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Covid-19 and Defendant Collectability Risk

April 15, 2020

Covid-19 and Defendant Collectability Risk

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 SUMARY
  • Covid-19 will likely lead to the biggest financial crisis since the Great Depression
  • The crisis has affected the solvency and viability of corporations and sovereigns
  • Litigation managers need to re-assess collectability risk, immediately and regularly, of each defendant in their portfolio
INVESTOR INSIGHTS
  • Diligencing litigation managers should involve a deep understanding of how they assess defendant collectability risk
  • Defendant collectability risk is an ongoing risk that changes over time, therefore managers need a continuous risk assessment methodology
  • Investors looking to invest in litigation finance secondaries to take advantage of the current dislocation should avoid single case risk and look to portfolio acquisitions, but must assess collectability risk across the portfolio being acquired
As Covid-19 has taken the planet and the legal community by surprise, I think there are some lessons learned from private equity that can be applied to litigation finance.  In short, focus on cash – its collection, generation, distribution and availability. So, how does this relate to Litigation Finance? This novel Coronavirus-driven healthcare crisis which has spiralled into a broad-based economic crisis, the likes of which the modern global economy hasn’t seen since the Great Depression, has had the effect of taking otherwise viable, profitable and cashflow positive businesses and stopping them in their tracks.  Overnight, certain businesses and industries have performed a complete one-eighty, whereby they went from solvent to being on the precipice of insolvency.  For many litigation finance firms, their immediate reaction has and should be to undertake an immediate and urgent review of the defendants involved in each and every case in which their portfolios have an investment, in order to re-assess collectability risk, one of the key areas of litigation finance underwriting. When an economy, especially a consumer driven economy like the US, effectively shuts down overnight, there are few industries and companies that will be spared from a diminution in their value and blockage from access to capital.  Former “recession-resistant” and “necessity” businesses have just experienced a new reality, which is that necessity is determined by context.  The current context states that the only necessity is feeding, hand washing, shelter and healthcare, and this has had a massive impact on the economy. While this too shall pass, the economic impacts will likely linger for a number of months and years.  The hope for a “V” shaped recovery has been dashed, as the crisis has extended beyond initial duration estimates.  My personal opinion is that it will at best look like a “U” shaped recovery with the possibility of a double “W”, meaning there will likely be some ups and downs along the way, should the dreaded “C-19” rear its ugly head again going into the next flu season, or should it fail to be contained due to premature ‘return to daily activity’ policy.  My hope is that the massive amounts of stimulus that are being pumped into the global economy actually make their way to the most hard-hit regions of the economy, namely ‘Mainstreet’, and thereby mitigate the damage that would otherwise be experienced for many small and medium-sized businesses on which most economies rely. While we tend to focus on home first, litigation funders should also be mindful that the economy is global.  As bad as developed countries think they may have it, fund managers who participate in the international arbitration market, which by definition, involve developing countries and corporations therein, need to be mindful that those defendants in developing countries will likely be even more greatly affected. Yes, even sovereigns. Those managers that are focused on patent litigation involving start-up technology companies should also ensure the plaintiff is solvent through the end of the litigation, not to mention the collectability risk of the defendant, which may have been negatively impacted. All of this is to say, that it is in the best interests of litigation finance managers to undertake a re-assessment of collectability risk of each and every defendant in their portfolio, and to do so on a regular basis for the foreseeable future.  Managers will need to assess (i) the degree to which the defendant’s industry has been impacted, (ii) the strength of each defendant’s business and balance sheet, (iii) the ability for the defendant (business or sovereign) to access sufficient capital to maintain solvency, (iv) the degree to which the value of such business has declined, (v) a study of the defendants’ behaviour during the last economic crisis, as it relates to litigation ongoing at that time, if any, (vi) determine the extent to which other parties have security and seniority ahead of the plaintiff’s claims and (vii) assess the defendants’ ability to raise capital outside of financing (i.e. asset sales, equity raises, etc.). Once a determination has been made as to the relative collectability risk, managers will then need to determine next steps with respect to protecting themselves from those cases where the defendant collectability risk has materially changed.  This may involve the withdrawal of any further financing provisions (to the extent the financing was milestone-based), partnering with other parties to share the increased risk of the case, or selling all or a portion of a case or a portfolio (although the manager would be selling into a weak secondary market with relatively few participants, which will be reflected in the valuation, if they can secure bids).  While the options may not be great, they may be better than investing ‘good money after bad’. Investor Insights For investors that are invested in the sector or considering making an investment in the litigation finance market, now is a good time to diligence how and the extent to which managers were on top of their portfolio in assessing collectability risk.  For those investors interested in secondary market opportunities, caveat emptor.  The risk profile for a single case secondary is much higher given the high level of uncertainty in today’s market so a portfolio of secondaries may be a better risk-adjusted avenue to pursue but the portfolio’s diversification benefits would not negate the need to reassess the collectability risk of each defendant in the portfolio.  Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.
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Bloomberg Law Cites Legal Funding Journal Podcast in Commentary on Funder Transparency

By John Freund |

A recent episode of the Legal Funding Journal podcast was quoted in a Bloomberg Law article on funder control of cases. In the episode, Stuart Hills and Guy Nielson, Co-Founders of RiverFleet, discussed the thorny topic this way: “What do funders care about? They certainly do care about settlements and that should be recognized. They do care about who is the legal counsel and that should be recognized. They care about the way the case is being run. They care about discontinuing the legal action and they care about wider matters affecting the funder.”

The provocative new commentary from Bloomberg Law reignites the longstanding debate over transparency in third-party litigation funding (TPLF), asserting that many funders exercise considerable control over litigation outcomes—despite public disavowals to the contrary.

In the article, Alex Dahl of Lawyers for Civil Justice argues that recent contract analyses expose mechanisms by which funders can shape or even override key litigation decisions, including settlement approval, counsel selection, and pursuit of injunctive relief. The piece singles out Burford Capital, the sector’s largest player, highlighting its 2022 bid to block a client’s settlement in the high-profile Sysco antitrust matter, even as it publicly claimed to be a passive investor. Such contradictions, Dahl contends, underscore a pressing need for mandatory disclosure of litigation funding arrangements under the Federal Rules of Civil Procedure.

The analysis points to contracts that allegedly allow funders to halt cash flow mid-litigation, demand access to all documents—including sensitive or protected materials—and require plaintiffs to pay sanctions regardless of who caused the misconduct. Courts and opposing parties are typically blind to these provisions, as the agreements are often shielded from disclosure.

While funders like Burford maintain that control provisions are invoked only in “extraordinary circumstances,” Dahl’s article ends with a call for judicial mandates requiring transparency, likening funder involvement to insurers, who must disclose coverage under current civil rules.

For legal funders, the takeaway is clear: scrutiny is intensifying. As the industry matures and high-profile disputes mount, the push for standardized disclosure rules may accelerate. The central question ahead—how to balance transparency with funder confidentiality—remains a defining challenge for the sector.

Case Developments Commercial

Siltstone vs. Walia Dispute Moves to Arbitration

By John Freund |

Siltstone Capital and its former general counsel, Manmeet (“Mani”) Walia, have agreed to resolve their dispute via arbitration rather than through the Texas state court system—a move that transforms a high‑stakes conflict over trade secrets, opportunity diversion, and fund flow into a more opaque, confidential proceeding.

An article in Law360 notes that Siltstone had accused Walia of misusing proprietary information, diverting deal opportunities to his new venture, and broadly leveraging confidential data to compete unfairly. Walia, in turn, has denied wrongdoing and contended that Siltstone had consented—or even encouraged—his departure and new venture, pointing to a release executed upon his exit and a waiver of non‑compete obligations.

The agreement to arbitrate was reported on October 7, 2025. From a governance lens, this shift signals a preference for dispute resolution that may better preserve business continuity during fundraising cycles, especially in sectors like litigation finance where timing, investor confidence, and deal pipelines are critical.

However, arbitration also concentrates pressure into narrower scopes: document production, expert analyses (especially of trade secret scope, lost opportunity causation, and valuation), and the arbitrators’ evaluation. One point to watch is whether interim relief—protecting data, limiting competitive conduct, or preserving the status quo—will emerge in the arbitration or via court‑ordered relief prior to final proceedings.

Case Developments Commercial

ASB Agrees to NZ$135.6M Settlement in Banking Class Action

By John Freund |

ASB has confirmed it will pay NZ$135,625,000 to resolve the Banking Class Action focused on alleged disclosure breaches under the Credit Contracts and Consumer Finance Act (CCCFA), subject to approval by the High Court. The settlement was announced October 7, 2025, but ASB did not admit liability as part of the deal.

1News reports that the class action—covering both ASB and ANZ customers—alleges that the banks failed to provide proper disclosure to borrowers during loan variations. As a result, during periods of non‑compliance, customers claim the banks were not entitled to collect interest and fees (under CCCFA sections 22, 99, and 48).

The litigation has been jointly funded by CASL (Australia) and LPF Group (New Zealand). The parallel claim against ANZ remains active and is not part of ASB’s settlement.

Prior to this announcement, plaintiffs had publicly floated a more ambitious settlement in the NZ$300m+ range, which both ASB and ANZ had rejected—labeling it a “stunt” or political gambit tied to ongoing legislative changes to CCCFA.

Legal and regulatory observers see this deal as a strategic move by ASB: it caps its exposure and limits litigation risk without conceding wrongdoing, while leaving open the possibility of continued proceedings against ANZ. The arrangement still requires High Court consent before going ahead.