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Funding Asia-Pacific Insolvency Claims

It’s no secret that an increase in insolvency filings looms on the horizon. Debt restructuring, government relief programs, and belt-tightening can only take a business so far. What many businesses don’t realize is that third-party legal funding can provide financial wiggle room. Omni Bridgeway shared a webinar panel discussion relating to insolvency claims across Asia-Pacific. It included Tom Glasgow and Heather Collins of Omni Bridgeway, Patrick Cowley of KPMG China, and David Walker of Allen & Overy. It was expected that an avalanche of insolvency would arrive in 2020. But thanks to government programs, that didn’t happen. However, global vaccination efforts may enable governments to scale back help to businesses—leading to more insolvencies.  Insolvency Practitioners are one group that can benefit from the use of legal funding. This can help cover legal expenses associated with recovery. Heather Collins explains that for an IP claim, a funder should be the third phone call made after the bank and lawyer. Funders can become involved at any point—but those in the know say earlier is better. Globally, the usage of third party funding will play out in different ways. In Hong Kong and Singapore, for example, lawyers are not permitted to work on contingency. This may mean that these territories will soon begin considering new types of funding.

International Arbitration Trends

A global pandemic may have brought sweeping changes, but it hasn’t slowed the filing of new cases. Early numbers suggest that new cases are being filed at about the same levels as the previous year, or higher. ICSID reported 58 new ICSID Convention and Additional Facility arbitrations last year—the most ever. SIAC also reported a record-high number of new cases, topping 1,000 for the first time ever. Burford Capital details several new trends in international arbitration. Remote conferencing, document sharing, virtual signatures, and other tech advancements have led to challenges and even postponements. But overall, the industry has embraced technological advancements that mitigate the barriers put up by COVID. Corporate liquidity has been an ongoing concern during the pandemic. Interest in Litigation Finance, and portfolio funding, in particular, have skyrocketed since the impact of COVID. But the main source of contention with regard to third-party legal finance continues to be disclosure. ICC Rules of Arbitration went into effect in January, which will require that third-party funders be identified in the interest of avoiding conflicts of interest, or appearances thereof. Some speculate that this may lead to an uptick in frivolous applications for securities for costs. Meanwhile, the LCIAs updated rules took effect in October of last year, and do not require disclosure when third-party funding is used. An upcoming UNCITRAL Working Group is undertaking arbitration reform, with legal finance being one of several issues up for discussion. It is not expected that the Working Group recommendations will lead to new laws or reforms by the end of 2021. The Energy Charter Treaty will undergo another round of negotiations in the ongoing modernization process. After this, new provisions may be vetted to ensure that any updates comport with existing EU law. As funders continue to adapt to new circumstances, monetizations and other tools are sure to broaden their usage over the coming months.

GLS Capital Co-Founders Named to IAM’s Strategy 300 Global Leader List for 2021 Read more: http://www.digitaljournal.com/pr/4970832#ixzz6mDg8sx9I

GLS Capital operates one of the world's largest private investment firms focused on litigation finance. The GLS team is comprised of investment professionals that provide financial solutions for complex legal matters, specializing in commercial litigation, arbitration, law firm financing and patent infringement litigation, including Hatch-Waxman litigation. Intellectual Asset Management ("IAM") is a leading publication covering intellectual property that  publishes the IAM Strategy 300 Global Leader List identifying the world's leading IP Strategists.  IAM has named GLS Capital partners Adam Gill and Jamie Lynch in their 2021 IAM Strategy 300 List of Global Leaders for Intellectual Asset Management, which is composed of leaders from the Americas, Europe, and Asia. Upon the recognition, Adam Gill, Managing Director of GLS Capital shared the following statement: "I am grateful to be named to IAM's Strategy 300 list for the 5th consecutive year. We appreciate this honor, which we view as a recognition of the entire GLS team's success in helping patent owners protect their IP and receive fair compensation for their technological contributions to the world." Adam and Jamie, along with David Spiegel are part of the founding team of GLS Capital. The partners have led and managed more than $600 million of litigation finance investments. The Team is focused on legal and regulatory risk management, and has become a trusted strategic partner and capital provider to top law firms and their corporate clients. To view IAM's 2021 Strategy 300 Global Leaders Guide, click here. For more information about GLS Capital, please visit the website, or call 312-900-0160.

Calls Continue for Farmers to Register in Fonterra Class Action

About 350 farmers have already registered in the class action suit against Fonterra, but attorney David Burstyner, says that’s not enough. The founding partner of Adley Burstyner has expressed concern that some farmers might be hoping to benefit from the case without attending meetings or becoming involved. The Courier explains that if the case doesn’t have enough registrations, it may not be able to move forward. Burstyner claims that at least 600 total registrations would be needed. An upcoming case management conference is scheduled for later this month. In it, ‘class closure’ may be discussed—defining who is included or excluded. Litigation Lending Services is funding the case, which means there’s no upfront cost for farmers who want to sign on. Litigation funding occurs on a no recourse basis with the expectation that funders will take a portion of any award or settlement in the case. Too few class members may mean a payoff too small for funders to consider the claim a good investment. As to the facts, the action asserts that Fonterra violated its contract with farmers by unleashing a step-down in milk price, deeply impacting farmers. The case also alleges misleading conduct that hurt many suppliers. Fonterra denies all of the points in the case—pointing to the recent formation of Fonterra Australia Suppliers Council as evidence of its strong relationship with farmers. The company further notes that the ACCC declined to take action against Fonterra after an investigation into the reduction in milk prices.

ISG Management Launches Counter-Claim in Group Action

ISGM is facing a class action, alleging that telecom workers endured financial losses stemming from a sub-contracting agreement with the company. Now, the court has approved a counter-claim against group members.  Litigation Lending, which is funding the action, details the following allegations:
  • The arrangement falsely held that employees were, in fact, subcontractors.
  • ISGM misused the Australian Apprenticeships Access Program.
The court has approved a counter-claim, alleging a bad faith action against ISGM. Meanwhile, Shine Lawyers and Litigation Lending invite those telecom workers who have endured losses to register their interests in the class action.

Dispute Finance with In-House Counsel, Tania Sulan and Leanne Meyer

A recent survey from Omni Bridgeway and the 2020 ACC in-house Legal Virtual Conference suggests that an inability to work litigation costs into corporates' budgets is what is spurring the rising interest in litigation funding. A panel discussion at the conferenced dissected how legal finance can assist in-house legal teams to manage risk and monetize legal assets. Omni Bridgeway details that the panel discussion features Tania Sulan, CIO for Omni Bridgeway Australia and New Zealand, Tasha Smithies of Network Ten, and Paul Forbes from Baker McKenzie. Facilitated by Tania Sulan, the panelists detailed how the main challenges of in-house counsel—cost management and new revenue—can be addressed with third-party legal funding. For many companies, cost is the main factor when deciding to pursue litigation. Even when the case is strong, economic stress can cause companies to shy away from taking on what could seem like risky new expenses. The non-recourse nature of funding removes that sizable obstacle while allowing meritorious litigation to move forward. What should a business look for in a funder? Expertise and experience are obviously critical. This should include expertise in your industry and experience with the relevant case types. Flexibility in accommodating funding needs and risk tolerance is vital as well. In addition to adequate funding, pragmatism is an essential trait of a successful funder—since strategy is everything.

Appeals Court Guidance on Litigation Funding and Securities for Costs

As commercial litigation grows in popularity, the issue of security for costs looms large. Recently, the Court of Appeals, via Rowe et al vs Ingenious Media Holdings plc et al set a precedent about providing a cross-undertaking in damages when seeking security for costs. JD Supra details that the Court of Appeal held that no cross-undertaking should have been required by the court. This, they determined, should be required only in exceptional circumstances. They went on to say that decisions suggesting otherwise should not be followed. According to the Court of Appeals, a well-run commercial funder shouldn’t need to be ordered to provide security. This decision is particularly impactful as it pertains to third-party litigation funding. The Court of Appeals stated that requiring a cross-undertaking when security is provided by a funder should be even rarer. Any funder that is properly capitalized should be able to provide evidence of their ability to meet an adverse cost order. Commercial funding is an investment, part of which includes security for costs (language to which is typically included in the funding agreement).  Before this recent Court of Appeals ruling, courts had leave to require a cross-undertaking as a condition pursuing security for costs, according to CPR 25 and CPR 3.1. This new precedent requires a “cogent and compelling” set of facts to reject the idea that costs incurred in funding claims cannot be recovered—thus laying that risk at the feet of defendants.

Investor Watch-Outs in the Commercial Litigation Finance Asset Class

The following article is part of an ongoing column titled ‘Investor Insights.’  Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance.  Executive Summary
  • Gross Returns Net Returns in this asset class and the differences can be material
  • Tail risk is more pronounced in litigation finance, misleading to infer performance from early results
  • Nascent and transparent market puts the onus on investors to dedicate time to understanding the asset class
  • Single litigation investments are impossible to value accurately, don’t rely on fair value estimates for performance measurement
Slingshot Insights:
  • Investors need to dedicate resources (internal or external) to a deep dive before allocating capital
  • Managers need to ensure transparency and alignment of interests in order to attract long-term capital partners
  • Managers need to be very careful in the figures they provide to potential investors and ensure they disclose net fund returns if they are going to disclose gross case returns.
I recently moderated Litigation Finance Journal’s digital conference entitled Investor Insights into Litigation Funding, and the panelists delivered a clear message that the asset class needs to be more transparent.  Accordingly, I decided to pen this article to explore the more opaque aspects of the asset class and the reasons underlying that opacity, and what this means for investors, as well as provide some “watch-outs” for those looking to invest in the industry. Clearly, the conference left the impression that the investor community is savvy to the fundamental economics of commercial litigation finance, despite the relative nascency of the industry.  While many investors have made investments in the asset class over the last five years, those same investors would say, when it comes to concluding about the overall merits of the asset class, that “the jury is still out” (pardon the litigation pun).  After having spent several years investing, reviewing troves of litigation finance realization data, I have come to the conclusion that it is a fundamentally strong asset class that has the extra benefits of being (i) non-correlated and (ii) ESG compliant.  However, investors should be aware that the application of portfolio theory (I have explored these concepts in-depth in a three-part series, here, here and here) and manager selection are both critical elements (emphasis added) to successfully investing long-term in the asset class. So, why is it that after decades of investing experience, the investor community still has some trepidation about the asset class?  The answer lies in a few fundamental truths about the asset class, along with a lack of transparency—which panelists called for an increase in, and is core to the litigation finance articles I write for the industry. Let’s start by exploring the cold hard truth about the asset class based on what we know today. It is important to note that this article makes specific reference to commercial litigation finance as distinct from the consumer side of the asset class (personal injury, divorce, inheritance/estate, etc.), which exhibits some very different characteristics as it relates to the risks highlighted below.  This article also mainly deals with portfolios of pre-settlement single case risks, as later stage cases and portfolio financings also exhibit very different risk profiles compared to those discussed herein. Gross Net Perhaps one of the biggest mistakes that fund managers make is not specifically referencing net returns in their fund documentation. And one of the biggest mistakes investors make is assuming that strong gross case returns will lead to strong net fund returns. Every single manager presentation deck in litigation finance I have reviewed, with perhaps one or two exceptions, has focused solely on gross case returns.  Now, in many asset classes, there is a relatively high correlation between gross investment returns and net fund returns, and investors can extrapolate with a great degree of certainty from the gross return what the likely net fund return will be, and rules of thumb have even been developed to estimate that relationship.  This is not the case in commercial litigation finance.  Indeed, managers that market their gross case IRRs and MOICs without also referencing their net fund IRRs and MOICs are misleading investors, and this may have ramifications for their fundraising efforts and the extent to which they are in breach of securities regulations.  Managers should seek the advice of securities counsel (and perhaps litigation counsel) prior to communicating any results to potential investors, and ensure that counsel understands how the proposed data was calculated and what it does and doesn’t include. The differences between gross case and net fund returns in commercial litigation finance are far greater than those in other asset classes, and the differences can transform high positive gross case internal rates of return (“IRR”s) into negative fund IRRs, depending on when the returns are being measured relative to the fund’s life. So, let’s explore why this discrepancy exists. Deployment Risk In the commercial litigation finance asset class, there are two levels of deployment risk.  The first is the common risk among many alternative asset classes, which is the risk of whether or not the manager will be able to allocate investors’ commitments during the proposed investment period. If not, investors will be stuck paying fees on a commitment that is not capable of being allocated in a timely manner, thereby making their effective fee drag much greater than anticipated (a concept I explore in a two-part article that can be found here and here), which I will refer to as Deployment Allocation Risk. To a large extent, Deployment Allocation risk can be somewhat controlled by the activities of the manager, in the sense that they are responsible for their fund’s origination efforts. The second deployment risk emerges once the manager has allocated (or committed) its monies to a case: What is the risk that the commitment will not be fully drawn upon? I will refer to this form of deployment risk as Deployment Draw Risk.  The real problem with Deployment Draw risk is that it is largely uncontrollable by the manager, and can have a significant effect on effective management fees. The other issue with Deployment Draw Risk is that it can have a meaningful impact on the diversification of the overall fund and thereby add volatility to a fund’s return profile. The lack of controllability stems from the fact that once the manager has decided to invest in the case, the case is generally beyond the control of the funder, as many jurisdictions prohibit the concept of “wanton or officious intermeddling”, which would put the funder offside legal doctrines of “maintenance”. As a result, some investors view the asset class as “passive” in that once the investment is made, the manager (and hence the investor) is simply ‘along for the ride’.  While true to a degree, the degree of passivity is dependent on the jurisdiction in question, with certain jurisdictions being more permissive with respect to the influence the funder can have on determining the outcome of settlement negotiations. In addition to the effective management fee issue, the other problem with Deployment Draw Risk is that it can have a profound impact on the diversification of a portfolio when viewed on a drawn basis as compared to a committed basis.  Take, for example, a portfolio of ten equal sized commitments where five of the commitments only draw on 50% of the commitment, and the other five draw on 100% of the commitment.  This means that the portfolio will contain five cases with 13% exposure each, and five cases with 6.5% exposure each, which means that five cases represent 67% of the drawn capital of the fund (assuming no other fund expenses).  When you then apply an overall industry win rate of 70%, you quickly see that the ultimate outcome of the fund will largely depend on whether one of five large cases is a winner or a loser (i.e. will those five have a 60% win rate (three wins) or 80% win rate (four wins), because you can’t win half of a case, and the difference is material).  This is far too much quasi-binary risk for my liking, which is why I believe a more appropriate concentration limit for this asset class is one based on 5% of capital available for commitment (after deducting a provision for management fees and operating expenses of the fund).  Unfortunately, concentration limits of 10-15% of a fund’s committed capital (not available capital), which have been borrowed from other asset classes, are more common in litigation finance funds, which is a mismatch given the risk profile of the asset class. Duration Risk The other non-controllable feature of litigation finance is duration risk, which is the risk that particular cases take a longer time to settle, or obtain an arbitral/trial decision than that which was underwritten. Why is this an issue?  The reason is that many times there are caps or limits on the upside available to litigation funders, because while the plaintiffs are willing to reward the funder for the risk they assume, there is a limit to their generosity which often comes in the form of economic caps on the funder’s return.  When gross dollar profits are limited, IRRs are negatively correlated with case duration, although multiples of invested capital (“MOIC”) are not impacted, unless there is also an IRR limit contained in the funding agreement (which is also common). ‘Tail’ Risk In commercial litigation finance, tail risk can be significant.  According to Investopedia, “tail risk is a form of portfolio risk that arises when the possibility that an investment will move more than three standard deviations from the mean is greater than what is shown by a normal distribution.  Tail risks include events that have a small probability of occurring, and occur at both ends of a normal distribution curve.” Applying this to litigation finance, the tail is influenced by both duration risk, outlined above, as well as case returns.  Since litigation finance has what I refer to as ‘quasi-binary’ outcomes (if not settled pre-trial, the longer the case goes and the further it moves down the path of a trial, the more binary it becomes), a normal distribution curve is not very applicable.  This is because the data set becomes bifurcated into winners and losers, hence, the concept of using a normal (bell shape) distribution to capture underlying portfolio dynamics (via mean and variance) is likely not appropriate, especially when infrequent but "extreme outcomes" materialize. In litigation finance, managers can definitely find themselves in situations where they obtain favourable outcomes in the portfolio relatively quickly after the funder makes the commitment, which generally leads to strong IRRs but relatively low MOICs. On the other end of the spectrum, a portfolio of litigation exposures, especially large ones or ones with specific attributes (international arbitration or patent), will contain cases that have longer durations, and have required more capital and have a higher propensity for a binary outcome. In addition, time is generally not your friend in litigation, as length of case duration indicates that either (i) the issue at hand is so significant or meaningful to the defendant (financially &/or operationally) that they may not have a choice but to fight until the bitter end, or (ii) the defense may be stronger (financially, counsel or case merits) than originally thought by the plaintiff. These are the ‘tails’ of litigation finance! While a manager may not mind having a few on the front-end (early settlements), those will not likely materially contribute to your fund’s overall MOICs, but they sure make the fund’s early results seem (emphasis added) strong. This is a strong watch-out, as one should never conclude that a fund will ultimately perform consistent with its early returns, as there is no correlation of results within a fund, since each case has its own idiosyncratic risks.  In fact, I would venture to say that an investor should not get comfortable with a well-diversified fund’s performance until it is about 85% realized.  Why? Because the back-end of the tail is much riskier for the reasons articulated above, and can be very punitive to overall fund returns if the results don’t mimic those of the remainder of the fund.  It is conceivable that a fund trending toward a mid-teens IRR can ultimately turn negative, depending on the outcome of the performance of the tail if those investments are significant in size.  As an investor, if you committed to the first fund and then made another commitment to the second fund before the tail realized, you could be caught in a long tenure, double loss situation. Portfolio Concentration The application of portfolio theory is critical to successful investing in this asset class. As discussed previously, due to Deployment Draw Risk, estimating portfolio concentration on a drawn capital basis is inherently difficult and beyond the control of the manager. Unfortunately, many managers don’t take this into consideration when building their portfolios, or believe that concentration limits in the 10-15% (of fund committed capital) range are more than adequate to create a diversified portfolio. They’re not!  Due to quasi-binary risk and Deployment Draw Risk, managers find it difficult to create diversified portfolios for this asset class, which means lower concentration limits than other asset classes are appropriate to protect the investor.  This was one of the main reasons for the design of the fund-of-funds I managed. “Mark-to-Market” or “Fair Value” Accounting It is very common and sometimes required for accounting purposes for many asset classes to mark-to-market or fair value account for their investments.  The reasons for this request are simply because investors want an accurate estimate of the carrying value of their investment, so they can judge manager performance and concentration within their own portfolios, and to serve as an early warning system for avoiding future bad allocation/funding decisions.  Investors may also require this to judge their own performance internally. In certain asset classes there is sufficient and current data available to undertake this exercise with some degree of certainty.  However, in the litigation finance asset class, each case has its own idiosyncratic risk, and there is an element of bias in any decision-making process that makes it impossible to accurately determine outcome or damages, and hence value a piece of litigation (especially commercial litigation).  Investors should also be aware of valuations established by secondary sales in the marketplace as they do not necessarily establish credible value for a case, but rather are more likely a reflection of a fund manager’s ability to convince others that the case has a higher probability of success and collection (i.e. I wouldn’t want to borrow against that value). As investors consider investing in the asset class, while they should look at the fair value figures provided by managers as part of their overall assessment, they should focus their decision-making on cash-on-cash returns, and understand that fair value calculations cannot be relied upon (portfolio financings have different characteristics which may make fair value less risky in this regard, as long as the portfolio is cross-collateralized and diversified). Managers need to be very careful using fair value accounting as their basis of investor reporting, as they may assume liability in the event the portfolio’s ultimate performance does not coincide with the fair value estimates. My suggestion is that if the manager insists on providing fair value accounting estimates, they also provide cash-on-cash returns for the realized portion of the portfolio, along with associated fund fees and expenses. Asset Class Nascency & Transparency For those of you who have been toiling in the asset class since inception, you may have come to the conclusion that the asset class is maturing, and have gotten quite comfortable with the risk/reward profile.  However, for many investors who have been investing for the last five years, they still have yet to experience fully realized fund returns from their investing efforts, and while they have made a significant dedication to the asset class (kudos to them for believing), they are data-driven organizations that require data to make sound long-term investment decisions.  In this regard, the entire industry is very nascent in terms of having produced fully realized funds – I can only think of a handful of managers who have done so, and as I have articulated above, an investor cannot infer returns from early fund results. However, the nascency of the industry has been aided by the transparency of the publicly-listed managers that operate in the industry (Burford, Omni, LCM, etc.).  Accordingly, the entire industry owes a debt of gratitude to the public players who have paved the way for the private players by ensuring a degree of transparency is disseminated in the market, as a result of their regulatory disclosure requirements.  Were it not for those players making their results public out of necessity, the industry would likely not have attracted the level of interest it has, and definitely not as quickly.  However, we must remember that the publicly-listed companies mainly invest from their permanent capital, and do not have fund horizons or fund management fees, performance fees and operating expenses to factor into their results (or at least they get buried within their own profit and loss statements, which are co-mingled with the costs of managing a portfolio).  Accordingly, the gross returns we see from the publicly-listed players need to be proforma’d for the expenses associated with running private funds, and those expenses are not immaterial. In a nascent and opaque asset class with a relatively small number of managers, manager selection becomes critical. Investors who are considering investing in the asset class need to spend the upfront time to take a deep dive in the global manager community, so they can ultimately select the best stewards of their capital.  This is something I have done over the last five years, and I can definitively say it has expanded my knowledge immensely and provided me with an enhanced perspective that has served my investors well. Slingshot Insights For investors, the asset class presents a unique opportunity to add an asset that has true non-correlation, along with inherent ESG attributes.  This makes litigation finance a very attractive asset class.  However, an investor needs to do their homework prior to executing an investment, and needs to think about this asset class in a very different way than others in which they may have invested.  If the investor doesn’t have the internal capabilities to devote to the effort, they should consider hiring an advisor to guide their decision making, or selecting a lower risk vehicle to ‘dip their toe in the water’. For fund managers, transparency is critical to raising significant investments from institutional investors.  The more data you can provide, and the more upfront you are about your net returns, the more success you will likely achieve.  Managers that address the risks inherent in the asset class through their fund structures and decision-making processes will likely be more successful. Aligning your fund economics as closely as possible to those of your investors will lead to long-term successful partnerships that may take managers in directions never contemplated during the early stages of the fund. As always, I welcome your comments and counter-points to those raised in this article.  Edward Truant is the founder of Slingshot Capital Inc. and an investor in the consumer and commercial litigation finance industry. Currently waiting out his non-compete agreement, Ed is designing a new fund for institutional investors who are interested in investing in the asset class.

Andrew Bailey Expresses Anger at Gloster Report

Londoners like Chief Executive Andrew Bailey are staunch adherents to the adage ‘Keep Calm and Carry On.’ With that in mind, onlookers were stunned at the outburst that occurred during Bailey’s recent appearance in front of the Treasury Select Committee. There to answer questions regarding Dame Elizabeth Gloster’s report, Bailey ended up lambasting the performance of the Financial Conduct Authority. This Is Money explains that Bailey, the Bank of England’s governor, was openly angry at the depiction of his culpability in a regulatory fiasco where he was referenced by name. Bailey had previously requested that his name, and those of other officials, be left out of the report. Bailey saw a distinct difference between ‘responsibility‘ and ‘culpability,’ which he claims the report ignored. It’s worth noting that the Financial Conduct Authority is responsible for policing over 60,000 firms, and providing oversight on matters not strictly covered by the FCA. That said, many feel that the FCA would do well to ramp up its oversight and develop more robust methods of maintaining awareness. Bailey has more unpleasantness on the horizon. As many as half a million investors in Neil Woodford’s investment scheme are poised to seek reparations for the imploded London Capital and Finance. One of Woodford's chief holdings was Burford Capital, which suffered a major drop in share price after Muddy Waters' short sale attack. A total of 13 people, including Bailey, are believed to be targets of the lawsuit.

Profile: Therium Investment Manager Neil Purslow

Neil Purslow didn’t intend to become an investment manager when he entered the legal world. Before long, however, he began a love affair with commercial litigation. This led to Purslow developing a broad knowledge base that included mastering the intricacies of the corporate and commercial fields. Law Gazette details that Purslow and a colleague, John Byrne, launched Therium Capital a mere two years after discovering a then-new practice called Litigation Finance. Not long after, the Jackson Review was released, advising that instead of increasing statutory regulation, funders based in England and Wales should unite. So they did, forming what ultimately became the Association of Litigation Funders—a precursor to the ILFA. ALF developed and adopted a Code of Conduct which set ethical guidelines for third-party litigation funders. When Purslow co-founded Therium Capital, new facets of the industry was emerging. This led to innovation and an expanse of new approaches, including portfolio funding. Litigation Finance is now an integral part of the legal landscape and is especially vital to class actions. When Therium discovered that there were cases they wanted to fund on a not-for-profit basis in 2018, the company took steps to form Therium Access with the goal of closing what is often called the Justice Gap. In the relatively short time since Therium was founded, tech and methodology for vetting cases and developing funding agreements have improved exponentially. Funders don’t just fund meritorious cases these days. Funders drive innovation and keep the wheels of justice turning. Neil Purslow has played a vital part in that evolution.

Apex Litigation Finance report positive market adoption of non-recourse litigation for lower value claims in its first year

Apex Litigation Finance have announced a successful first calendar year of providing litigation funding targeted at small to medium sized claims. The firm reports positive acceptance of its innovative non-recourse funding model from the legal sector and both individual and corporate litigants. Since the launch of its first fund in late 2019, the firm has successfully invested in 32 pieces of litigation, with anticipated claim values ranging from £30,000 to £27,000,000. Claim types have included financial mis-selling, professional negligence, intellectual property/copyright, shareholder disputes, breach of contract, contentious probate, group claims and various insolvency related matters. Apex say that the positive response from investors confirms the attractiveness of a non-recourse model for lower value cases. Its first investor fund closed at the beginning of 2020, and within 12 months it had committed over two thirds of the available capital into funding cases. The firm believes its ability to attract applications and convert enquiries into funded cases further demonstrates the viability of its non-recourse model. The other significant feature of Apex’s first year has been its commitment to using technology to increase efficiency and reduce costs. By integrating artificial intelligence (AI) legal predictive claim analysis into its business model, Apex have significantly reduced total claim analysis costs - for the firm and its clients. Apex initially partnered with a third-party AI development team, but in late 2020 brought development in-house. This has allowed Apex to create a tool which will continue to grow with the company and add greater value to its future funding proposition. Many of the currently invested claims are expected to settle by the end of 2021. Model simulation tests predict a minimum 75-80% positive outcome, which Apex aims to enhance through a rigorous review and fluid investment process. Maurice Power, CEO at Apex says: “I fully expect 2021 to see Apex firmly established as one of the litigation funders of choice. Plans are already advanced to grow the company, our share of the litigation funding market and the development of our technology. “Building on our experience in litigation funding, legal review, AI and fund management, we have been successful in developing an investment team that we believe is unique within the industry. Our second investor fund is on course to launch this year and is projected to raise a minimum of ten times the amount secured in the first fund.”
Apex Litigation Finance Limited brings together experts from the legal and finance sectors to provide third party litigation funding to litigants (corporates, liquidators and individuals) who are unable to pursue a claim due to the prohibitive cost of litigation. Although the claim may have merits, uncertainty over the total costs and the potential risk of being ordered to pay the defendant’s cost, should they lose the claim, prohibits access to justice for many claimants. Our process is augmented by artificial intelligence systems to assess risk. As a professional litigation funder, Apex will make available funds to pay legal and other costs associated with a claim in return for an agreed share of any successful return. If there is no recovery, or if the claim is lost, there is nothing to repay. For details please see https://www.apexlitigation.com

Key Highlights from LFJ’s “Investor Insights into Litigation Funding” Digital Event

This past Thursday, LFJ hosted a digital conference that featured insights from various institutional investors active in the litigation funding sector. The panel - moderated by Ed Truant (ET) of Slingshot Capital - consisted of Jonathan Rix (JR), Senior Associate at UK-based PE firm Partners Capital, Kendra Corbett (KC), Principal on the Investment team of independent asset manager Cloverlay, and David Demeter (DD), Investment Director of Davidson College's $1Bn endowment fund.

The event also featured a keynote address from Charles Agee, founder of Westfleet Advisors, a litigation funding advisory firm. Charles discussed the key findings of his 2020 Litigation Finance Market Report--the most holistic industry survey on the market.

Below are some key highlights from the event.  First, some notable lines from Charles Agee's keynote address:

“Where is Litigation Finance now compared to where it could be, relative to its potential?”

  • The big picture is $2.5 billion in new capital commitments during the 12 months we analyzed. That’s on the US side of the commercial market. That $2.5 billion is committed to about 300 individual deals (cases and portfolio). The top 45 funding firms collectively have $11 billion in assets under management.
  • Our data ends just before the pandemic, so we have to think that’s a factor. That said, we measured a 6% annual growth rate in terms of new capital. But realistically, the real growth rate is much higher.
  • Portfolio vs single case breakdown is steady. 60% portfolio and 40% single case deals seem about right.
  • The key driver of addressable market is how much investment-grade litigation is out there. Even a strong case might not be suitable for investors. It’s not clear though, how to measure the amount of investment-grade litigation available. But quantifying that makes more sense than just looking at total dollar amounts.
  • “Big Law shuns Lit Fin” news stories are not an accurate representation of the industry. Big Law (largest 200 firms by revenue) potential is difficult to quantify.
  • Funders close about 5% or less of the deals that come in (though they may get funding elsewhere). The failure to close rate is very high, but it’s not clear whether that’s where it should be. We can’t know yet whether that’s optimal.
  • Innovation could best occur by bringing in new blood to the industry. In addition to former litigators, those with asset management backgrounds should be encouraged to join the Lit Fin industry. This would bring in more diverse perspectives, which could open growth opportunities for the industry.
  • I’m bullish on the industry, conceptually. But there is a lot of room for innovation, growth, and improvement.

And some key highlights from the panel discussion:

ET: What do you look for in a management team, both in terms of skills and composition?

KC: Origination and claim underwriting expertise, and asset management skills. In the early stages of diligence, we look at how replicable their approach might be in the future, their prior track record. Ideally, a team would have a combination of skills beyond legal expertise, since fund management is very different. Investment management expertise, understanding the likelihood of losing capital.

JR: There’s no one-size-fits-all team. But what we look for are partnership and ethics.

ET: What are some of your more significant insights from investing in this asset class? Both positive and negative.

KC: Not everyone considers the passive nature of funding, that you’re not able to have any control over the litigation itself. We try to find strategies that allow for more active control.

DD: I couldn’t agree more. We need to see structural ways of addressing deployment risk in order to invest. Not all the managers have significant experience. Many firms that started in the last few years have people who come out of commercial litigation and not from a finance background. It’s important to build trust with institutional investors.

ET: Charles touched on transparency and its importance from an investor’s perspective, and the lack of standardization. Would you echo that?

DD: I haven’t had a lot of issues with that. I do see reports where gross returns are emphasized and net returns are a footnote. That’s just unacceptable. The transparency we’re asking for isn’t hard. What I’d like to see is a willingness to share public information, public filings, and judgments. It’s already out there, there’s no reason not to give it to investors.

JR.: There’s definitely a lack of standardization in the industry.

ET: How are your deployment rates in your current portfolio? What advice do you have in terms of increasing deployment?

KC: Deployment rates have lagged. As far as the impact on net returns, we try to find innovative ways to structure cases to meet minimum return budgets.

JR.: In terms of advice I’d give—sizing the fund is important. If your goal is quality and effective deployment rather than quantity...ultimately your business depends on investment performance. As a manager, you can be creative. You may find more interesting capital solutions that allow you to, maybe, overcommit the fund. Managers should be flexible in terms of fees on committed capital.

ET: What’s your advice to first time managers with respect to fundraising?

JR.: Fundraising is always a tough gig. Choose partners very carefully, because litigation funding is nuanced and complicated. You make your life harder by partnering with people who don’t understand those complexities.

Anna-Maria Quinke Joins Omni Bridgeway German Cartel Team

Omni Bridgeway is poised to grow its services for German clients. With that in mind, the firm has added Anna-Maria Quinke to its team. Quinke is an anti-trust litigation specialist who will now serve as Senior Legal Counsel as well as an Investment Manager. Omni Bridgeway details that before joining the firm, Quinke spent more than a decade at Clifford Chance. She is adept at domestic, international, and multi-jurisdictional litigation. Omni Bridgeway’s Senior Investment Manager, Dina Komor, explains that Quinke’s expertise compliments the wider EMEA team. Quinke hold degrees from EBS Business School in Germany, and Durham University in England.

Sandfield Capital launches to re-imagine the future of legal finance

New investment fund Sandfield Capital has launched this week to tackle an increasingly challenging area of litigation that remains poorly served by the market. Steven D’Ambrosio, a former Finance Director at Close Brothers Premium Finance, has conceived and built a number of highly-successful ventures in the financial and legal sectors and remains extremely passionate about creating and tailoring funding solutions. Now, with Sandfield Capital, he hopes to enable real change in the sector for the good of those struggling to engage with legal services. Thousands of disputes cases in the UK fail to progress because of the increasingly high level of financial commitment required from day one. With average initial legal fees and disbursements coming in at around £15,000, most of us don’t have the readily-available capital available to pursue a claim. As Lord Justice Briggs pointed out in the Civil Courts Structure Review, “The single, most pervasive and intractable weakness of our civil courts is that they simply do not provide reasonable access to justice for any but the most wealthy individuals.” Whilst the explosive growth in litigation funding over the past five years has created support for cases that simply wouldn’t have seen the light of day, the litigation funding community tends to focus on higher value corporate commercial claims exceeding £2m in value and requiring at least £1m in funding. For the majority of claims that fall below that threshold there are few options for claimants. Sandfield Capital provides an easy-to-access platform that enables individuals to commence a dispute through innovative loans that cover disbursements such as court, expert and counsel fees. If the litigation is ultimately unsuccessful, the individual is fully insured against liability, safeguarding any negative financial impact. In the case of a win, the cost is simply factored into settlement. The initial focus of the fund will be on funding disbursements on cases for civil litigation, eventually moving towards partnering with more law firms to then fund their clients’ cases. D'Ambrosio comments: “At the heart of our business is a clear purpose - we believe in making justice accessible for all, regardless of financial circumstances. This is especially important right now, as we all emerge from C-19 and into an extremely uncertain economy. We also want to work with like-minded lawyers and progressive funders who want to join us in our mission to change the legal universe for good.” The firm will concentrate on offering straightforward, innovative products that support disbursement costs for a diverse range of litigations, ranging from financial mis-selling to GDPR breach. The team behind Sandfield Capital has over 100 years’ combined experience in dealing with the financial services sector, both directly and fighting for justice as a result of mis-sold products. D'Ambrosio continues: “This is about providing help to people who would have almost certainly been denied it. Our fully insured products and services will allow more people to take a stand when they have been wronged, knowing they are protected from financial repercussions. We take a special pride in being able to empower people of all backgrounds to access the justice system.”

Is Consumer Legal Funding a loan? Why does it matter?

The following article was contributed by Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding (ARC). The classification of Consumer Legal Funding as a loan is more than mere semantics. Consumer Legal Funding is the purchase of an asset; that being a portion of the proceeds of the consumer’s legal claim. This form of investment allows the consumer to access much needed support in order to obtain the financial assistance they need while their claim is making its way through the system. You may ask yourself, so why does this matter? In her publication “Harmonizing Third-Party Litigation Funding Regulations,” Professor Victoria Shannon Sahani clarified why Consumer Legal Funding is not a loan:
  • First, there is no absolute obligation for the funded client to repay the litigation funder. If the client is the claimant, the client must only repay the funder if the client wins the case. If the client is the defendant, the premium payments end as soon as the case settles, and if the defendant loses, the funder will not receive a success fee or bonus.
  • Second, litigation funding is non-recourse, meaning that if the client loses the case, the funder cannot pursue the client’s other assets unrelated to the litigation to gain satisfaction.
  • Third, the funder is taking on more risk than a traditional collateral-based lender; therefore, the funder is seeking a much higher rate of return than a traditional lender. This is not a unique concept. For example, an unsecured credit card typically carries more risk than a secured loan, so regulations tolerate much higher interest rates on unsecured credit cards than allowed even on subprime mortgages, which are backed by collateral. Similarly, as mentioned above, funders structure their agreements to avoid classification as loans in order to avoid the caps that usury laws place on interest rates for mortgages and credit cards.
  • Fourth, distancing funding even further from a loan, funders are taking on even more risk than unsecured credit cards because the credit card agreement is a bilateral transaction, while funding is a multilateral transaction.
Shahani explains that Consumer Legal Funding does not contain any of the characteristics of a loan, as illustrated in the chart below:
CharacteristicsLoanConsumer Legal Funding
Personal repayment obligationYESNO
Monthly or periodic paymentsYESNO
Risk of collection, garnishment, bankruptcy.YESNO
What is interesting to note is that no state where the legislature has carefully examined the product has classified it as a loan. In fact, states have gone so far as to declare that Consumer Legal Funding is unequivocally not a loan. In 2020, Utah passed HB 312 that specifically states that the product does not meet the definition of a loan or credit. In Indiana for example: A statute was passed regulating the industry which specifically states: “Notwithstanding section 202(i) of this chapter and section 502(6) of this chapter, a CPAP[1] transaction is not a consumer loan.”  The statute further articulates: “This article may not be construed to cause any CPAP transaction that complies with this article to be considered a loan or to be otherwise subject to any other provisions of Indiana law governing loans.” The Nebraska state legislature has declared: “Nonrecourse civil litigation funding means a transaction in which a civil litigation funding company purchases and a consumer assigns the contingent right to receive an amount of the potential proceeds of the consumer’s legal claim to the civil litigation funding company out of the proceeds of any realized settlement, judgement, award, or verdict the consumer may receive in the legal claim.” In Vermont: “Consumer litigation funding means a nonrecourse transaction in which a company purchases and a consumer assigns to the company a contingent right to receive an amount of the potential net proceeds of a settlement or judgement obtained from the consumer’s legal claim. “ In other words, Consumer Legal Funding is specifically classified as a purchase, not a loan. And it’s not just the state legislatures that have weighed in on this, the courts have as well. In 2018, the Georgia Supreme Court affirmed the Georgia Court of Appeals ruling, that the product is not subject to the Industrial Loan Act. The Appeals Court stated: “Unlike loans, the funding agreements do not always require repayment. Any repayment, under the funding agreement is contingent upon the direction and time frame of the Plaintiffs’ personal injury litigation, which may be resolved through a myriad of possible outcomes, such as settlement, dismissal, summary judgment, or trial.” Even dating back to 2005, when the New York Attorney General’s office came to an agreement with the industry, it stated in its press release: “The cash advances provided by these firms are not considered “loans” under New York State law because there is no absolute obligation by a consumer to repay them.” So, this leads me back to my opening question: Why does it matter? Classification matters, because once you mischaracterize the product by calling it a loan, you limit consumers’ availability to access it by subjecting Consumer Legal Funding to state laws that regulate loans. According to MarketWatch, in January of 2021, as many as 74% of Americans are living paycheck to paycheck. When their income stream is interrupted (typically due to an accident), they desperately need some economic assistance to help them through the lengthy and extensive process of filing their legal claim. So we ask State Legislators, when you are deciding how best to regulate this important financial product, to do what is best for your constituents by providing them access to economic assistance during their time of need, and ensuring that they are fully informed as to the terms and conditions of the transaction, by having their attorney review it with them in order to confirm that it is properly classified as a purchase. Blanket statements labelling Consumer Legal Funding as loans only serve to hurt those in need of its assistance, especially at a time when they need it. Eric Schuller President Alliance for Responsible Consumer Legal Funding   [1] CPAP Civil Proceeding Advance Payment

Building a New Law Firm in the Time of COVID

Hosted by Jim Batson, the latest episode of Omni Bridgeway’s podcast features Ariana Tadler, founder of Tadler Law. Baston runs Omni's New York office and serves as Senior Investment Manager. Tadler is an accomplished class action litigator and a global authority on e-Discovery. She is a founding member of Meta-e Discovery, which does consulting and data hosting. Tadler describes her time in law school, working for a variety of lawyers, judges, and firms. Her work on securities fraud cases led Tadler to focus on clients who had been wronged but lacked the ability to pursue legal action. This led her to focus on who was underrepresented or underprivileged. Legal systems are for everyone’s benefit. Increasingly though, Tadler found that the impecunious were often left out in the cold. Tadler has strong opinions on value and how it is applied to legal work. She recognizes that a firm has to make money to stay afloat. At the same time, monetary value is not the only, or even the most vital, measure of a person or their work. At Tadler Law, the team is well paid, but their value is recognized in other ways too. Obviously, COVID has been a major driver in remote working tech and e-Discovery. Tadler finds that she checks in with her team more often now, and to a more thorough degree. COVID fatigue impacts team members and clients alike, which may necessitate more downtime than usual. Zoom hearings have been unexpectedly beneficial since they cut down on travel time and the associated expenses. While courts do have higher expectations than before in terms of submitting information, Zoom depositions and other remote meetings have streamlined processes that often take much longer. Creativity abounds, thanks to COVID. Tadler Law is a female-founded, female-led organization. Tadler explains that this brings a unique perspective to the legal work. Empathy, which is a necessary facet of engaging with clients, is emphasized. The firm wants to ensure that it's being as inclusive as it can be, supporting both women and people of color.

Fronterra Suppliers Called to Class Action Meeting

An upcoming meeting of Fronterra milk suppliers promises to provide information about the developing class action. Fronterra, a major milk processor, is accused of engaging in deceptive and misleading conduct by failing to price match another major milk processor—Murray Goulburn. Dairy News Australia explains that in May 2016, Fronterra took the astonishing step of retroactively revising pricing for the entire season. This necessitated that farmers pay back wages they had been paid by the company. Lawyers from Adley Burstyner have stated that they believe this ‘clawback’ to be in violation of the law. Registration in the class action is free. Litigation Lending Services is providing funds to pursue the action on a no-win-no-fee basis. In addition to this upcoming meeting in Traralgon, meetings are expected to be held in Western and Northern Victoria, and in Tasmania. So far, several hundred farmers impacted by the clawback have joined the action. One dairy farmer, Wendy Whelan, explained that Fronterra’s decision set her business back years. Another couple, Rachael and Hayden Finch, was forced to sell their farm as they were unable to take on the sudden and unexpected debt thrust on them by Fronterra after what had already been a difficult season. The dairy company denies any unlawful activity and has stated its intention to defend the case with vigor.

The International Expansion of Corporate Law

Global expansion has been a huge driver of growth in corporate law departments. Managing the array of requirements and regulations around the world presents specific challenges that GCs are meeting with aplomb. OA Online details an upcoming webinar that promises to discuss legal globalization, keeping up with legal trends and tech, and how to best allocate resources with an eye toward the future. Outsourcing has become a key strategy for legal teams dedicated to increasing efficiency while keeping costs down. This includes managed legal services, international compliance, and utilizing portfolio funding as a means to manage budgets. Wolters Kluwer has been a purveyor of legal services for over 125 years; it employs more than 19,000 people in over 40 countries. Services include incorporation, international compliance, and registered agent services. Its reach covers nearly 200 countries, as well as over ¾ of Fortune 500 companies.

COVID Woes Make Litigation Funding Even More Inviting

In the past year, COVID has wrought financial havoc, business interruption, and court delays. It has also led to spikes in specific types of litigation. With that in mind, Litigation Funding is enjoying a resurgence that appears to be here to stay. A legal firm that typically relies on fees from clients may find itself in dire financial straits. Even a firm that’s meeting its goals for billable hours may find that clients are less able to pay. Law.com explains that there are several common uses for Litigation Finance. The most well-known is funding plaintiff-side litigation in exchange for a share of any award stemming from winning judgments or settlements. This can apply to a single plaintiff or a class action. An increasingly common form of third-party legal funding is the funding of a firm’s portfolio. This diversifies the risks funders take, as legal funding is provided on a non-recourse basis. As Litigation Finance has expanded in acceptance and scope, the legal world has affirmed that its use is a net gain. Early on, some feared that widespread litigation funding would lead to spurious lawsuits that clog dockets. In reality, funders vet cases carefully and have no interest in funding litigation that lacks merit. The New York City Bar Association Working Group affirms this, saying that lawyers and clients would benefit from fewer restrictions and disclosures related to funding. Protecting confidentiality is sometimes seen as being at odds with funding-related disclosures. For example, details about cases shared with funders as they assess the prospect of funding claims. This can be addressed by invoking the work product doctrine to protect all parties before materials are shared. Ultimately, litigation funding can provide innovative solutions to money woes, or the means to try a case in spite of financial barriers. We can expect more from the Litigation Finance industry long after COVID is behind us.

California Legal Working Group Seeks to Close Justice Gap

California's Closing the Justice Gap Working Group is exploring possibilities for amendments to the Rules of Professional Conduct as part of a move to boost access to justice. Bloomberg Law details that a state bar working group has determined that California’s legal system needs to be more accessible and affordable to average consumers. One push includes non-lawyer investment and ownership—signaling more widespread acceptance of Litigation Finance. This reform might hasten the entry of large accounting firms into the American legal market. This is expected to include EY, PwC, Deloitte, and KPMG—AKA the Big Four. California is also looking to do away with Rule 5.4, as Arizona did last year. This would allow non-lawyers to share fees with lawyers, as well as allow ownership of legal services by non-lawyers. It’s worth noting that some California legal service providers actually do better in the UK because the rules governing them are more welcoming and flexible. If these changes happen, we can expect more consumer-facing legal service providers to appear. Rocket Lawyer and Legal Zoom are already taking advantage of the new relaxed rules.

“True Sales” in Litigation Funding Agreements

The following article was contributed by John Hanley and Douglas Schneller of Rimon Law, P.C An issue that keeps some litigation funders up at night concerns the possibility of a claimant filing for bankruptcy after receiving funding and before their underlying case is resolved.  Proceeds from the case may become property of the bankruptcy estate and made available to the transferor’s creditors.  A carefully drafted litigation funding agreement (“LFA”) can increase the likelihood that the right to receive a portion of litigation proceeds is legally isolated (like the island in the picture above) and beyond the reach of the transferor’s creditors or a bankruptcy trustee.[1] This Insight refers to the litigation funder as the “purchaser” (since the funder acquires rights to receive a portion of litigation proceeds) and the claimant who received funding as the “seller” of rights to receive a portion of litigation proceeds. How can litigation funders ensure that the transfer of rights to receive a portion of proceeds resultant of funded litigation (the “Litigation Proceeds”) under an LFA constitutes a “true sale” divesting seller of its property interest in the Litigation Proceeds and not a secured financing whereby the seller is deemed to have borrowed money from the purchaser secured by the Litigation Proceeds? Determining whether an asset is “property of the estate” of a debtor in bankruptcy is a question of federal bankruptcy law. However, determining whether a property interest held or not by a debtor in bankruptcy is generally a question of applicable nonbankruptcy law, typically state law. As a general matter, “the bankruptcy estate consists of all of the debtor’s legal and equitable property interests that existed as of the commencement of the case, that is, as of the time that the bankruptcy petition . . . is filed.” [2]  If a party has disposed of an asset prior to its bankruptcy petition in exchange for fair consideration, that asset generally will not be property of the debtor’s estate. Litigation funding generally refers to an arrangement whereby the funder advances funds to a litigant with a meritorious cause of action who is financially unable or unwilling to underwrite the full costs of the litigation. In exchange the litigant agrees that the funder is entitled to an agreed-upon portion of Litigation Proceeds resulting from a judgment or settlement. An LFA is typically non-recourse, meaning that if the litigation is unsuccessful and no Litigation Proceeds result, the funder has no recourse to the litigant for the funds used for the litigation. A carefully drafted LFA with attention to the factors indicated below (among others) and conduct by the purchaser and seller of rights to Litigation Proceeds that supports true sale treatment of the transaction, may increase the likelihood that a litigant’s intervening bankruptcy will not swallow up the Litigation Proceeds. And that in turn might provide the funder with less counterparty risk.[3] In assessing whether a particular transfer is properly characterized as a sale or a secured financing, courts generally attempt to discern the intent of the parties to the transaction, based on the facts and circumstances underlying the transaction.[4] Courts considering the issue will examine both the stated intent of the parties as documented in the agreement, as well as the parties’ conduct and other objective factors.[5] Case law reveals that there is no universally accepted set of factors that courts use in determining whether a purported sale should be recharacterized as a financing.[6]  However there are numerous factors that various courts have examined; not every court considers or weighs these factors in the same way, and almost always the particular facts and circumstances of the case may influence the significance of the factors considered by courts.  As one bankruptcy court decision noted, “the reviewing court will look to the substance of the transaction, rather than the form. It is beyond the scope of this Insight to examine in detail each of the factors from the standpoint of a litigation funding arrangement.  Nevertheless, several important true sale factors may be relevant to consideration of these issues in connection with litigation funding. The principal factors that courts have identified and emphasized in the context of “true sale” analysis include: Recourse to the Seller. For many courts, the purchaser having a right of recourse to the seller weighs against characterizing the transaction as a true sale. Such recourse can include  seller guaranties of collectability and repurchase obligations and similar provisions and structures.[7]  Although recourse to the seller is an important attribute indicating a secured loan, there are decisions to the effect that recourse by itself, without other factors indicating a financing, does not require recharacterization.[8] Other courts have held transfers to be sales even where partial or full recourse existed in addition to other factors that are typically indicative of borrowing.[9] Risk of loss. Related to recourse is which party bears the risk of loss with respect to the asset.  Courts have generally held that, where a party does not bear any risk of loss, the result is a debtor-creditor relationship rather than a true sale.[10] By contrast, if the risk of non collection of the Litigation Proceeds shifted from transferor to transferee, that suggests that the benefits and burdens of ownership of the asset have also changed.  Of course, both the funder and the litigant in a funded case would bear the risk of loss with respect to their respective interests in the litigation. Language of the Contract and Conduct of the Parties. When non-sale factors exist, courts will often examine the language of the agreement governing the transaction as well as the parties’ conduct, i.e. terms such as “security” or “collateral” where other secured loan factors exist, or on terms such as “sell” or “absolutely convey” where sale factors exist.[11] Indeed some courts have suggested that the language in an agreement and conduct of the parties are “the controlling consideration[s]” in the true sale analysis, notwithstanding full recourse provisions.[12] Restrictions on Alienation. Courts have found that a provision that restricts purchaser’s right to resell the purchased assets is inconsistent with a true sale of such assets.[13]  The purchaser of the rights to Litigation Proceeds should be able to pledge or encumber the rights without the consent of the seller and the seller should not be able to pledge or encumber the rights to Litigation Proceeds at all. True Sale on Organizational Books and Records.  If the purchaser of rights to Litigation Proceeds, and the seller of such rights, each treats the transaction as a true sale on their respective organizational books and records, a court may be less likely to recharacterize the transaction as a financing. Although the considerations above may be important in structuring a litigation funding agreement, there are several aspects of a typical litigation funding that may be at odds with true sale analysis. For example, in a true sale, buyer acquires all rights to the asset, including the ability to control the use and nature of that asset, while seller retains no, or occasionally minimal, ability to act in respect of the asset (for example, to collect and forward payments on the asset that belong to buyer).[14]  By contrast, in litigation funding the litigant, not the funder, controls the prosecution of the litigation; indeed the ultimate value of any Litigation Proceeds will depend on the litigant’s ability to prove its case or motivate a favorable settlement (acknowledging, however, that the funder provides financial means to enable litigant to do so).[15] In conclusion, and as noted above, there are no reported controlling judicial precedents directly on point, and the authors have not identified any judicial decisions that state that an agreement by a litigation funder and litigant is a true sale, and we have not located statutory or decisional law interpreting specific contractual provisions identical to those contained in “typical” LFAs.  The cases referenced above are only indicative to illustrate the approach some courts have taken with respect to true sale analysis. Generally, the presence or absence in a transaction of one or more of the particular attributes noted above will not, alone, necessarily be dispositive of a court's conclusion that a sale, or alternatively a secured borrowing, has occurred. Nevertheless, true sale analysis may offer useful concepts and cautions for parties to litigation funding arrangements to consider.   [1] Note that this Insight does not address tax or regulatory issues that may be implicated by litigation funding, including whether there may be tax or regulatory consequences if a litigant or funder were to treat a transaction under an LFA as a sale. [2] 5 Collier on Bankruptcy ¶541.02. [3] An examination of the various complications that may result for a litigation funder from a litigant’s bankruptcy filing is beyond the scope of this Insight. [4] See, for example, Major's Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 543-45 (3d Cir. 1979); Bear v. Coben (In re Golden Plan of Cal., Inc.), 829 F.2d 705, 709 (9th Cir. 1986). [5] See, for example, Paloian v. LaSalle Bank Nat'l Ass'n (In re Doctors Hosp. of Hyde Park), 507 B.R. 558, 709 (Bankr. N.D. Ill. 2013) (noting that “the reviewing court will look to the substance of the transaction, rather than the form. Therefore, it is important to focus on whether the transaction is arms length and commercially reasonable as well as in proper form and subsequent acts actually treat the sale as real” and listing the following factors as relevant: recourse; post-transfer control over the assets and administrative activities; accounting treatment; adequacy of consideration; parties intent; a seller's right to surplus collections after the buyer has collected a predetermined amount; the seller’s retention of collection and servicing duties; and lack of notice to the account debtor or others of the purported sale). [6] See for example Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 416 (5th Cir. 2003) (“the distinction between purchase and lending transactions can be blurred” and therefore the outcome of any case will depend on the precise facts of the case and the manner in which it is argued in court); Savings Bank of Rockland County v. FDIC, 668 F. Supp. 799, 804 (S.D.N.Y. 1987), vacated per stipulation, 703 F. Supp. 1054 (S.D.N.Y. 1988) (“The cases that address whether or not certain transactions are to be considered loans or sales do not lay down a clear rule of law on the issue.”); In re Commercial Loan Corp., 316 B.R. 690, 700 (Bankr. N.D. Ill. 2004) (discussing the difficulties of determining whether a transaction is a sale or a secured borrowing). [7] See, for example, In re Woodson, 813 F.2d 266 (9th Cir. 1987) (seller’s purchase of insurance policy to insure buyers of participations in mortgages against loss an important factor in holding the assignment was a disguised loan); People v. Service Institute, Inc., 421 N.Y.S.2d 325, 327 (Sup. Ct. 1979) (transaction characterized as a loan where assignor had right of full recourse and did not assume risk, charging of interest plus service charge, no notification of account debtor as to the assignment, assignee’s right to withhold payments on accounts until 60 days had expired and right to commingle moneys collected with assignor’s own, and assignor’s offer to help collect the accounts receivable); Aalfs v. Wirum (In re Straightline Invs.), 525 F.3d 870, 880 (9th Cir. 2008) (purported “sales” of receivables were actually disguised loans where seller guaranteed full repayment and correspondence between parties referred to payments for the receivables as “advances”) . [8] See, for example, Lifewise Master Funding v. Telebank, 374 F.3d 917, 925 (10th Cir. 2004) (holding that, under New York law, the term “recourse” in an agreement refers to the liability of a seller of receivables to the buyer if the underlying obligors fail to pay the receivables and that a repurchase obligation for breach of representations and warranties does not convert a nonrecourse assignment into a recourse assignment). [9] Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997) (assignment of future royalties to two creditors sufficient to divest assignor of property interest, therefore tax lien did not attach to royalties, even where assignment did not extinguish debt and assignment could be terminated following repayment of debt). [10] See, for example, Woodson, 813 F.2d at 270-72 (debtor relieved the investors of all risk of loss; permanent investors were paid interest regardless of whether original borrower paid Woodson; "[s]imply calling transactions 'sales' does not make them so. Labels cannot change the true nature of the underlying transactions."); and In re Major Funding Corp., 82 B.R. 443 (Bankr. S.D. Tex. 1987) (promising investors a set return on their investment regardless of rate on assigned note, as well as a repurchase of prior lien upon default, indicating that the investors did not have any risk related to ownership and resulting in a finding that the transactions were loans by investors, not sales). [11] Golden Plan, 829 F.2d at 709, 710 n. 3 (provision in assignment agreement "without recourse" suggests sale where other countervailing factors are not present); Palmdale  Hills  Property,  LLC v. Lehman Comm. Paper, Inc., 457 B.R. 29, 44-45 (B.A.P. 9th Cir. 2011) (parties' manifestation of intent that transaction constitute a sale evidenced in their use of terms "buyer" and "seller," "purchase date," and "all of seller's interest in the purchased securities shall pass to buyer on the purchase date"); Paloian, 507 B.R. at 709 ("[w]hether the documents reflect statements that the parties intend a sale" is a relevant factor to consider in determining if the transfer of healthcare receivables constituted a true sale); Goldstein, 89 B.R. at 277 ("orders, assigns and sets over" language supported sale treatment); In re First City Mortg. Co., 69 B.R. 765, 768 (Bankr. N.D. Tex. 1986) (contract language coupled with preexisting debtor-creditor relationship indicated loan). [12] In re Financial Corp. (Walters v. Occidental Petroleum Corp.), 1 B.R. 522, 526 n.7 (W.D.Mo. 1979), aff'd. sub. nom., Financial Corp. v. Occidental Petroleum Corp., 634 F.2d 404 (8th Cir. 1980) (“While this repurchase agreement had many attributes of a secured loan, there was nothing in the record to indicate that this transaction was intended to effectuate a security interest.”). [13] See In re Criimi Mae, Inc., 251 B.R. 796, 805 n. 10 (Bankr. D. Md. 2000) ("[A] restriction on alienability is inconsistent with [the] claim that the Repo Agreement accomplished a complete transfer in ownership of the Disputed Securities.") [14]   See for example Southern Rock v. B & B Auto Supply, 711 F.2d 683, 685 (5th Cir. 1983) (noting that the retained right of assignor to receive proceeds, coupled with a “Security Agreement” and assignment of “collateral security” defeats claim of absolute assignment); and Petron Trading Co, Inc.. v. Hydrocarbon Trading & Transport Co., 663 F. Supp. 1153, 1159 (E.D. Pa. 1986) (no absolute assignment of right to payment under contract where assignor continued to prepare invoices for contract payments, did not notify account debtor and retained rights under contract to petition account debtor for price adjustments). [15] See, for example, Hibernia Nat’l Bank v. FDIC, 733 F.2d 1403, 1407 (10th Cir. 1984) (participation agreement permitting the loan originator to, inter alia, release or substitute collateral and to repurchase the loan, did not transfer ownership of the loan to participating bank; grantor/originator retained complete discretion to deal with the loan); and Northern Trust Co. v. Federal Deposit Ins. Corp., 619 F. Supp. 1340, 1341-42 (W.D. Okla. 1985) (because loan participation agreement gave participant little input into grantor’s management of the participated loans and collateral backing such loans, court held the participation “did not create or transfer any ownership or property rights” in the participated loan).

Grant Farrar, Founder of Arran Capital, Discusses Litigation Funding for Public Sector Entities

On a recent episode of the Litigation Finance Podcast, Grant Farrar of Arran Capital discussed his firm’s value proposition as the only litigation funder focused solely on public sector financing. Grant explains why public sector funding merits its own categorization, what the sticking points are in convincing politicians and others of litigation funding’s value, and what his expectations are for future growth in this rapidly-evolving space.

Below are key takeaways from the interview, which can be listened to in its entirety here.

LFJ: What makes litigation financing for public sector entities so unique? Why does this type of funding merit its own differentiated category?

GF: In terms of public sector affirmative litigation, one of the undeniable and very interesting trends that’s going on across the country with every shape and size and jurisdiction, is the uptrend in affirmative litigation. So, it really started off with, as you recall, the tobacco litigation in the late 90s and early 2000’s, and now has evolved into some different issues areas, so it can be a public nuisance, relative to environmental or other quality of life issues that affect constituents around the country. It could be the opioid litigation which everybody is very familiar with, a related offshoot of that would be the Juul litigation which is being maintained right now. And a whole host of other issues that relate to consumer fraud or antitrust. One of the things about public sector entities is they are the intersection of every piece of public policy and business.

As litigation continues to increase, certainly in the time of COVID-related budget strain and stress on entities across the country, the core issue of ‘okay, how do we find funding’ and ‘how do we pay for this legal representation’ is certainly at the forefront. And this is where Arran Capital comes in, with our value proposition that we’re real excited to talk about today.

LFJ: In terms of public sector financing more broadly, what are some of the key drivers of growth that this sector of the industry is facing?

GF: It really boils down to a concept which is being discussed in public sector circles with respect to rethinking revenue models and finding ways to generate revenue in different and creative ways that will assist public entities across the spectrum. So one of the drivers on that is chief financial officers in public sector organizations and their chief legal officers that work hand-in-hand with those who set the policies. They’re coming to the realization that it’s more than just across the board budget cuts or trying to lean operations. They’re trying to find different and creative ways to manage that revenue strain while also dealing with the growing expectation and the demand on behalf of their constituents and their public sector leaders for affirmative litigation to address the issues.

LFJ: ESG—this is a hot buzz word at the moment across the investment landscape and across Wall Street. It stands for Environmental, Social, and Governance, also known as Impact Investing. The idea is that investors are starting to look beyond just profit at how companies they invest in are impacting those various metrics. A lot of institutional players are starting to mandate ESG allocations from their partners. How could this trend impact public sector financing?

GF: Great question. I’m glad you asked that. Just this week we’ve seen the largest asset manager in the world speaking to the tectonic shift in the investment space with respect to funds flowing into ESG-related investments and ESG-related approaches. And at Arran Capital, we view ourselves as part of that component and part of that wave, because if you think about what ESG stands for, one of their core case matters or case areas that we seek to invest in is with respect to the environment; those public sector / public nuisance actions. So investing with our fund that can then invest in cases that address environmental issues, that’s part of our core focus and mission.

Going to social and governance, it’s also about investing in cases that promote access to justice for citizens across the country, and ensuring that citizens and their public servants have a role as constituents and representatives of government having a responsive investment approach and a responsive and good outcome on the litigation side. So we’re really excited about how we can tie into ESG, it’s one of the main drivers in our value proposition and one of the things we seek to focus on and execute.

Click here to listen to the full episode.

London Court of Appeals Clarifies DBA Laws

In this post-Brexit world, London has long positioned itself as a global destination for disputes. A new Court of Appeal judgment clarifying laws relating to Damages Based Agreements helps support that goal. The recent ruling affirms the importance of DBAs, allowing greater access to justice. Burford Capital explains that a DBA is an agreement between client and attorney to share in litigation risk in return for a share of any award. DBAs were introduced in 2013. This is similar to a contingency agreement, with a few sticking points:
  • Could a solicitor recover funds if the DBA is terminated before the case ends?
  • If a partial payment is made, such as in a hybrid agreement, could the DBA then become unenforceable?
The court determined in Zuberi v Lexlaw that hybrid fee arrangements do not negate DBAs according to 2013 regulations. That’s great news all around. Contingency arrangements increase access to justice and allow meritorious cases to move forward even when plaintiffs lack the ability to pay costs. Combined with the accessibility of third-party legal funding, DBAs will no doubt explode in popularity in the coming years.

Capitalized Funders and Adverse Costs

Now that Litigation Finance has established itself as a viable industry, laws are being written to clarify finer points and add consistency to laws across jurisdictions. One area of focus is how costs are handled, both in terms of the UK adverse costs regime, and in possible new requirements for third-party funders wishing to obtain securities for cost. DLA Piper explains that a strong example of this clarification comes by way of Rowe & ors v Ingenious Media Holdings. The case involved multiple finance schemes that were challenged by HMRC. More than 500 investors brought claims. Defendants applied for security for costs against the funder—Therium. The claimants then said that if security for costs was ordered, courts should require defendants to provide a cross-undertaking to cover any loss suffered due to that order. Ultimately, security for costs was granted, but not the cross-undertaking. The reasoning was that rather than a loss, what happened was an allocation of recovery. During the appeal, the court affirmed that regardless of third-party funding, claimants are not typically insulated from costs when pursuing claims. The appeals court determined that cross-undertaking for damages in return for security costs should not be presumed. In fact, it should only be used in ‘rare and exceptional cases.’ There are three main takeaways here:
  • That costs covered by third-party legal funding should be treated the same across the board.
  • Security for costs is typical and funders should factor this in when calculating expected costs.
  • Funders should be fiscally prepared to weather an adverse costs order.
This means that claimants and funders need to be more cognizant of the possibility of adverse costs orders, and should discuss these eventualities early on in the process.

Omni Bridgeway Expands into Latin American Markets

Omni Bridgeway has been a leader in Litigation Finance for over 30 years. In that time, they’ve made a name for themselves in the US, Canada, the Middle East, Asia, and Australia. Now, the company is making a move to Brazil, Chile, Peru, Mexico, and Argentina with the formation of the Omni Bridgeway Latin America Group. Omni Bridgeway details that the group includes Senior Investment Managers Oliver Gayner and Tim DeSieno, Associate Investment Manager Cheng-Yee Khong, Legal Counsels Dana MacGrath, Nilufar Hossain, Dr. Gian Marco Solas, and managing Director Wieger Wielinga. The focus will be on bringing Omni Bridgeway’s services to new populations. This will include financing for commercial arbitration and litigation, award enforcement, insolvency and other distressed debt matters. The expansion is sure to be a boon to new clients and investors alike.

Australian Insurers Unified in Denying Policy Claims for COVID

There’s no apparent end in sight to the legal battles between insurers and policyholders with regard to business interruption and COVID. At least five law firms are looking at potential class actions against insurers denying that their business interruption policies do not cover pandemics. ABC details that business interruption policies exist to help companies when the unforeseen happens. This might include natural disasters or fires. Most reasonable people would agree that a pandemic is exactly the sort of calamity business interruption insurance was meant to cover. Insurers disagree, however. An early test case relied on a single sentence to make a determination. Whether or not to cover losses for disease depends on whether the disease itself is ‘quarantinable under the Quarantine Act 1908 and subsequent amendments’. But this act was repealed and replaced in 2016 with the Biosecurity Act. The issue now comes down to whether ‘subsequent amendments’ includes the Biosecurity Act. Not surprisingly, a consensus is yet to be reached. Litigation funder John Walker of Investor Claim Partner stated that on some level, he feels bad for insurers who may not have intended to pay out in the event of a pandemic. But that, he says, does not relieve them of their ethical, legal, and moral obligations to their policyholders. In the year since the pandemic began, very few claims have been paid. Walker finds this unacceptable. It’s unclear how insurers can make a claim that payouts for pandemics are not normally covered. Obviously, pandemics are not a normal occurrence, so insurers, courts, and policyholders are all treading in uncharted territory. Further test cases are expected soon. The sad truth is, these cases could drag on for years, leaving business owners without the protection they paid for.

Turning Litigation into an Advantage in the Wake of COVID

Most business owners are feeling the pressures of COVID. Startups and established brands alike are finding new challenges to overcome as they negotiate lower sales figures, supply chain hassles, and budget shortfalls. But solutions are available if you know where to look. Real Business UK explains that while some companies are relying on high-interest emergency loans, there are better options out there. Litigation might be the key to financial solvency during trying economic times. How? Pending litigation doesn’t have to be a drain on time and resources. In fact, with proper planning and backing from an experienced legal funder—litigation can become its own revenue stream. Often, financial pressures mean not following up on viable litigation. When the markets are down, it may feel like there’s just not enough revenue to go around. In fact, the Litigation Finance industry is not correlated to the rest of the market. Even during COVID, funders are flush with investable cash, and in search of meritorious cases to fund on a non-recourse basis. By sharing risk with funders, companies can pursue litigation without adding additional legal fees to the budget. In the UK and around the world, insolvencies and business closures keep coming. Third-party legal funding, now an increasingly viable asset class, can help companies pursue legal action, and even help with enforcement of awards or managing insolvencies.

Remote Legal Tech Leads to Increased Competition

With remote work now mainstream, it’s become the norm for Legal Tech firms to hire well outside their physical location. While this opens up new opportunities to recruit talent, it also increases competition for job seekers, and companies looking to hire. What might this mean for Litigation Finance? Law.com details that physical offices are not a thing of the past just yet—but that day may be coming. Remote work, flexible office time, and teleconferencing are all being normalized thanks to a pandemic that’s still raging one year on. The talent pool for many firms has gone from local, to state-wide, to national, and even global. This applies not just to tech professionals, but to legal teams and those who specialize in legal finance. Some legal tech companies were already hiring remote workers before COVID hit. But many are still hiring with the expectation of filling their office spaces eventually. The level of training and expertise expected from remote workers may not need to expand, as some had predicted. Because staffers work remotely on a part-time or as-needed basis, it’s less essential to gain many skill sets with a single hire. That means that while competition is growing, so is the number of available positions. Ultimately, the expansion and growth of legal tech is good news for attorneys, clients, and the litigation funding industry on the whole. This ecosystem of coexistent entities will continue to adapt to support the goals of the industry.

Law Firm Declares that Vauxhall Owners Will Not Pay for Legal Action

Millberg London has stated that, along with the assistance of third-party litigation funders, they will assume all upfront charges in order to begin legal action against Vauxhall. This will ensure that class participants will not bear any costs associated with the case, minimizing their personal liability. Express reports that clients will not be charged if the case is unsuccessful, and that insurance has been taken out to cover costs if there is no award. The case itself revolves around ‘defeat devices’ installed in a car’s engine management system in order to falsify emissions readings. According to the complaint, drivers were told they’d receive an environmentally safe car with a level of performance that’s literally impossible under normal conditions. Vauxhall maintains that they do not use defeat devices, and stresses that their vehicles comply with existing regulations.

Thoughts on Legal Tech and COVID

Senior Investment Manager and Head of Omni Bridgeway’s offices in New York, Jim Batson, recently hosted Omni's Beyond Hourly podcast. Batson is a former commercial litigator and law firm partner. The podcast features Ariana Tadler, founder of Tadler Law. Omni Bridgeway’s Beyond Hourly podcast shares insights about gender in law, being a consumer advocate, and the ways in which COVID continues to impact the pursuit of justice. Tadler describes an early case she worked as plaintiff’s coordinating counsel for an IPO Securities Litigation. The case began in 2000 and was related to more than 300 different class actions that were coordinated together, dealing with more than 50 investment banks as defendants. This led to discussion of an amendment to the Federal Rules of Civil Procedure, which was needed to update laws to include modern technology like the internet. Tadler herself was instrumental in the amendments process, eventually being appointed by Chief Justice Roberts to the Federal Civil Rules Advisory Committee. Talk of technology led to a discussion of COVID, and how the legal world simultaneously came to appreciate the value of high-speed internet. The need for remote working conditions, teleconferencing, and virtual document sharing has led to upgrades in tech across the industry. Tadler expresses that she’s confident in the tech choices she made for her firm, acknowledging that such decisions are easier in a smaller firm. When asked if she had advice to share with anyone contemplating founding a firm of their own, Tadler’s answer was unsurprising. She recommends tapping into existing network connections and then branching out into new ones. Never underestimate the value of a good Listserv and a diverse workforce. Seeing other firms and products as networking opportunities rather than as competition elevates everyone involved, while providing a framework to recommend and share information that ultimately helps legal teams and clients alike.