Fall 2014 • Issue 53, page 10

Litigation Financing Can Greatly Benefit Receivership Estates

By Doumani, Peter*

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?

A 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 the estate.

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 successful.

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 claim.

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 undertaking.

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:

  1. What type of cases does the funder finance? Consumer, commercial, both?

  2. Does the funder require a minimum investment amount and, if so, what is it? What is the maximum amount?

  3. 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?

  4. How long does it take the funder to underwrite and make a determination on whether it will fund the case or not?

  5. Does the funder participate in the management of the case? (Note: It shouldn't.)

  6. Will the funder pay legal fees through the client? Through the attorney? Will it do either?

  7. 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 successful resolution.)

  8. 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?

  9. Are there certain jurisdictions where the funder cannot operate? If so, is my case in one of those jurisdictions?

  10. 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.

2 Id.

*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.