The Litigation Funding and Transparency Act has been reintroduced by Republican Senators Grassley (Iowa); Thom Tillis (N.C), JohnCronyn (Texas), and Ben Sasse (Nebraska). This legislation would require parties in class action lawsuits to disclose third-party funding arrangements, positing that this transparency will head off potential conflicts of interest and bring accountability to the industry. A prior version of this bill was introduced in 2017, but failed to gain any traction. The legislation is supported by in-house counsel for 30 major U.S. companies, including General Electric, AT&T, Chevron, Google, Johnson & Johnson, and others. Some litigation companies, including Burford and Vannin Capital support limited disclosures, but find that the proposed legislation is overreaching and would permit defendants in legitimate lawsuits to gain an improper advantage.
New York State Senators Leroy Comie (D. 14th) and Michael Ranzenhofer (R. 61st) have co-sponsored new legislation that would subject consumer litigation funding transactions to state regulation – Senate Bill 3651 – The Consumer Litigation Funding Act.”. A “same as” bill has been introduced in the New York Assembly by Assemblyman Erik M. Dilan (D. 54th). The proposed legislation, if passed, will require certain contract requirements, consumer disclosures, and registration with the Secretary of State for consumer litigation funding companies.
The Georgia Supreme Court recently ruled in Ruth v. Cherokee Funding, LLC, that funding provided to plaintiffs during a pending lawsuit is not a loan under Georgia law. The court reasoned that since the funders did not expect repayment if the plaintiffs lost their lawsuits, the agreements were not loans under Georgia’s Payday Lending Act or the Industrial Loan Act. This decision was a win for the litigation funding industry. In an article in Legal News Line, executive director of the American Legal Finance Association was quoted as saying: “The American Legal Finance Association (ALFA) applauds the Georgia Supreme Court’s decision today recognizing the fundamental differences between pre-settlement advances and loans.”
The New York Times published an interesting article on May 30, 2017 – “After Divorce, Giving Our Kids Custody of the Home”. It describes an interesting arrangement where a divorced couple keep the children in the family home, and the mom and dad move in and out of the family home according to a prearranged schedule. One can’t help but wonder if the next step is the creation of a company – limited liability company or S-corp to manage the finances of the nest. Could be a win-win for all involved.
Litigation funding has moved into a new realm – crowd funding. With the cost of a divorce estimated to be as much as $30,000.00, it is no wonder that formerly happy couples are looking for ways to finance their breakup. Several crowd funding websites have a section dedicated to divorce: Plumfund and FundedJustice are two we recently looked at. This is definitely a new style of litigation funding. This definitely takes “litigation funding” to a new place. The jury is out.
In an interesting twist, a note published in the Michigan Law Review “Eliminating Financiers from the Equation: A Call for Court-Mandated Fee Shifting in Divorces” advocates fee shifting as a way to “obviate the need for …financing firms that improperly profit from divorce and whose services come with many unwelcome strings attached.” While the proposed solution of fee shifting is novel, the problems the Note’s author cites as being associated with divorce funding are the same dredged up by all opponents to the many varieties of litigation funding: interference with the attorney/client relationship; conflicts of interest; unreasonably high, potentially usurious fees; and the settlement deterrent. Given that many divorces involve out of court settlements, and no divorce attorney can take on a client on a contingency basis, court approved fee shifting is not likely to eliminate the need or the desire for a non-monied spouse to seek third party financing.
Despite warnings from organizations like the U.S. Chamber Institute for Legal Reform that third party litigation funding will increase and prolong litigation, the financing of litigation and law firms seems here to stay. Earlier this summer, Burford Capital Limited announced its plans to expand with several new business lines, and according to a recent study by Burford, 79% of lawyers polled think litigation finance is a useful tool. With litigation costs sky-rocketing it is no wonder that plaintiffs, defendants and the law firms that represent them are looking for new ways to finance their lawsuits.
Ruling on a motion to dismiss, New York Supreme Court Justice Shirley Werner Kornreich refused to dismiss Hamilton Capital VII’s lawsuit against Khorrami LLP, a Los Angeles based plaintiffs firm. Justice Kornreich rejected claims that the financial arrangement amounted to illegal fee sharing and found the financial arrangement supported by public policy. “Modern litigation is expensive, and deep pocketed wrongdoers can deter lawsuits from being filed if a plaintiff has no means of financing her or his case. Permitting investors to fund firms by lending money secured by the firm’s accounts receivable helps provide victims their day in court.” Hamilton Capital VII, LLC v Khorrami, LLP, 2015 N.Y. Misc. LEXIS 2954, *20, 2015 NY Slip Op 51199(U), 9 (N.Y. Sup. Ct. Aug. 17, 2015).
Yesterday the Wall Street Journal reported that the founders of BlackRobe Capital Partners LLC were closing up shop. The fund, which launched in 2011, had apparently failed to attract sufficient capital. The litigation finance industry has grown significantly in the past five years, but remains fragmented and difficult to analyze. Some investors like the uncorrelated nature of this emerging asset class, but others find the returns too irregular and of a uncertain duration. Binary risks are not for everyone.
Edward Stone and Steve Huttler of Sadis & Goldberg LLP collaborated on and contributed a chapter entitled “Litigation Finance Meets Intellectual Property” for the Practicing Law Institute’s IP Monetization 2012 seminar course book.
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