The development of financial instruments is imperative to streamlining investment processes in our lives. In the legal field, litigation finance is no exception. Third-party litigation finance helps litigators acquire working capital for cases. It also rewards investors with a potential financial upside when the uncertainty of litigation results in conversion to a certain present value by assigning probabilities on different outcomes.[1]
However, in spite of the benefits provided by litigation financing, it might not yet be a popular financial vehicle among litigators, especially defense lawyers. For example, in a poll during the 16th Annual Legal Malpractice and Risk Management Conference, only about 35% of the attendees, mostly defense lawyers and representatives from the insurance industry, were involved in a case where the plaintiff received third-party funding.[2] In other countries, however, litigation financing may have had a much more substantial role.[3] Countries including the United Kingdom, Australia, and South Africa already have a mature litigation finance market.[4] Certain firms now specialize in litigation finance,[5] and the development of litigation finance firms would encourage wider adoption of this method.
Plaintiff-side lawyers usually seek out alternative financing if they want to work out a different fee arrangement with their clients.[6] Once a lawyer identifies a litigation finance firm, she provides certain basic information, such as jurisdiction, potential damages, and the law firm’s budget.[7] The client’s information will not be released until later in the process.[8] Prior to drafting a funding proposal, the litigation finance firm will conduct due diligence in identifying the lawyers and the parties.[9] Further, there are usually two kinds of funding arrangements: funding a client in a single case, and multiple-case portfolio funding.[10] Because the fee structures between the lawyer and the fund are different in each arrangement, litigation funding can potentially shape trial strategies and gives the lawyer different perspective on settlement. For the purpose of better financial outcomes, litigation fund firms may push for a quick settlement to lower losses or for a longer trial for better returns.
The financial reality of litigation financing complicates the much wider policy concern for litigation financing to “broaden access to justice by providing plaintiffs with resources to litigate.”[11] However, lenders are incentivized to fund winning cases. Most litigation financings are nonrecourse, which means that the lenders will not be repaid unless the party wins the case.[12] Legal finance is especially important in bankruptcy and restructuring cases because it can serve as a funding tool for the debtors-in-possession (“DIPs”.) Companies in bankruptcy often choose to partner up with a legal financial provider on a nonrecourse basis for their DIP cash needs.[13] After all, DIP claims are paid out before any other unsecured claims in bankruptcy[14] and therefore, lenders will be more motivated to lend.
[1] See Steven Garber, Alternative Litigation Financing in the United States: Issues, Knowns, and Unknowns, RAND Corporation Occasional PapersOP-306-LFCMP __ (2010), https://www.rand.org/pubs/occasional_papers/OP306.html.
[2] Joan C. Rogers, Litigation Funding on Rise in Big Cases, Panel Says, Bloomberg: News (Mar. 23, 2017), https://www.bna.com/litigation-funding-rise-n57982085617/.
[3] Id.
[4] Id.
[5] See The Leading Global Finance Firm Focused on Law, Burford Capital, http://www.burfordcapital.com/about/.
[6] Rogers, supra note 2.
[7] Id.
[8] Id.
[9] Id.
[10] See id.
[11] Stan Hill, Strategic Discovery of Third-Party Litigation Funding in Class and Collective Actions, National Law Review (Mar. 14, 2017), https://www.natlawreview.com/article/strategic-discovery-third-party-litigation-funding-class-and-collective-actions.
[12] See Rogers, supra note 2.
[13] See Expert Q&A on Bankruptcy Litigation Financing, Burford Capital (Feb. 27, 2019), http://www.burfordcapital.com/blog/expert-bankruptcy-litigation-financing/.
[14] See 11 U.S.C. §364 (2016).
