Assets can take many forms: cash, inventory, receivables, and… litigation? Most businesses view litigation only as a potential liability. Even if you’re the party bringing the claim, the prospect of attorneys’ fees, expert witnesses and miscellaneous expenses like court reporters, travel expenses and lost productivity sometimes makes litigating even the most compelling case a lose-lose situation. But, what if you could get paid for your lawsuit before you bring it? That’s where the ever-expanding option of third-party litigation financing steps in.
Third-party litigation funding is a financing alternative that has enjoyed rapid growth in the United States in the past decade. In its simplest form, a third-party funding firm provides money to a claimant to cover or supplement the cost of litigating a claim. The third-party funding firm is then repaid from whatever damages the claimant recovers from the defendant, less attorneys’ fees and expenses. The financing is often provided on a non-recourse basis, i.e., the borrower is not liable for the amount of the loan if the underlying lawsuit is unsuccessful.
The borrower maintains complete control over the case, including selecting counsel, approving settlements and choosing to go to trial, and the proceeds of the financing are immediately available. Typical cases that are attractive to litigation financiers include breach of fiduciary claims against directors and officers, commercial contract claims, intellectual property disputes and fraud. Whether the lender will approve financing and on what terms depends on the amount of damages at stake, the likelihood of recovery, and the number of claims securing the financing, i.e., a financier is likely to provide better terms if the financing is secured by several claims against several defendants, as opposed to one large claim where recovery is “all or nothing.”
According to a recent survey of U.S. commercial litigators conducted by the Burford Group, a London-based investment firm that provides third-party financing, in-house general counsels and chief financial officers forecast significant expansion of litigation finance. Fifty percent of AmLaw 200 litigators have had cases that could have used litigation funding, and 18 percent have a current case that could use funding. And, fifty-nine percent of general counsels and 71 percent of chief financial officers say that litigation finance levels the playing field between parties with unequal financial resources.
For centuries, common law prohibited non-parties from participating in lawsuits by the doctrines of maintenance and champerty. Maintenance is where a non-party provides economic support to a party to an existing lawsuit. Champerty, which is technically a form of maintenance, is where a party acquires an interest in the outcome of a lawsuit to which it is not a party based on economic or other support of one of the parties, typically the plaintiff. The majority of decisions issued in England and the United States have discarded dated concerns over maintenance and held in favor of third-party litigation financiers and their clients on the basis that, in many case, third-party financing grants access to justice that a financially strapped individual might otherwise be denied for purely economic reasons.
The primary concern most often expressed by critics of third-party litigation funding is that it will increase the number of frivolous lawsuits filed, but that concern misses the underlying rationale for investing in lawsuits in the first place. Third-party litigation financiers only invest in cases where the plaintiff’s claims are strong and the damages are easily demonstrable. Investing in frivolous cases is bad business. At this early stage, third party financiers are essentially cherry-picking the best cases with the highest likelihood of recovery. Not surprisingly, third-party litigation lenders include hedge funds, but more recently traditional lenders have gotten into the game, including two companies traded on the London stock exchange.
Funding can take numerous forms and is limited only by the imagination of the investors. Funds may be provided to the party to the litigation in exchange for an interest in the underlying litigation equal to the amount of the loan, plus interest – in some cases up to 40 percent. Alternatively, some lenders negotiate a multiple return of their initial investment, ranging from 2.5 to four times. It’s not cheap, but it may beat paying attorneys’ fees and experts on an hourly basis in some cases.
Disclaimer
The materials made available in this Blog have been prepared by Greensfelder, Hemker & Gale, P.C., are for general informational purposes only. The information contained in this Blog is general in nature and does not constitute legal advice or an opinion of counsel. Each legal problem is different, and past performance does not guarantee future results. You should not act on any of the information contained in this Blog without first consulting legal counsel. The choice of a lawyer is an important decision and should not be based solely upon advertisements.