, Mitnick claims that Balanced Bridge, along with lawyers at Fox Rothschild, committed ethics violations. However, much of this stance has already been rejected by arbitrators. The Consumer Financial Protection Bureau has long had a bee in its bonnet about Litigation Finance. Recently, the CFPB was instrumental in multiple funding agreements being ruled invalid due to prohibited assignment of benefits. This was reversed in 2019, but other issues came to light. Specifically, that lawyers were encouraging clients to obtain advances on settlements from firms in which they hold financial interests. Mitnick encouraged former NFL players to sue the league over its alleged failure to inform players about the risks of brain injuries. After a consolidation of the lawsuits and a dispute with another firm that entered a fee-sharing arrangement with Mitnick, Fox Rothchild and Mitnick ended their relationship—leaving tens of thousands of dollars unpaid. Despite making $1.9 million in repayments, the amount owed is still over $2 million. Ultimately, Mitnick was ordered to pay Balanced Bridge $2.3 million in back interest, as well as a further $150,000 in fees and expenses. Mitnick’s firm asserted that the contracts couldn’t be enforced, as they were non-recourse in nature. But the agreements stipulated that if the firm defaulted, the creditor may pursue the debtor’s assets to recoup the outlay. These events have been touted as evidence that litigation funders are greedy. In fact, what this case may illustrate, is the importance of standardized contracts and clarity of expectations.
Commercial Legal Innovation

Blockchain Tech Meets Litigation Finance

The concept of blockchain investing is still a mystery to many consumers. To many it sounds complicated, risky, and predicated on guesswork. Blockchain-style investment in third-party legal funding is a new concept, and one that brings with it questions about transparency and disclosure. Law 360 explains how one hemp company, Apothio LLC, launched an ‘initial litigation offering’ to be used in its upcoming federal court battle. The company is suing a California county after the county allegedly destroyed acres of hemp plants—saying that the THC content was above the legal limit. This ILO is listed on the Republic platform, using blockchain technology and standard crowdfunding rules. Litigation tokens are purchased by investors, representing a percentage of interest in any award stemming from the case. Ava Labs' blockchain arm, Avalanche, is hosting the tokens. Litigation Finance is a rapidly growing industry that has demonstrated an unmatched capacity for innovation and adaptation to the needs of those using it. The crowdfunding aspect of the funding means that a new class of small investors can now access the impressive payouts that litigation funding can provide. These investors are generally less savvy and more risk averse. As such, the complexities of third-party legal funding may be untenable for inexperienced investors, but increasing access to this investment type can be a boon to those who take the time to learn the industry. Apothio LLC’s case is currently facing a motion to dismiss. If that motion is successful and the case ends, investors will be refunded 80% of their original investment. What happens when a defendant seeks disclosure regarding who is funding the case? Plenty of questions abound as to whether small blockchain investors could be seen as having influence over funded cases. Issues could also arise after the one-year period ends, in which purchased tokens become tradable. Depending on valuation, tokens could reveal information on a case.
Commercial

How Litigation Finance Can Address the Gender Pay Gap

Most industries report that women are still making less money than men, despite similar job performance. In American law firms, multiple studies affirm that male lawyers make more money than their female counterparts. A partner compensation survey from last year shows that male partners earned 44% more than female partners. Can third-party legal finance help address this? Validity Finance explains that while this 44% number seems discouraging, it’s actually a step up from 2018—when the pay gap was a maddening 53%. The data shows that the pay gap is emphatically not the outcome of women working fewer hours than their male counterparts, nor does it suggest that women are producing inferior work. Studies actually show that women work more efficiently than men, and that they tend to report higher annual billable hours than men. There are many factors that contribute to this, such as mothers choosing a non-equity partnership track, women being less likely to negotiate pay increases, and a dearth of women in leadership roles in their law firms. But many feel that the biggest hurdle to pay equity is origination credit. A study by the National Association of Women Lawyers showed that nearly half of the top 200 law firms do not have a woman in their top ten earners. According to another study, female partners reported only 67% of the origination credits of men. Third-party litigation funding can enable lawyers to offer an array of bespoke alternative fee arrangements. Sharing risk with clients and funders allows firms to take on more cases with less financial risk. It’s been suggested that women are penalized more severely when they take risks that don’t pan out. Litigation funding offers security for women to take those risks, without leaving their firms in a lurch. In short, legal funding is a proactive solution whose time has come.
Commercial

Liverpool’s Pure Business Group Folds, 200+ Jobs Lost

Pure Business Group, which specialized in civil legal claims, is now in administration along with seven connected entities. The firm employed 256 people in total, with 203 of those immediately dismissed for “redundancy.” Liverpool Business News explains that Pure Business Group was comprised of two separate law firms, various claims management operations, a litigation funding arm, and more. There were nine limited entities in all. Administrators Robert Armstrong, James Saunders, and Michael Lemmon of Kroll Advisory will be serving as joint administrators. So far, they have taken steps to secure client files and protect financial assets. The administrators are also expected to work with industry regulators to preserve the rights of claimants. Rights to handle claims and WIP files has been secured. Claimants with active cases are being approached with the next steps.
Case Developments Commercial

Key Witness in Tinder Trial Received $2 Million Before Trial

The Tinder trial is about to begin. One co-founder of the popular dating app is suing Barry Diller and his media holdings for an astronomical $2 billion—claiming that he was misled about Tinder’s true value. The New York Post details that a key witness in the case, former Tinder VP 0f finance James Kim, was paid the sum of $2 million before the trial began. He was allegedly offered a further $1 million if the court ruled against Diller and his companies. Partially redacted emails show that Kim negotiated the large payments with attorneys for Rad. There is nothing illegal about the payments to Kim. But that hasn’t stopped IAC (Diller’s media conglomerate, which also owns the Match Group family of dating apps) from implying impropriety or undue influence. Purportedly, Kim will testify that top brass at IAC pressured him to undervalue Tinder’s worth to investment bankers, as Match poised itself to add Tinder to its app roster in 2017. Plaintiff Sean Rad, along with other co-founders of Tinder, have stated that the bankers involved grossly undervalued the worth of Tinder at $3 billion. Without citing a specific figure, they claim it should have been far more. The undervaluation allegedly led IAC et al to cheat Rad and other co-founders out of billions. The funds paid to Kim were provided by an unnamed litigation funder. New York Supreme Court judge Joel Cohen stated that while payments to Kim are allowable within the law, such payments may approach the line between “legitimate” legal finance and an illegal payment of witnesses—but was clear in stating that the line was not crossed. Predictions abound that the case will settle for between $300-700 million, but we'll have to wait and see how the case pans out. 
Consumer

Erika Girardi Calls Fee Agreement ‘Unenforceable’

Erika Girardi’s legal troubles are far from over, it seems. A lawsuit filed by Tom Girardi’s former co-counsel alleges that she is responsible for fees that were misappropriated by her husband’s firm, Girardi Keese. The former Mrs. Girardi has called their claims unenforceable, as they are allegedly based on an “illegal and unethical” funding agreement. Law 360 reports that Edelson PC is attempting to lift a bankruptcy stay on their current lawsuit. Earlier this week, Erika Girardi asserted that conduct in the partnership between Edelson PC and Thomas Girardi violated ethical rules. In their representation of the families in the crash of Lion Air Flight 610, the law firm allegedly did not receive written consent from clients to split fees. This argument was used without success by Keith Griffin, a former Girardi Keese lawyer. Griffin has also been accused of misappropriation relating to funds from the Lion Air action. After denying Griffin’s motion, the judge stated that the court was open to reconsidering in a summary judgement motion. Erika Girardi is no stranger to legal trouble, as clients from both Edelson and Girardi Keese pursue funds she allegedly received from her ex-husband. Girardi Keese was forced into bankruptcy after evidence surfaced that Thomas Girardi embezzled at least $2 million from claimants in the Lion Air case. Since then, more clients, funders, vendors, and others have stepped up to claim that they too were cheated by Girardi. Recently, founder Jay Edelson stated that Girardi’s claims were untrue, and part of a scheme designed to enlist the bankruptcy trustee for Girardi Keese to fight the firm’s claims. Within a year of declaring bankruptcy, Thomas Girardi owned roughly $250 million in assets and cash. Now, the trustee is unable to find valuables, and suspects that they have been hidden or given to someone else. Meanwhile, many records cannot be found, and those that have been found are riddled with inconsistencies.
Commercial

Staffing Shortfalls? Portfolio Legal Funding May Be an Option

As legal firms try to keep up with a spike in new litigation, a worker shortage is making an already tough task even more challenging. Many firms initiated a hiring freeze during the pandemic, and are now scrambling to cover staffing shortfalls. As competitive wages for lawyers climb, salaries for first year associates can be as much as $200,00 annually at Big Law firms. Market Screener suggests that litigation funding for legal portfolios can help law firms cover worker shortages. Financing a portfolio of fees from current cases leads to an influx of cash that can be used to bring in new staff. Because third-party funding is provided on a non-recourse basis, it doesn’t have to be paid back unless or until the funded cases are successful. Portfolio financing refers to legal funding for a bundle of meritorious cases that can include those with a contingency fee arrangement in place, or hybrid cases with bespoke pay structures. Firms that normally utilize bank loans or traditional lines of credit may find that the non-recourse nature of litigation funding is more cost-effective in the end. The lack of interest payments or a need to put up collateral can be a boon to firm partners. The more experienced the funder, the more likely it is that they’ll have valuable contributions to make about the cases they fund. Decision making is always left to the client, but funders may provide strategic assessments based on years of experience in courtrooms. Ideally, funders should have former trial lawyers and other legal professionals on staff as well as finance specialists.  This is yet another way that litigation funding can help support the needs of both law firms and clients.
Commercial Regulatory Issues

CEO of Baker Street Funding Talks Litigation Finance Regulation

Litigation Finance has become a powerhouse investment in the last decades, with billions in assets under management. The reasons for this are varied—including financial instability caused by the pandemic, a thirst for uncorrelated assets, and a burst of interest in ESG investing. TechBullion spoke with Baker Street Funding CEO Daniel Digiaimo, who explains the benefits of third-party legal funding for legal clients, lawyers, corporates, and investors. In a climate where pursuing a legal case is prohibitively expensive, legal funding allows those with meritorious cases to see their day in court. Digiaimo explains that financing helps clients in more ways than simply funding legal expenses. Experienced funders can advise on case strategy (though decision-making remains the purview of clients), recommend experts, and ensure that claimants won’t be tempted by lowball settlement offers as their legal budgets soar out of control. The most commonly stated reasons to invest in litigation funding, according to Digiaimo, are the uncorrelated nature of the asset and the potential for very high returns. However, the timing of payouts can be unpredictable since complex cases can take years to reach completion.
Announcements Consumer

KBRA Assigns Preliminary Ratings to Oasis 2021-2

Kroll Bond Rating Agency (KBRA) assigns preliminary ratings to two classes of notes issued by Oasis 2021-2 LLC (“Oasis 2021-2”), a litigation finance ABS transaction. Oasis 2021-2 represents the fourth ABS collateralized by litigation finance receivables to be sponsored by Oasis Intermediate Holdco, LLC (“Oasis”) and the second to include Oasis’ MedPort-branded (“MedPort”) medical lien receivables. Oasis, through its operating subsidiaries, has a long history as an originator, underwriter and servicer of litigation finance receivables. The company is a wholly-owned subsidiary of Oasis Parent, L.P. which is majority owned by Parthenon Investors IV, L.P. The MedPort receivables are originated by various originators with operating histories dating back to 2003. Oasis acquired the various MedPort originators on January 5, 2021. Oasis 2021-2 issues two classes of notes. The previous three transactions had only one class of notes. The notes benefit from credit enhancement in the form of overcollateralization and a cash reserve account. The portfolio securing the notes has an aggregate discounted receivable balance (“ADPB”) of approximately $110.3 million as of the statistical cutoff date. The ADPB is the aggregate discounted collections associated with the Oasis 2021-2 portfolio’s litigation funding receivables, litigation loan receivables (“Litigation Receivables”), medical funding receivables and medical loan receivables (“Medical Receivables”). As of the statistical cutoff date, Litigation Receivables, Medport Medical Receivables and Key Health Medical Receivables comprise approximately 53%, 39% and 8% of the aggregate funded amount and have average advance to expected case settlement values of 8.5%, 29.1% and 30.2%, respectively. The transaction also features a $36 million pre-funding account that may be used to purchase additional Receivables during the three-months after closing. Click here to view the report. To access ratings and relevant documents, click here. Disclosures Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above. A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here. Information on the meaning of each rating category can be located here. Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com. About KBRA Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.
Announcements Case Developments

Litigation Capital Management: Successful award in LCIA international arbitration

Litigation Capital Management Limited (AIM:LIT), an alternative asset manager specialising in dispute financing solutions internationally, announces the delivery of an award in favour of the funded party in an international arbitration, under the LCIA (London Court of International Arbitration) rules.  The arbitration, seated in London and brought under the rules of the LCIA was for the determination of a construction dispute relating to a development in the Middle East.

This investment forms part of LCM's Direct Investment Portfolio and was 100% funded from balance sheet.

As a result of this award LCM has received approximately £9.8m (AUD$18.4m) in revenue, which includes the return of LCM’s investment of £2.8m (AUD$5.1m). This investment generated ROIC on the investment of 255%, with an IRR of 195%. The life of this investment was 26 months.

Patrick Moloney, Chief Executive Officer of LCM, commented: "This successful Award is the realisation of one of the first investments which LCM entered into following the opening of its London office in 2018 and demonstrates the successful application of its underwriting process to an expanding range of investments both in terms of geography and claim type.  This award is an excellent result for both LCM and our funded party." 

Litigation Capital Management (LCM) is an alternate asset manager specialising in disputes financing solutions internationally, which operates two business models. The first is direct investments made from LCM's permanent balance sheet capital and the second is third party fund management. Under those two business models, LCM currently pursues three investment strategies: Single-case funding, Portfolio funding and Acquisitions of claims. LCM generates its revenue from both its direct investments and also performance fees through asset management.

LCM has an unparalleled track record driven by disciplined project selection and robust risk management.

Currently headquartered in Sydney, with offices in London, Singapore, Brisbane and Melbourne, LCM listed on AIM in December 2018, trading under the ticker LIT.

Announcements Commercial Legal Innovation

Kerberos Capital Management Announces World’s First ESG-Linked Debt Product for Litigation Finance Markets

Kerberos Capital Management announced today the introduction of a groundbreaking new direct lending product to law firms with a margin ratchet linked to ESG targets – the first debt product of its kind in Litigation Finance markets. The program is intended both to recognize and reward firms that have already established a commitment to advancing ESG factors in their work, and to incentivize qualifying firms to continue those efforts into the future.
To qualify for the program, firms must (A) demonstrate a material and ongoing commitment to providing pro bono legal services, (B) generate a threshold amount of revenue related to ESG-advancing case types, and (C) establish that they do not prosecute cases or otherwise conduct business in ways that run counter to ESG principles (a negative screener test). Key Performance Indicators related to each of these three primary qualifying factors will be assessed at the loan’s inception and monitored throughout the duration of the loan period, with downward margin adjustments ranging from 50 to 100 basis points.
“At some level, most plaintiff-side litigation can be thought of as advancing social interests, as it is through this work that individual rights are vindicated and accountability is imposed. In the same vein, litigation financing in general has ESG attributes, because the capital provides increased access to justice. But we wanted to go further,” said Joe Siprut, CEO & CIO of Kerberos. “Certain categories of cases warrant special acknowledgment for advancing ESG interests to a unique extent, and Kerberos’ new ESG product is intended to incentivize the prosecution of those cases. Building these incentives into our debt products will drive better ESG practices and outcomes.”
About Kerberos
Kerberos Capital Management is a boutique alternative asset manager. We seek to provide our clients excess return at every point along the risk-reward spectrum with an emphasis on yield, opportunistic, and hybrid strategies. Kerberos’ flagship strategy is providing innovative capital solutions to law firms. The depth of our private credit and direct lending platform has enabled us to generate differentiated absolute and risk-adjusted returns in litigation finance markets, regardless of the business cycle or economic environment. Kerberos’ investment team is comprised of senior members from both the legal and private credit industries, including former principals of the world’s leading law firms and multi-billion dollar private credit funds. In 2020, the independent, London-based Private Debt Investor magazine named Kerberos Capital Management one of its Top 3 Global Newcomers in the private debt fund category. Kerberos manages both separate accounts and pooled vehicles for institutional and high net worth investors worldwide.
Commercial

The Increasing Complexity of Litigation Funding

As new jurisdictions discover the benefits of third-party legal funding, access to justice is increasing around the globe. As predicted, Litigation Finance is gaining acceptance among Big Law firms, corporates, and the public at large.

Bloomberg Law details that the 2021 Litigation Finance Survey shows that the industry has weathered the pandemic—and may even have been strengthened by it. At least 56% of litigation funders said that business increased during COVID. Even more—59%--claim they have even more business now than before the pandemic.

While litigation funding has been around since the last economic downturn, it has only begun gaining real traction in the last few years. More than two-thirds of funders who have researched or used third-party funding are more likely to approach funders now than they were even five years ago. Almost a quarter (23%) are more likely to seek out funding than they were last year.

In early 2021, Willkie Farr & Gallagher was the first major law firm to announce a partnership with a prominent funder—Longford Capital. These kinds of deals are likely to ripple through the industry, as many more large-scale agreements are forged.

As the industry grows, so does the roster of active participants. In addition to more traditional funding entities, multi-strategy investors find themselves entering the funding space with increasing frequency. Even insurers are getting in on the action—offering judgment preservation insurance.

As the industry grows, so do calls for increased regulation. We’ve seen corporates and governments on the receiving end of class action cases speak out against funding, calling it opportunistic or bad for the economy, as insurance rates rise and nuclear payouts occur. Disclosure continues to be a divisive issue as well. As funders look to invest in law firms, potential conflicts draw attention from lawmakers, yet courts and bar associations have thus far been leaning toward loosening regulations.

Only time will tell how these various issues will shake out. For now, funders, lawyers and investors in the space must navigate these various complexities with an understanding that things may change drastically from one moment to the next.

Commercial Regulatory Issues

New Zealand Law Commission Reviews Litigation Funding Regulations

At present, the New Zealand Law Commission is reviewing regulations regarding class action regimes and litigation funding. The expectation is that a new round of regulations could be introduced to the minister of justice by summer of next year. Lexology explains that there is no class action regime, nor are there rules specific to litigation funding in New Zealand. The High Court Rules govern class actions—which has proven incomplete to effectively regulate a complex process like third-party funding. Until recently, New Zealand had no cause to consider how, or even if, the civil justice system should take steps to accommodate litigation funding or encourage class actions. Because legislation is lacking, funders and courts have had to rely on other factors when making decisions on class actions or third-party funding agreements. This lack of regulation results in inconsistent rulings on vital issues, including:
  • Various aspects of disclosure
  • Securities for costs
  • Opt-in vs opt-out in class actions
  • General legal costs
Officially, New Zealand has not abolished champerty laws as much of the world has. This means the very legality of third-party funding is still being litigated on a case-by-case basis. As the official report is being developed, the Law Commission has released a basic report affirming the following:
  • Litigation funding is a net gain for increased access to justice.
  • Third-party funding should be permitted under the right circumstances.
  • There are specific concerns regarding funding that should be addressed.
  • A statutory class action regime should exist in New Zealand.
A widely publicized case involving Harditex building materials ended when funding was withdrawn mid-case after a ruling that hurt the plaintiff. This left claimants in a lurch after waiting 6 years for the case to reach the trial phase. Ultimately, the Law Commission has a duty to recommend regulations that work for funders, as well as claimants, in order to continue increasing access to justice. Final recommendations from the commission are expected in May of next year.
Case Developments Commercial

Binance Freezes Customer Withdrawals of Crypto Assets

Referencing a “large backlog,” Binance has put a temporary hold on customer withdrawals of crypto assets. The number one cryptocurrency exchange tweeted the announcement earlier this week. Crypto Briefing details that Binance resumed allowing withdrawals within minutes of the hold. Later that day though, withdrawals were again withheld. Meanwhile, other major crypto exchanges, like Coinbase, are still functioning normally. This is not the first time Binance has experienced overloads, and unintentionally shut customers out. The same thing happened in May of this year, leaving users without access to their accounts as prices fell dramatically. Liti Capital is now suing Binance on behalf of traders impacted in that shutdown. No word yet from Liti on whether this latest outage will factor into their claim against Binance, or whether the funder will launch an entirely new claim altogether.
Commercial Regulatory Issues

Litigation Finance Catches on in Canada

Like many places in the world, Canada’s cost of litigation can be prohibitively high. Even meritorious claims may not be worth what it costs to pursue them—leaving good people victimized and the unscrupulous free from dissent. Enter third-party litigation funding. That’s when everything changes for Canadians seeking justice. MONDAQ explains that Canadians are beginning to see that help from litigation funders can go a long way to bridging the gap between those who can afford proper legal representation, and those who need assistance. In addition to helping individual plaintiffs or group claimants, litigation funding in Canada is also a tool used by savvy GC’s to limit legal spending and even monetize existing litigation assets. Canadian common law prevented the practice of third-party legal funding, believing it would enable meritless cases. Recently though, courts came to understand that justice is better served when more people have access to the legal system, and to good legal counsel. Court approval is not required for a funding agreement in either private commercial arbitration or litigation. In fact, third-party funding is business-as-usual in these types of cases. Litigation funding is also used to enforce judgments or to monetize claims without adding to legal budgets. Insolvency is another area where legal funding is making a difference. The Bluberi case affirmed that the CCAA does allow for monetizing assets to provide interim financing when needed. In a case involving Crystallex International, courts determined that arbitration financing was permissible—even necessary to successfully restructure an outstanding debt. As legal funding becomes the norm in Canada, knowledge of funders and funding agreements is more vital than ever. Knowing how to select and approach an experienced legal funder can make or break a case—especially one against a well-monied corporation or government. Indeed, funding should be considered by every commercial litigator.
Commercial

A Looming Potential Risk of ESG Investment

Bloomberg predicts that by 2025, nearly a third of assets under management will consist of ESG investments. Representing advances and social justice in environmental, social, and governmental systems, sustainable investments sound like a great idea for all concerned. But are they? Dentons suggests that wrapping up investments in festive ESG packaging may have the opposite of its intended impact. The FCA penned an open letter earlier this year on the topic, expressing concern over purported ESG investments that have little to no relevant impact on ESG causes. ESG credentials are one way investors decide where to put their money. If investors are told they’re making sound investments that advance ESG goals, they may have a legitimate grievance if this turns out not to be the case. One may ask—what if the investor makes money? Surely, investors wouldn’t bring a suit over a profitable investment? In truth, making money would not negate a claim of fraud if the ESG claims made were knowingly false or intentionally misleading. At the same time, if the value of the investment has increased, it might make more sense for investors to simply sell rather than go through the time and expense of filing a legal case. Recent developments in the LitFin space may increase the risk of investor lawsuits regarding ESG claims. The opt-out class action model in use in places like England and Wales makes cases about investment disclosures potentially lucrative. Such cases may make use of the ‘same interest’ requirement, if the same platform and information were used in the transactions. Even without a financial loss, investors may experience distress at having invested in something that was not presented properly. Such damages are rare in civil cases, but ESG investing is a growing topic that may lead to new thinking about how distress should be compensated.
Commercial Regulatory Issues

Judge Considers Acceptability of ATE Insurance as Security for Costs

After-the-event insurance is a common means of covering costs by both defendants and plaintiffs in litigation or arbitration cases. Often, such insurance can also be used as security for the defendant’s costs. Recently though, Deputy Master Nurse found in Addlesee and Ors v Dentons Europe LLP that not all ATE policies are suitable as providing security for costs. Stewarts Law explains that in this instance, there was a strong likelihood that the policy in question could not wholly be used as security for costs, and that only half of the policy value could be used as such. This decision necessitated that the litigation funder provide an additional GBP 1.3-1.6 million in security in case insurers determined that the claims were exaggerated—and therefore not pay the full amount. The scuffle over costs was one of many in a class action over a gold dust investment scheme advanced by the now-defunct Anubus Holdings Limited. The defendant, a legal advisor for Anubus, facilitated the scheme and endorsed it to investors. Claimants are funded by Managed Legal Solutions Limited, with an agreement for an undisclosed portion of any award. As is now common among defendants in class actions, Dentons applied for securities for costs against the funders because they aren’t able to order security against individual claimants in a class action. All this back and forth typically results in higher legal fees and costs passed down to claimants. A similar case previously ruled that ATE insurance could represent 66% of security for costs, rather than the 50% suggested in this case. This seems to hinge on contract language, specifically the word “exaggerated,” which is vague at best and arbitrary at worst. Suffice to say that going forward, the language used in ATE insurance policies will be more important than ever.
Case Developments Commercial

Insurance Comparison Site Facing Antitrust Complaint

More than 20 million potential claimants believe they overpaid on their homeowner’s insurance because of overt bias on a price comparison website. Augusta Ventures is backing the claim for an undisclosed percentage of any potential award. Law 360 explains that Home Insurance Consumer Action, the group formed to advance the claim, asserts that the website abused the “most favored nation” clause. These made expansion and challenges by competitors more difficult and restricted 30+ insurers from offering lower prices elsewhere. Kate Wellington, director of Home Insurance Consumer Action, affirms that such sites play a vital role in helping consumers make informed decisions. This site allegedly did the opposite, and rightfully should refund their customers. According to the claim, plaintiffs are owed damages regardless of where they purchased their insurance. Again we see the value in litigation funding helping homeowners who could otherwise never hope to seek compensation from Comparethemarket.com individually. The site has already been fined $24 million, but has stated its intention to appeal.
Case Developments Commercial

Kleiman v Wright Bitcoin Case Kept Alive by Litigation Funding

Can a marketing rep of average financial means successfully mount a civil case against a billionaire? A few decades ago, probably not. But now that third-party legal funding is on the scene, a complex civil suit is finally reaching the trial phase after years of delays. CoinGeek details that Kleiman sought funding for years before securing it. Evidence exists suggesting that Kleiman offered substantial interest in “the Bitcoin space” to potential funders in exchange for bankrolling the lawsuit on behalf of his late brother’s estate—a brother he describes as being the co-creator of Bitcoin. In his disclosure of interested parties in the case, Kleiman listed “BTCN 1610-491 LLC.” This implied that Kleiman obtained legal funding from either BTCN 1610-491 LLC or a related funder, Parabellum. Kleiman was not forthcoming about the specifics, but eventually, lawyers affirmed that BTCN 1610-491 LLC is owned by Parabellum—and that Parabellum was the funder of record on the case.   In the case itself, parties have agreed not to bring up the issue of litigation funding, so long as neither side puts the issue in question. At the same time, it’s been suggested that third-party funding prevents defendants from confronting their accusers. This may be even more true in the case of Wright—a well-known name in blockchain currency. One significant factor here is that if the case does not go Kleiman’s way, Wright may be able to recover his legal costs from the funders, according to Florida law. This happens in instances where funders allegedly maintain control over the claim in the form of “value-added” services that clients may utilize along with their funding. Given the length and complexity of the case, legal expenses on both sides are bound to be staggering.
Consumer

Legal Funder Accused of Misusing $10 Million

Litigation lending has a reputation for unscrupulous, or even predatory behavior. One such lender, KrunchCash, was recently accused of squandering a large investment, hiding relevant information, and using threats to intentionally amplify risk to that investment.

Law 360 details that a complaint filed in a Florida federal court alleges that KrunchCash, its subsidiary, and owner Jeffrey Hackman have repeatedly threatened investors with sabotaging the litigation they invested in. Over the course of two years, KrunchCash also allegedly hid recoveries and misappropriated funds.

Earlier this year, investor Pursuit Special Credit Opportunity Fund LP learned of the actions of KrunchCash and hired lawyers to protect its investment. By this time, KrunchCash was cash poor and had become a one-man operation. Jeffery Hackman, the suit alleges, had become secretive, aggressive, and unpredictable.

Pursuit invested more than $10 million that was intentionally put at risk of a complete loss. When Pursuit wanted to move funds into an escrow account—Hackman refused to do so, according to the complaint.

The claims in the case include breach of contract, unjust enrichment, breach of fiduciary duty, and constructive fraud. In addition to seeking $10 million in damages, Pursuit also seeks penalties under Blue Sky Laws—a Florida legal provision designed to protect investors from just this kind of misappropriation.

Consumer

Attorney Under Fire for Missing Oral Arguments Claims Sabotage by Opposition

Attorney Farva Jafri has been ordered to show cause as to why she should avoid disciplinary action for missing oral arguments in a recent case. The Seventh Circuit panel had ordered Farva to appear in court on the matter of costs. Farva did not. Law 360 explains that Farva, in her statement to the Seventh Circuit, asserted that counsel for Oasis Legal Finance and Gary Chodes (former CEO) had settled their issues and sought to end the appeal. She further claimed that attorneys for Oasis misrepresented a conversation in which they agreed to convey relevant details of the settlement on behalf of all involved. The court also pointed out that Jafri did file a motion to dismiss the appeal. But it was filed late Friday night—too late for the court to consider the motion. The court claimed the motion was also incomplete. Even though the dismissal was agreed to by both parties, it was missing vital signatures and did not address issues relating to costs. In an amended motion, Jafri explained that the parties agreed to settle with no payments of any kind. Instead of relaying that to the court during oral arguments, Jafri says opposing counsel made statements that were intentionally misleading and designed to paint her in a negative light. Opposing counsel also reversed its position on costs, saying that appellants should cover costs. According to the motion, Chodes accepted the agreement to forgo a request for fees. Jafri lives in New York and argued that it was not practical or necessary to fly to Chicago for an appeal that had already been dismissed. Barry Irwin, lead counsel for Oasis, agreed to convey this to the court at the oral arguments hearing. He did not, and has since asserted that Jafri’s assertions are inaccurate. Jafri characterized the actions of opposing counsel as a “sandbag.”
Commercial Regulatory Issues

Discovery of Funding Source Allowed by Court in Nunes Farms Libel Action

Recently, Magistrate Judge Mark Roberts released his decision in the NuStar Farms action, regarding discovery of the identity and terms of the third-party legal funder supporting the plaintiffs. Citing “unusual” circumstances in the case, Judge Roberts determined that disclosure was necessary in this instance. Reason details that the plaintiffs in the defamation case never hid the fact that they were using third-party legal funding. Thus far in the case, plaintiffs have only incurred $500 in charges. One plaintiff, Anthony Nunes III, also the corporate representative, is not even aware who is paying plaintiff lawyers. The circumstances in the case elevate the defense’s inquiry into funding from guesswork to a more concrete suggestion of potential conflict. As such, this case differs from say, a personal injury case, or a case where the defendant petitioning for disclosure cannot identify how funding could impact credibility. The question of malice is a vital factor in any defamation case. The government adopted a specific standard so as not to give public figures or politicians an unfair advantage over those they serve. In a defamation allegation, public figures are usually required to prove malicious intent. On that note, it's not yet known whether there has been collaboration between Congressman Nunes and the rest of his family. But the inquiry into the funder’s identity could establish coordination or a lack of it. Why is the identity of the funder even relevant here? If Anthony Nunes III does not know who is paying lawyers for the plaintiffs, this could mean that entities related to NuStar Farms have a financial interest in the case—and would therefore be relevant to an investigation of potential conflicts. Defendants also asserted that a witness in the case may be closely connected to the funders. That would create an obvious conflict of interest and should be disclosed to the court.
Commercial Legal Innovation

Hemp Vendor Apothio Launches Blockchain-Based ILO Token

Blockchain-based token offerings are finding their way into the Litigation Finance sector. Apothio, an Indiana grower and distributor of hemp, has launched the initial litigation offering in the hopes of raising $5 million. Law 360 reports that Apothio is suing California’s Department of Fish and Wildlife, alleging that it illegally destroyed hundreds of acres of farmlands during the hemp growing season. Those who invest in the blockchain tokens will earn revenue if the suit is successful—based on a multiplier of how many tokens are held, and for how long. This will be payable after contingency fees are paid to Roche Freedman. Tokens are being hosted on the Avalanche blockchain, currently being managed by Ava Labs. Investors on the Republic platform can buy into the ILO, which is governed by crowdfunding rules. According to Republic’s website, the litigation offering allows low-level investors to invest in assets, not unlike those a litigation funder would have in its portfolio. That said, single case funding is inherently more risky than portfolio funding. There is a pending motion to dismiss. If Apothio loses the motion, investors will get back 80% of their investment. If the case loses at trial, the investment is lost.
Commercial Regulatory Issues

Australian Parliament Introduces Litigation Funding Reforms

This week, the Australian Parliament has introduced the Corporations Amendment Bill 2021. It’s designed to promote what’s described as a “more fair” distribution of awards from class actions. Mirage News details that court oversight over the dispersal of class action proceeds will increase if the bill passes. Courts will have authority to approve or alter the allocation of awards or settlements—ensuring that the interests of class members supersede those of third-party litigation funders. The Corporations Amendment Bill will also require consent from plaintiffs in order for funders to collect fees or commissions. This is meant to encourage responsible book building, and ensures that funders have support from actual claimants.  
Commercial Regulatory Issues

Litigation Finance: The Cost of Class Actions

Litigation funding expenses are fundamentally related to the cost of doing business—so says a federal district court judge in their rejection of a request to recover expenses. In Perez v Rash Curtis & Assoc, the judge held that if funding expenses were recovered from a class settlement fund, that it would undermine necessary transparency—particularly in cases in which funding agreements were not pre-approved by the court. Lexology details how this ruling affirms that litigation funding expenses should be treated the same as other financing agreements used in class actions. As such, expenses resulting from a funding agreement should not be recoverable from any settlement. Take this case involving the Telephone Consumer Protection Act. Class counsel and a third-party funder agreed to enforce the recovery of a judgment of more than $250 million. Additionally, the funder paid $10 million to class counsel, and more to a separate legal firm to assist. When it came time to divide the award, counsel attempted to recover $300,000 for payment to the broker who arranged the funding agreement, plus $15 million to the funders—amounting to a return of $5 million on a $10 million investment. It could be argued that the funder and broker made the $75 million (the final settlement amount) possible. The district court, however, insisted that funding expenses must not be charged to claimants. No regulation affirms that expenses relating to litigation funding are recoverable. As the court concluded, such fees are directly related to the cost of doing business—and not a recoverable expense relating to litigation. Of course, this might all go differently if counsel sought court approval of their litigation funding agreement. This could open a Pandora’s Box of questions regarding disclosure and the standards of scrutiny the courts apply to funding agreements.
Consumer

Former Oasis CEO Fails to Appear in Court for Oral Arguments

Can a former CEO simply not show up for a court date? Not without consequences. Earlier this week, former Oasis CEO Gary Chodes was required to appear before the Seventh Circuit Court for oral arguments. These pertained to a resolved trademark dispute and the allocation of appeal costs. Judge Easterbrook presided, stating that there were valid reasons the motion to vacate could not be approved. Law 360 explains that the court was not happy that Chodes declined to appear. The court had been informed that the parties involved wanted to forgo the appeal, but did not approve a subsequent request to vacate oral arguments. Chodes is no longer CEO of Oasis after being fired for unspecified reasons in 2013. He was embroiled in a case addressing whether he had infringed on the name of his former company when he founded Oasis Legal Finance Group and Oasis Disability Group. Chodes maintains that he owns multiple Oasis trademarks that include using the word “Oasis” with regard to Litigation Finance. Oasis argued that Chodes had taken multiple steps to connect the two companies in the minds of potential litigants. A representative from Oasis stated that the appellant should cover the costs, especially since she (the Oasis rep) appeared in court as required and was ready to proceed. In March of this year, a district court judge awarded $3 million to Oasis for attorney fees.
Commercial Regulatory Issues

Privilege & Litigation Funding in the United States

The purpose of attorney-client privilege is to allow clients and their legal teams to discuss cases privately without fear of disclosure to other parties. Yet third-party funders require information about cases in order to vet them for potential funding. How is this dichotomy addressed? MONDAQ details that normally, the presence of a third party invalidates the privilege between attorney and client. If this was applied to third-party funders, it would have a profound and damaging impact on clients, cases, and indeed—justice. What client would be willing to risk privilege for any reason, even funding? The Excalibur decision resulted in a judge affirming that Litigation Finance is a feature of modern litigation. That is to say, the practice is mainstream and must be accommodated in order to facilitate access to justice. How then, do courts recognize the validity of the funder’s due diligence without destroying the basics of privilege? Currently, courts cannot agree on whether sharing information with a funder is a waiver of privilege. Surely the client’s intent should matter? Courts have largely concurred that the work product exception can apply to both due diligence documents and funding agreements. At the same time, some jurisdictions—notably New Jersey—have passed more stringent legislation requiring disclosure of funding agreements and their terms. In the Leader case, a judge determined that funders and plaintiffs did not share a common interest strong enough to extend attorney-client privilege. The court held that common interests must not be solely commercial, and should be identical interests, not merely similar. More broad interpretations of common interest and work product are also common. Many courts have held that a common enterprise is also a common interest. As of yet, there is no consensus as to the precise definition of what common interest is. Until that happens, venue selection will be vitally important in funded cases.
Commercial

Third-Party Legal Funding in Germany

Germany is already well-known for its robust legal system, and is a preferred venue for international and domestic arbitration. Litigation funding has been in use in Germany for more than two decades. For most of that time though, funding has been used by cash-poor clients on a single case basis. This is beginning to change as funders step up and develop new solutions to meet complex legal funding needs. Burford Capital details the many ways in which funding can be used by companies to reduce risk and get an immediate influx of cash for a case that could take years to resolve. Third-party legal funding is typically deployed on a non-recourse basis. Essentially, the company is advanced a portion of an expected award in a meritorious case. If the case is successful, the funder is paid back for their investment, plus an agreed-upon portion of the award. If the case fails, the funder loses its investment, but the company pays nothing. Monetizing claims may seem simple, but it actually requires extensive expertise to value claims correctly. This expertise is an essential part of successful litigation funding—if the funders aren’t valuing cases accurately, their bottom line can be adversely impacted—leading to less deployable cash to go around. Expertise is only half the battle though. Big cases call for big investments, and not every firm is equipped to handle a large portfolio of cases, or even one very big and complex case. The time it can take a case to completion can be long or unpredictable. Delays are common, not to mention appeals. Monetizing cases allows companies to better control cashflow. The timing of funding deployments is controlled and known beforehand. This is also true of award enforcement. The help of experienced funders can make this process worry-free for companies in exchange for a share of the recovery.
Commercial

Mainstreaming Legal Funding: Good News or Bad?

Third-party legal funding is on the rise, both in terms of major players and client requests. Money is pouring in from investors, and some hedge funds are even funding litigation without input from established litigation funders. But is mainstreaming litigation funding a good thing for industry professionals who already appreciated it before it was cool? Therium suggests that while mainstreaming can make some things less unique or special, that doesn’t have to be the case with Litigation Finance. Competition between funders is robust, and new funding entities are being launched regularly. That’s actually good news for plaintiffs looking for funding. An influx of smaller, boutique funders with a specialized focus are even more beneficial to those in need of bespoke solutions. A constant inpouring of capital means more people who need funding will get it. The main reasons legal funding is catching on have more to do with investment considerations than with general economics. Investors love investing in litigation for a few key reasons:
  • Possibility for large rewards—20% annually is not uncommon
  • Returns are uncorrelated to the stock market.
  • Alternative asset classes are a smart way to diversify one’s portfolio
What about the impact on law firms? Most analysts believe the mainstreaming of legal funding will offer greater opportunity. It will likely also lead to firms building relationships with funders, incorporating more sharing of risk into their existing business models. This may also lead to solidifying a hierarchy of funding classes—from large corporate funders to small boutique firms. Educating the public has long been a goal of the funding industry. When the public has a solid understanding of how funding works, the process of pitching funders becomes more streamlined with less wasted effort. In short, there’s no reason to fear the mainstreaming of third-party litigation funding. There’s room, and deployable cash, enough for all.
Commercial Regulatory Issues

Crypto Litigation Finance – Regulated Bitcoin is a Game Changer

What’s the connection between Litigation Finance and cryptocurrency? David Kay, CIO of crypto litigation finance entity, Liti Capital, says that the overlap between these two topics is an increasingly popular discussion in the digital assets theatre. News Nation USA explains that bringing cryptocurrency transactions into the Litigation Finance space is a way of leveling the playing field. Like traditional funders, crypto-focused legal funders provide funds that people can use to finance a meritorious legal case. Investors can use blockchain tokens (LITI, wLITI) to buy equity. Liti Capital finances appeals for crypto investors. Currently, over a thousand investors who lost money during the Binance outage are seeking more than $20 million in damages. Kay is expecting an epic battle once charges are brought against the world’s largest crypto exchange. Now that the SEC has approved a Bitcoin ETF, many suggest it’s bad news for so-called meme coins like Dogecoin and other fly by night cryptocurrencies. As new legislation is passed over the next few years, major industry adaptations are sure to follow. Coins with no real-world utility may fall by the wayside. Kay offered tips for building a portfolio of cryptocurrency. Diversification is necessary, as it is in most types of investing. Bitcoin is relatively stable—but still saw huge swings in the last year. Scams and fraud are also common in the crypto space. Knowing what you’re up against can make all the difference. Ultimately, careful study is the key to smart investing in the crypto space.