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Legal and Ethical Considerations When Navigating Litigation Finance

By John Freund |

The following post was contributed by Jeff Manley, Chief Operating Officer of Armadillo Litigation Funding. 

In litigation finance, especially in mass torts and class actions, trust and success hinge on unwavering ethical practice and legal compliance. For attorneys and financial professionals navigating this complex field, a steadfast commitment to upholding ethical standards is not just ideal—it’s imperative. This article delves into the crucial considerations that must guide the intricate relationship between legal funding and professional integrity.

The Importance of Law Firm Independence

Law firm independence is paramount when it comes to funding arrangements, particularly within the complex sectors of mass torts and class actions. The imperative to maintain this independence while engaging with external funding sources necessitates a sophisticated approach to partnership. Firms must ally with financiers who not only understand the legal and ethical implications inherent to such cases but who also value the firm’s autonomy in decision-making processes. A skilled financier can guide firms through the nuances of these arrangements, ensuring that the terms of any financial agreement bolster the firm’s ability to act in its clients’ best interests without external influence. Drafting agreements with a clear delineation of roles and expectations, without compromising the firm’s command over legal strategy, is not solely a matter of due diligence—it’s a strategic endeavor to uphold the integrity and efficacy of the legal services provided.

Managing Conflicts of Interest

Managing conflicts of interest requires a collaborative effort between law firms and their funding partners. Identifying and mitigating potential conflicts at the intersection of funders, firms, and clients necessitates a united approach. Together, firms and funders should conduct thorough reviews of funding arrangements to spotlight areas where interests might diverge, ensuring that neither the firm’s allegiance to its client nor the client’s best interests are compromised. Adopting a joint strategy that aligns with ABA Model Rule 1.7 on conflicts of interest can fortify this alliance. This partnership approach to conflict management might include establishing shared guidelines for conflict checks, mutual disclosures to involved parties, and embedding protective measures in funding agreements that prioritize client outcomes. A cooperative oversight mechanism, possibly in the form of a committee comprising representatives from both the firm and the funder, can serve as a vigilant guardian of ethical integrity and client dedication, fostering a proactive culture of transparency and ethical vigilance.

Crafting of Finance Agreements

Moving into the structuring of financing agreements, it’s vital that financiers and law firms unite to craft solutions (and operating agreements) that are ethically grounded and legally sound, starting with shared due diligence. Both parties engage in a transparent exchange to ensure all legal and ethical considerations are meticulously evaluated, laying a groundwork that prioritizes the client’s best interests and compliance with regulations. The agreement’s structuring phase is an exercise in precision, balancing financial objectives with stringent ethical standards. Following the execution of the agreement, a concerted monitoring effort is essential to ensure ongoing compliance and address any ethical issues proactively. This cooperative stance not only fosters trust and transparency between the financier and the firm but also upholds the dignity of the legal profession and the rights of the clients they serve. This endeavor necessitates guidance from a trusted and sophisticated financier, ensuring that the partnership is built on a foundation of expertise and integrity.

Regulatory Compliance

Navigating this domain requires acute awareness of both state and federal regulations. This environment demands that law firms and financiers possess a deep understanding of the legal intricacies that define their operational landscape. The diversity of regulations across jurisdictions necessitates a partnership with well-respected funders, who bring sophisticated guidance to the table. Their expertise is invaluable in steering through the complexities of compliance, ensuring that practices are not only current but also anticipatory of the legal field’s dynamic evolution.

The future of litigation finance hinges on adaptability to regulatory changes, which are increasingly influenced by the sector’s growing recognition and its impact on access to justice. The call for enhanced clarity in regulations and the push for stringent disclosure practices indicate a trend towards standardization across the board. Law firms, guided by seasoned financiers, must remain vigilant and adaptable, ready to adjust their strategies to maintain compliance and ethical integrity. This proactive stance is crucial not just for navigating today’s regulatory challenges but also for shaping the future of ethical litigation finance.

Conclusion

In the rapidly shifting landscape of litigation finance, the value of a partnership with a well-respected financier cannot be overstated. Such collaborations are critical not only for steering through the regulatory complexities but also for shielding a firm against potential legal liabilities, including malpractice claims. As the industry continues to evolve, the guidance of experienced financiers becomes an indispensable asset, enabling law firms to anticipate changes, adapt strategies, and maintain compliance. This partnership does more than protect; it empowers firms to thrive amidst challenges, ensuring that their commitment to justice and client service is upheld. In the end, the journey through the ethical and regulatory intricacies of litigation finance is one best undertaken with a trusted financier by your side, crafting a future where the legal profession and its principles stand resilient.

About the author

John Freund

John Freund

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Commercial Deals

Litigation Funders Pursuing Law Firm Ownership Through Arizona ABS Rules

By Harry Moran |

As the legal funding industry continues to mature and grow, funders are keen to explore new opportunities to commit their capital to legal disputes, either through direct or indirect routes. One example of the latter approach can be found in law firm funding, with funders looking to embrace opportunities in jurisdictions that allow for outside investment or ownership of law firms.

An article in Bloomberg Law examines the influx of capital into Arizona from litigation funders and private equity firms who are seeking to acquire stakes in law firms, following the state’s reforms of rules governing law firm ownership and alternative business structures (ABS). The article states that of the 76 applications for an ABS that have been approved since 2020, at least 15 of these applications have involved litigation funders or private equity firms.

Bloomberg Law’s reporting reveals that the litigation funders behind these moves into ABS ownership models of Arizonan law firms include: Pravati Capital, Virage Capital Management, Counsel Financial, Bespoke Capital Consulting and 777 Partners. 

One example given is the 1787 legal group, which was formed in 2023 by Pravati Capital’s CEO Alexander Chucri, who owns 80 percent of the company through Arizona Legal Ventures LLC. Similarly, the article covers an ongoing venture pursued by Armadillo Litigation Funding alongside the Houston-based Johnson Law Group, the ABS Bay Point Legal Partners, and ARCHER Systems settlement administrator. In this case, both Armadillo and Johnson Law Group are already owned by the same individuals.

Boris Ziser, based partner and co-head of the finance group and global leader of the litigation funding practice at Schulte Roth + Zabel, told Bloomberg that Arizona’s reform of the ABS rules “didn’t introduce a new concept in terms of funding or financing of a law firm’s business, what it did was changed the way one can provide that funding.” Ziser goes on to explain that “what the Arizona ABS enables the law firm to do is actually funding, or investing, in an equity form rather than debt and that could have a lot of appeal.”

The article goes on to explain that despite these firms being based in Arizona, the ABS model still allows them to pursue case opportunities nationwide, as the lawyers at the firm can co-counsel with firms based in other states.

Case Developments Commercial

Deminor Funding Paralympic Athlete’s Lawsuit Against IPC

By Harry Moran |

Supporting access to justice remains one of the core benefits that litigation funding brings to legal systems all around the world, with third-party funders providing the desperately needed resources for smaller litigants to fight against well-resourced defendants. This is epitomized in a case where a funder is supporting a Paralympic athlete’s fight for justice against the sport’s governing body.

An announcement from Deminor Litigation Funding revealed that it is funding a lawsuit brought against the International Paralympic Committee (IPC) by Brazilian Para swimmer André Brasil. The lawsuit has its origins in World Para Swimming’s (WPS) revision of its classification system for the Paralympic Games in 2018, which led to André Brasil being reclassified as ineligible to compete. Following this decision, Brasil and the Brazilian Paralympic Committee (CBP) initiated legal proceedings against the IPC in Germany, arguing that the classification system violates both human rights, and German and European antitrust laws. 

At first, the Cologne Regional Court rejected these arguments and sided with the IPC, but this was eventually overturned by the Düsseldorf Court of Appeal, ruling that the IPC’s position as a monopoly meant that it ‘had an obligation to grant the Athlete a sufficient grace period in order to prepare him for the rule change and his potential ineligibility.’ The court ordered the IPC to pay André Brasil damages, but the IPC is now seeking to appeal the decision at the Federal Court of Justice.

André Brasil is being represented by Counsel Alexander Engelhard and a team of attorneys from Arnecke Sibeth Dabelstein. Engelhard expressed gratitude to have “a reliable and value-driven litigation funder in Deminor” supporting the lawsuit, and said that “together we will do what it takes to allow the Federal Court of Justice to decide in the Athlete’s favour.”

Dr. Malte Stübinger, General Counsel Germany at Deminor said, “By supporting André, we are advocating for a broader change that champions the rights and fair treatment of all athletes. It's essential that we address these systemic issues to ensure that the spirit of competition remains just and equitable for everyone.”

Announcements Commercial Fundraising

CASL Targets Australian Investors in Launch of New $150M Litigation Fund

By Harry Moran |

Leading Australian litigation funder CASL today launched a $150 million fund giving local investors the opportunity to participate in funding of selected new class actions including product liability and other mass consumer claims, commercial litigation and insolvency claims. 

CASL Fund 2 is expected to appeal to Australian sophisticated investors seeking exposure to a truly alternative asset class with attractive risk-adjusted returns and a capital-protected option. The fund is well suited to high-net worth individuals, family offices and foundations seeking to diversify into uncorrelated ESG assets. 

Co-founded in 2020 by two of Australia’s most experienced litigation funders, John Walker and Stuart Price, CASL has quickly established a reputation as an astute backer of legal claims in the competitive Australian market. The two completed actions filed with the backing of CASL’s inaugural $156 million fund since 2022 have returned 165% to investors; another 11 actions are in progress. 

Considered a pioneer of litigation funding in Australia, CASL Executive Chair John Walker co-founded IMF Bentham, now Omni Bridgeway, in 1998 while CASL CEO Mr Price was CEO of Litigation Lending Services for six years prior to co-founding CASL. 

Mr Price said litigation funding had an important role to play in levelling the legal playing field for victims of corporate or government misconduct, and investors were important partners in this process. 

“In global terms Australia is a receptive jurisdiction for the filing of group claims and funded actions but there is increasingly a premium on funders with proven expertise in sourcing and qualifying claims, and managing them to a successful resolution,” Mr Price said. 

“CASL brings that – our team has a proven record for deploying funds efficiently in support of worthy claims and generating strong financial outcomes for both claimants and investors. 

“We see a healthy pipeline of potential new actions in Australia with good prospects and considerable upside for investors willing to fund them. This fund will be a rare opportunity for investors to participate in a purely domestic litigation funding play backed by an experienced local team with a proven record for generating returns for investors. Early indications are we have $30 million in investor pre-commitments so there is clearly an appetite for litigation funding as an alternative asset class.” 

The combined success rate of 183 funded claims involving Mr Walker or Mr Price since 1996 is 92%. These cases have delivered settlement proceeds of $2.6 billion with an average duration of two and half years. 

The launch of CASL Fund 2 comes amid a changing landscape for class actions in Australia, with consumer actions overtaking securities actions as the leading type of funded claim, reflecting the development of effective legislation to hold large corporates to account. 

An innovative feature of the CASL Fund 2 offer is the ability of investors to elect a capital-protected allocation option with a discounted target return.

Key features of the offer include:

 CASL Fund 2: Up to $150m, Class A and Class B Units
 Class AClass B
Capital protectionYesNo
Fund term5 years
(2 years investment, 3 years harvest)
Hurdle rate per annum10%12%
Performance fee (after hurdle, fees and costs)40%25%
Management fee (% of capital commitment) per annum2%2%

Funds raised will be deployed only into new actions, with all existing funded matters funded by CASL Fund 1. No distinction will be made between Class A and B funds for the purposes of funding actions. 

An estimated $200m to $300m is deployed by litigation funders supporting legal claims in Australia, excluding law firms’ funding of actions from their own balance sheets. The most active sources of funding for Australian actions are based offshore and include hedge funds and specialist asset managers, many domiciled in tax-friendly jurisdictions such as the Cayman Islands and Channels Islands, attracted to Australia’s relatively receptive environment for group claims. 

CASL’s Fund 2 will be an Australian-domiciled unit trust. Bell Potter is lead manager for the CASL Fund 2 capital raise. 

Mr Price said: “Agility and responsiveness are important in selecting claims and bringing litigation – being based locally, CASL has the advantage of being able to move and make decisions quickly when required.” 

To coincide with the fundraise CASL announced that Ian Stone, former Group Managing Director and CEO of RAA, would join the Board of CASL’s Trustee entity CASL Funder Pty Limited. Tania Sulan, former Managing Director and Chief Investment Officer - Australia for Omni Bridgeway will also join the CASL Investment Committee. Visit www.casl.com.au for more information about CASL Fund 2.

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