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Commercial Regulatory Issues

Best Practices and Lessons Learned in Firm-Funder Partnerships

By John Freund |

This Day 2 panel featured Alex Chucri, CEO and Founder of Pravati Capital, Vincent Montalto, Partner at DLA Piper, and Ronald Schutz, Partner at Robins Kaplan. The panel was moderated by Kathryn Boyd, Partner at Hecht Partners.

Discussion topics ranged from operationalizing firm decisions involving funding, to the best ways to structure a funding partnership or alliance.

Not everyone knows about the various structures of relationships between law firms and funders, so the panel addressed the various models in play, including those that involve some form of recourse funding. Pravati has a debt structure in play, which founder Alex Chucri thinks makes the most sense for his firm’s structure. He believes in recourse to the firm, to the management team, and personal guarantees. This makes investors more comfortable, knowing that Pravati has skin in the game.

Panelists also discussed having to monitor the capital structures, and being cautious about capital allocation. A lot of funders raise $100MM and need to put that capital to work, and so they finance claims the wouldn’t otherwise take on. This is concerning. “When you put capital into a deal, it changes the whole landscape of a deal,” according to Vincent Montalto. His firm has implemented internal structures to monitor capital expenditure and management.

The panel also delved into some of the risks of partnering with funders, including whether funders will withdraw their funding – how and why would they do this? Where is funder money coming from – there are all types of investment structures out there, law firms have to be aware of those, so they can better understand the risk to the funder, which presents a downstream risk to them. These are things that the average lawyer in a law firm doesn’t appreciate, but it’s very important to know if the funder  has the capital on hand, is it subject to capital calls, etc.

One final point on the tax implications of recourse funding: recourse funding can be clawed back, and so its treated as a loan and so it’s not taxed. Recently there was a legal standing that if the funding structure is non-recourse, that is treated as income, which means it is taxes. Often, there are a lot of emotions about getting a deal done, so they overlook the tax implications, and there is a real danger there.

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John Freund

John Freund

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Announcements Commercial People Moves

ALFA Welcomes Mackay Chapman as Newest Associate Member

By Harry Moran |

In a post on LinkedIn, The Association of Litigation Funders of Australia (ALFA) announced that it is welcoming Mackay Chapman as its newest Associate Member. Mackay Chapman becomes the 12th Associate Member of ALFA, following the inclusion of Litica in April of this year.

Mackay Chapman is a boutique legal and advisory firm, specialising in high-stakes regulatory, financial services and insolvency disputes. The Melbourne-based law firm was founded in 2016 by Dan Maclay and Michael Chapman, who bring 25 years of experience in complex disputes to the business.More information about Mackay Chapman can be found on its website.

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Case Developments Commercial

Deminor Announces Settlement in Danish OW Bunker Case

By Harry Moran |

An announcement from Deminor Litigation Funding revealed that a settlement has been reached in the OW Bunker action in Demark, which Deminor funded litigation brought by a group of 20 institutional investors against the investment banks Carnegie and Morgan Stanley.

This is part of a wider group of actions originating from OW Bunker’s 2014 bankruptcy, which led to significant financial losses for both company creditors and shareholders who had invested in the company. These other cases were brought against several defendants, including OW Bunker and its former management and Board of Directors, Altor Fund II, and the aforementioned investment banks.

The settlement provides compensation for plaintiffs across the four legal actions, with a total value of approximately 645 million DKK, including legal costs. The settlement agreement requires the parties to ‘waive any further claims against each other relating to OW Bunker’. Deminor’s announcement makes clear that ‘none of the defendants have acknowledged any legal responsibility in the group of linked cases in connection with the settlement.’

Charles Demoulin, Chief Investment Officer of Deminor, said that “the settlement makes it possible for our clients to benefit from a reasonable compensation for their losses”, and that they were advising the client “to accept this solution which represents a better alternative to continuing the litigation with the resulting uncertainties.” Joeri Klein, General Counsel Netherlands and Co-head Investment Recovery of Deminor, said that the settlement had demonstrated that “in Denmark it has now proven to be possible to find a balanced solution to redress investor related claims.”

Case Developments Commercial

Burford German Funding Sued Over Hausfeld Ownership Stake

By Harry Moran |

The ownership or funding of law firms by litigation funders continues to be a hot topic in the world of legal funding, with models such as alternative business structures (ABS) gaining momentum in places like Arizona. However, a complaint filed by a client in Delaware reveals a falling out due to the reverse funding model, where a law firm maintained an ownership stake in the funder.

Reporting by Bloomberg Law covers a new lawsuit brought against Burford German Funding (BGF), an affiliate of Burford Capital, by a client who claims that the funder failed to disclose the fact that BGF was partly owned by the same law firm it nominated to lead the client’s antitrust cases. Financialright Claims GMBH (FRC) alleges that when it negotiated the funding agreement with BGF for its antitrust litigation against the trucks cartel, it had no knowledge “that Hausfeld  was  also  a  part  owner  of  BGF  through  an  entity  called German Litigation Solutions LLC (“GLS”) or that one of the lead German partners at Hausfeld responsible for the firm’s representation of FRC had a personal stake.”

The complaint, filed by FRC in the Delaware Superior Court, explains that as Hausfeld is part-owner of BGF, and the funding agreement “provides for a share of FRC’s recoveries in the Trucks Litigations to flow to FRC’s lawyers”, this constitutes a contingency fee arrangement which are illegal under German law.  FRC had filed a lawsuit against Hausfeld in a German court and then applied for discovery from BGF, Burford and GLS in the Delaware District Court, which was followed by an assertion by these parties that the application for discovery “is subject to mandatory arbitration” under the terms of the funding agreement.

FRC argues that “as  a  direct  result  of  BGF’s  fraud  on  FRC,  FRC  did  agree  to  the Arbitration Agreement that—according to BGF—subsumes disputes between FRC and GLS.” However, FRC claims that it “would  never  have  agreed  to  an  arbitration  clause  requiring  it  to arbitrate claims against Hausfeld”, were it not for the concealment of Hausfeld’s ownership stake in BGF. FRC is therefore asking the Superior Court to declare that “BGF fraudulently induced  FRC  into  agreeing  to  the  Arbitration  Agreement”, and that the agreement should be declared both invalid and unenforceable.

Lisa Sharrow, spokesperson at Hausfeld LLP, provided the following statement:  “The US-based Hausfeld LLP and the UK-based Hausfeld & Co LLP hold indirect economic minority interests in Burford German Funding. These are separate legal entities from Hausfeld Rechtsanwälte LLP that do not practice law in Germany. Burford German Funding was of course developed and set up in a way that was fully compliant with all relevant regulations.”

David Helfenbein, spokesperson at Burford, also provided a response to Bloomberg via email: “There is a dispute in Germany between a client Burford has funded and its lawyers. Burford is not a party to that dispute and its outcome has no impact on us. This Delaware proceeding is a third-party discovery request to Burford for material for the German litigation, which Burford believes should be adjudicated in arbitration and not in the Delaware courts.”

The full complaint filed by FRC can be read here.

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