As a receiver, have you ever encountered a situation
where you have a very strong claim against a third-party but lacked the
financial ability to prosecute that claim?|
few years ago, while I was acting as receiver over a subcontracting
company, I found myself in that position. The company had a very strong
claim against the prime contractor, who in essence had driven the
subcontractor out of business through inappropriate actions. A reasonable
analysis of the claim indicated that it had a value of approximately $20
million, but it would have cost at least $1 million in legal fees and
expenses to prosecute the claim.
The estate did not have the financial ability to
pursue this claim and the lender, which had requested the appointment of
the receiver, was not willing to advance monies even though the lender
believed that the case was a winner. Assumption of such risks were not in
the normal course of business for the lender, so it was understandably
reluctant to finance the claim.
I spoke with numerous large, well-known law firms
that had substantial construction contract litigation experience, but was
unable to get any of them to take the case on a contingency basis. It is
very rare for the larger firms to take cases on a contingency fee basis. I
did find one, lesser-known firm that was willing to take the case on a
contingency fee basis, and I engaged that firm. Fortunately for me, the
firm did an excellent job, which resulted in a very favorable outcome to
This experience made me realize the problems
facing a receiver in pursuing costly claims that can greatly enhance the
value of the estate. Many of those problems can be overcome by the use of
third-party litigation finance.
Contingency fee arrangements with attorneys in
cases such as personal injury, product liability, wrongful death, and
insurance bad faith have been available for many years. However, similar
arrangements for commercial litigation are extremely difficult to obtain.
Third-party litigation finance, also commonly known as alternative
litigation finance or third-party funding, involves an established
financing company providing all of the costs of commercial litigation,
legal fees and expenses, in exchange for a percentage of any award or
settlement obtained. Litigation finance is done on a non-recourse basis.
The plaintiff has no obligation to repay these monies if the case is not
Litigation Finance in Receivership Litigation
In recent years, trustees in bankruptcy have used litigation finance to
pursue claims for the benefit of their bankruptcy estates. In
receiverships, state court judges have approved contingency fee
arrangements with law firms that have represented receivers as plaintiffs.
It is expected that they will also approve of arrangements with
third-party litigation financers because essentially the effects on the
receivership estate are the same. As discussed below, in many cases,
third-party financers provide additional value to the case.
Litigation finance for receiverships can become a
viable option in the same way that it has for trustees in bankruptcy.
Confidentiality agreements between funders and clients make it difficult
to quantify the number of bankruptcy cases leveraging third-party
financing, but the existence is prevalent. In a 2013 article, Third
Party Litigation Funding in Bankruptcy Cases,1
author Patrick M. Jones states, “Third-party litigation funding seems like
a natural fit for bankruptcy-related litigation.” The example given in the
article is of a typical Chapter 11 bankruptcy case where it is easy to
liquefy the hard assets of company, but the remaining soft assets in the
form of causes of action such as “preference and avoidance actions, breach
of contract claims, and breach of fiduciary duty claims which may be
difficult and expensive to monetize.” Pursuing these causes of action is
expensive, and just like in my experience, finding a qualified lawyer to
work on contingency is very difficult. Third-party litigation funding
allows the receiver to pursue the claim without risk and “assist in the
efficient, comprehensive liquidation of estates and provide the maximum
benefits for creditors.”2
The Litigation Financing Process
The review and approval process varies greatly among the more established
litigation financiers. The first step in the process, common to most
financiers, is a preliminary assessment of the claim. This generally
involves a brief initial legal review to verify that the basic
characteristics of the claim (i.e., subject matter, potential damages,
court jurisdiction, etc.) meet investment profiles.
It is in the second phase of the underwriting
process where one will find a broad variance amongst financiers. The most
sophisticated processes include a comprehensive risk analysis of the
matter. This will include a more extensive and thorough review of the
legal aspects of the claim and a risk evaluation that may include
presenting the information to separate panels of experienced trial
lawyers, judges, and expert witnesses. Jury insights may also be obtained
through sophisticated online surveys that combine the unique benefits of
small-group qualitative research and large-group quantitative samplings.
Some financiers use technology to perform case
risk analysis and conduct underwriting activities. Litigation finance
company, Vinson Resolution Management, developed The VRM Evaluation
Protocol,SM a proprietary technology that employs a scientific approach to
evaluate the perceived merits of the claim and the potential for achieving
a satisfactory recovery. Led by Dr. Donald E. Vinson, the “founding
father” of the jury and trial consulting industry, The VRM Evaluation
Protocol,SM is built upon mathematical modeling techniques designed to
perform a statistically reliable, multi-dimensional risk analysis of a
Summarizing VRM’s unique approach, Dr. Vinson
commented, “Our risk analysis tools are based on sophisticated social
science techniques that we have successfully employed to develop effective
models for assessing litigation-related matters. It takes into account how
a dispute is likely to be perceived and accessed by: experienced trial
lawyers, judges, expert witnesses and jurors. The evaluation also accesses
the impact of trial venue, estimates the time frame for bringing a case to
a successful resolution, and weighs the costs of pursuing the litigation
against the likelihood of obtaining a recovery.”
Benefits to the Receivership Estate
An accurate screening mechanism – While the value of litigation
funders is predominantly thought to be in the funding they can provide,
receivers can also benefit enormously from the rigorous due diligence they
perform when evaluating a claim as a possible investment. Given that these
funders typically provide financing on a non-recourse basis, they have a
strong incentive to accurately assess the risks in pursing litigation and
are unencumbered by those factors that often cause counsel to overestimate
their odds of success. Such truly unbiased, independent analysis can help
receivers make informed decisions regarding claims they are considering
A means to obtain court approval – A
receiver can use the unbiased, objective assessments these firms provide
to demonstrate the quality and strength of a claim in front of the
appointing judge. Furthermore, the receiver’s billable hours for time
spent working on the claim may be part of the financing agreement and paid
by the litigation funders and not the receivership estate.
Absorb the risks inherent in litigation matters
- Typically, receiverships advance funds for litigation and assume the
financial risks in pursuing litigation. But with third-party litigation
funding, the financial burden and risks can be shifted to the funder. If
there is a settlement or judgment, the receivership receives capital for
the estate. If the receiver fails to obtain a recovery, the funds advanced
to prosecute their claim do not have to be repaid.
Is Litigation Finance Right for Your Case?
Litigation finance is a growing phenomenon in the United States and has
emerged as a viable solution for the receivership estate to pursue
meritorious litigation with quality counsel of your choosing. When looking
for a third-party funder, here are some questions to ask to determine if
it’s right for you and your case:
What type of cases does
the funder finance? Consumer, commercial, both?
Does the funder require
a minimum investment amount and, if so, what is it? What is the maximum
On what does the funder
base its returns? Percentage of the recovery? (If so, what is the
minimum amount of total damages required by the funder?) Multiples on
the amount funded? Combination of the two?
How long does it take
the funder to underwrite and make a determination on whether it will
fund the case or not?
Does the funder
participate in the management of the case? (Note: It shouldn't.)
Will the funder pay
legal fees through the client? Through the attorney? Will it do either?
Will the funder work
with the handling attorney on other than a 100% contingency fee
arrangement? (i.e., where the funder pays 100% of all fees and expense.)
What about alternative or hybrid fee arrangements? (i.e., funder pays
handling attorney a reduced hourly rate with a kicker upon obtaining a
Does the funder retain
the right to cease funding at any time? Or is it a limited right? What
happens if the funder exercises that right? Does it retain an interest
in the case or does it give up that right?
Are there certain
jurisdictions where the funder cannot operate? If so, is my case in one
of those jurisdictions?
- Does the funder offer any "value-adds" with its
financing? (i.e., Reduced rates on contractors with whom the funder has
partnered, or "sister-services" offered by the funder.)
1 Jones, Patick M. “Third Party
Litigation Funding in Bankruptcy Cases.” Law Journal Newsletters: The
Bankruptcy Strategist. January 2013. Vol. 30, Number 3.
*Peter J. Doumani has served as a State Court Receiver in
approximately 50 cases. He has an extensive background in finance and
dispute resolution and is a graduate of Loyola Law School, Los Angeles.
Currently, Peter serves as the Director of Client Relations for Vinson
Resolution Management, a leader in the Litigation Finance industry.