ALTERNATIVE LITIGATION FINANCE: Tales from the Trenches - PowerPoint PPT Presentation

1 / 62
About This Presentation
Title:

ALTERNATIVE LITIGATION FINANCE: Tales from the Trenches

Description:

Nebraska No communication between the attorney and the civil litigation funding company as it pertains to the nonrecourse civil litigation funding contract shall ... – PowerPoint PPT presentation

Number of Views:280
Avg rating:3.0/5.0
Slides: 63
Provided by: Eli4153
Category:

less

Transcript and Presenter's Notes

Title: ALTERNATIVE LITIGATION FINANCE: Tales from the Trenches


1
ALTERNATIVE LITIGATION FINANCE Tales from the
Trenches
LINZER ASSOCIATES, P.C.
  • Presenters
  • Kenneth A. Linzer, Esq., LINZER ASSOCIATES,
    P.C.
  • Elisha E. Weiner, Esq., LINZER ASSOCIATES, P.C.

2
Outline
  • What is ALF?
  • Brief History of Litigation Finance Companies
  • Legal Challenges
  • Where is an ALF contract most likely to be
    enforceable?
  • How to avoid becoming a discovery dispute pawn
  • Could a financer be held liable for the other
    sides attorneys fees?
  • ALF as the Newest Asset Class and Wall Street
  • Concluding Remarks and Q A Time

3
  • Litigation finance is an emerging multi-billion
    dollar market in the U.S.
  • This asset class is yielding highly attractive
    returns
  • for pioneering investors -- . . . .
  • Brochure for a recent Litigation Finance and
    Investment Summit
  • held in April 2011 a few blocks from the NYSE.

4
Will the next asset allocation include commercial
litigation cases in addition to equities, bonds,
cash and gold? If so, will niche markets for
diversified litigation transfer risk products
develop?
5
Much like the commodities market, will there
come a time when you can buy and sell product
liability cases, mass tort claims, shareholder or
corporate governance claims? Will such claims
be traded on a spot market or will an options
market develop for these types of claims
6
Will the next referral call come from a hedge
fund rather than your clients general counsel?
7
Phrases for the new world of litigation finance
  • litigation risk capital
  • institutional capitals ability to scale a large
    law firms risk
  • bespoke deals
  • you got to bet the jockey as much as the horse
  • the proper alignment of all participants
    (attorneys, clients, ALF) interests
  • the role of market inefficiencies in lawsuits
    attracting sizeable capital interest
  • not wanting to take the client off the risk

8
Is Alternative Litigation Finance just another
form of off-balance sheet funding for
corporations to fund their commercial
litigation?
9
One way to help the imbalance re a
misalignment of interests among the various parts
of this puzzle is to introduce risk capital into
the proposition which tends to balance out the
imbalances.
10
Why do people speak of it as an asset class?
  • As an asset class these claims or cases can it
    be treated as tangible and subject to valuation.
  • Unfortunately, until now, many claimants couldnt
    afford to maximize the value of their asset
    through the prosecution of the claim whether by
    arbitration or litigation.
  • As a result, without litigation financing, the
    asset is devalued badly or lost completely.

11
The Macro Environment
  • Investing in commercial disputes takes 2 basic
    forms
  • 1. Providing investment capital to a party in a
    dispute which will be used to pay the costs of
    dispute resolution (typically litigation or
    arbitration).
  • 2. Providing capital to monetize the expected
    outcome of a dispute before its been concluded.

12
Macro Environment (cont)
  • Businesses to whom this capital is provided
  • Businesses with liquidity, budgetary or resource
    constraints on ability to pay the legal fees and
    costs of disputes in which they are involved P
    or D.
  • Businesses with no such financial constraints,
    but prefer not to use their own capital to pay
    the costs of disputes.
  • Businesses with expected recoveries from claims
    or disputes that would like immediate capital for
    business purposes instead of waiting for the
    expected recovery to be paid.
  • Law firms who are willing to provide clients with
    alternative fee arrangements but whose propose
    arrangements dont go as far as the clients would
    like, maybe because they dont cover the fees of
    expert witnesses or forensics.

13
Why is capital flowing into the claim investment
marketplace?
  1. Anachronistic model of big law firm economics
    hourly rate and inverse relationship between
    hours and results
  2. Sophistication of corporate legal markets - In
    case one general counsel of a major Fortune 100
    company legal department is itself a profit
    center.
  3. Off balance sheet financing concepts
  4. Desire for corporate risk mitigation or to shift
    the risk of loss
  5. Non-correlated investment criteria
  6. Recession-proof business
  7. Counter-cyclical nature of claim finance space
  8. Pure hedge against risk of pursuing an asset of
    speculative value

14
  • Essentially, this industry is monetizing a
    legal claim to reduce to present value the
    expected income stream of that claim to generate
    a return for an investor who is looking for an
    absolute, uncorrelated investment with a zero
    beta.

15
Overview of ROI
  • Pricing of investments is based on a multiple of
    capital invested (3 or 4 to 1) or a portion of
    recovery (20 to 40).
  • Typical time line to recovery 2 or 3 years.

16
Types of Claims
  • Intellectual Property claims
  • Bowie Bonds - see Intellectual Ventures, Inc.
    funding
  • Patent infringement or patent licensing claims
  • Antitrust
  • Price Fixing

17
Investment Portfolio Strategy and Business Model
  • We do not just write checks. We act as business
    advisors to structure financings, drawing upon a
    team of proven and renown litigators and other
    interdisciplinary specialists.
  • Our goal is not only to arrange critical funding,
    but to improve the odds of a favorable outcome.
  • Using a portfolio investment approach, we seek to
    provide investors with attractive dividend
    returns and capital appreciation.
  • We are not simply lawyers although having great
    lawyers is important. Rather, we are litigation
    managers and investment professionals who
    understand that disputes exist in a broader
    financial and management context.
  • Disputes and claims are financial assets, capable
    of being bought, sold, securitized,
    collateralized. Just as corporations rely on
    bankers to structure equity and debt financings,
    they rely on us to structure dispute financings.
  • Burford Annual Report Chairmans Statement

18
History of Litigation Finance Companies
  • In the beginning there were . . .
  • Consumer or retail claims
  • consumer - individual or domestic disputes
  • personal injury
  • class actions
  • mass tort
  • divorce cases

19
Next, came Australia . . .
  • First there was Insolvency Management Fund
    Limited (IMF)
  • Started by Hugh McLernon (ex-prosecutor) in 1989
  • Initially funded litigation brought by bankruptcy
    trustees, who had statutory authority to sell
    interests in estates to finance recovery efforts.

20
  • IMF has funded cases in the past decade that have
    resulted in settlements and awards totaling
    almost A 900 Million.
  • Currently has in excess of A 1.7 Billion in
    active claims under management.
  • Went public in 2001 - listed on the Australian
    Securities Exchange
  • Stock price has risen from less than a A .25 a
    share in 2002
  • To almost A 1.90 in May 2011.

21
  • IMF contracts with individual plaintiffs to
    finance their case,
  • offering security against costs and paying the
    lawyers fees,
  • all in exchange for 30 to 35 of the total
    settlement.
  • Typical case funded is A 5.4 MM (USD 5 MM)

22
Then immigrated to Europe . . .
  • UK about 15 years ago
  • Calunius Litigation Risk Fund, UK
  • Harbour Litigation Funding, UK
  • Germany, Switzerland, Holland about 10 years ago
  • Germany Allianze ProzessFinanz and Deutche Bank
  • Switzerland Credit Suisse

23
And, now, in addition to IMF on the Australian
Securities Exchange, we have . . .
  • UK - Publically traded funds
  • Juridica Capital
  • Burford Capital
  • Headquartered on the Isle of Guersney, U.K.
  • Listed on the Alternative Investments Market on
    the London Stock Exchange.

24
Litigation Finance can be either plaintiff
side or defendant side
25
SIMPLE LITIGATION FINANCE ECONOMICS
  • Initial cost of financing the case C
  • E.g. 1,000,000
  • Total value of benefit if case settles or is won
    B
  • E.g. 10,000,000
  • Probability of settling or winning P
  • E.g. 10, 20 . . .
  • Financiers return on investment R
  • E.g. 3,000,000
  • Financier will invest where C lt P x B
  • 1,000,000 lt .10 x 10,000,000 1,000,000

26
SIMPLE LITIGATION FINANCE ECONOMICS
  • But, in order to get expected ROI, financier must
    obtain R
  • 1,000,000 lt .20 x 10,000,000 2,000,000
  • 1,000,000 lt .30 x 10,000,000 3,000,000

27
Defense side Litigation Funding
  • Motion for Summary Judgment or Summary
    Adjudication
  • Defendant considers filing MSJ with cost estimate
    of 50,000.
  • Goes to counsel and says will pay 25,000.
  • If successful and case dismissed or damages
    minimized
  • will pay 75,000.
  • ALF pays difference - 25,000 against possible
    recovery of
  • 50,000
  • 75,000 - 25,000 50,000
  • 200 return on investment

28
Damages Minimization Example
  • If company sued and damages judgment likely
  • defendant company attempts to contain costs
    (legal fees)
  • by bringing in ALF to pay its legal fees on a
    sliding scale of recovery.
  • Essentially, ALF buys a portion of the claim
    defense for a share of the damages minimized.

29
Defense Example - Economics
  • ALF invests in case and adjusts the relative risk
    calculus for share of damages minimization.
  • Possible damages exposure 100,000,000
  • ALF investment 5,000,000
  • If damages limited to 50,000,000
  • ALF recovers 15,000,000 to 25,000,000
  • Defendant company
  • total out of pocket 65,000,000 to
    75,000,000
  • Yields savings of 25,000,000

30
Challenges to ALF
  • Enforceability of the ALF Contract
  • Discovery of documents and information
    communicated to Financer
  • Liability for Attorneys Fees

31
Enforceability of the ALF Contract
  • Maintenance
  • Champerty
  • Usury
  • Unregistered Securities
  • Unconscionability/Duress
  • Public Policy

32
Saladini v. Righellis, 687 N.E.2d 1224 (Mass.
1997)
Held champerty and maintenance no longer
applicable in Mass.
33
Osprey, Inc. v. Cabana Ltd. Partnership, 340 S.C.
367 (S.C. May 15, 2000)
Held champerty not a defense in SC
34
Rancman v. Interim Settlement Funding Corp. 789
N.E.2d 217 (Ohio 2003)
Held Champerty is alive and well in Ohio.
35
Echeverria v. Estate of Lindner, 2005 NY Slip Op
50675U (N.Y. Sup. Ct. 2005)
Held Not champertous even though champerty
exists by statute in NY (Judiciary Law 489),
BUT it is usurious!
36
Anglo-Dutch Petroleum Int'l, Inc. v. Haskell, 193
S.W.3d 87, 90 (Tex. App. Houston 1st Dist. 2006)
Held Not usurious because its not a loan.
37
Legislation
  • Maine, Ohio, and Nebraska are the only states so
    far that have statutes defining and regulating
    ALF
  • There is pending legislation in other states,
    including Kentucky and Illinois

38
Enforceability Summary
  • Are you in a state that recognizes champerty,
    doesnt recognize champerty, or is somewhere in
    the middle?
  • What is the risk threshold in your state at which
    it will be treated as an investment rather than a
    loan and therefore not usurious?
  • What are the best practices in your state for
    ensuring that the contract is fair?

39
Champerty and Maintenance
  • Yes Champerty
  • Pennsylvania (Kenrich Corp v. Miller, 377 F.2d
    312, 314 (3rd Cir. 1967))
  • Oklahoma (Parks v. American Warrior, Inc., 44
    F.3d 889, 893 (10th Cir. 1995))
  • Alabama (Wilson v. Harris, 688 So. 2d 265, 270
    (Ala Civ. App. 1996))
  • Nevada (Del Webb Communities v. Partington, 2009
    WL 3053709 (D. Nev. Sept. 18, 2009))
  • Officious Intermeddler
  • New York (Judiciary Law 489 but, construed
    narrowly in Fairchild Hiller Corp v. McDonnell
    Douglas Corp., 270 N.E.2d 691, 693 (NY 1971))
  • Florida (Kraft v. Mason, 668 So.2d 679 (Fla.
    Dist. Ct. App. 1996))
  • No Champerty
  • Massachusetts (Saladini v. Righellis, 687 N.E.2d
    1224 (Mass. 1997)
  • South Carolina (Osprey, Inc. v. Cabana Ltd.
    Partnership, 340 S.C. 367 (S.C. May 15, 2000))
  • California (Muller v. Muller (1962) 206
    Cal.App.2d 731, 733 Estate of Cohen (1944)  66
    Cal.App.2d 450, 458)
  • New Jersey (Bigelow v. Old Dominion Copper Mining
    Smelting Co., 71 A. 153, 167 (N.J. Ch. 1908))

40
Usury How risky does the investment actually
have to be?
  • NJ Dopp v. Yari, 927 F.Supp. 814 (D.N.J. 1996)
  • MT Nyquist v. Nyquist, 255 Mont. 149 (Mont.
    1992)
  • MI Lawsuit Financial, LLC v. Curry, 261 Mich.
    App. 579 (Mich. Ct. App. 2004)
  • FL Kraft v. Mason, 668 So.2d 679 (Fla. Dist. Ct.
    App. 1996)
  • NY Echeverria v. Estate of Lindner, 2005 NY Slip
    Op 50675U (N.Y. Sup. Ct. 2005)
  • TX Anglo-Dutch Petroleum Int'l, Inc. v. Haskell,
    193 S.W.3d 87, 90 (Tex. App. Houston 1st Dist.
    2006)

41
Unconscionabilty/Fairness
  • Osprey factors for fair and reasonable under the
    circumstances
  • Equal bargaining power
  • Aware of terms and consequences
  • Necessity of Financers help
  • Disproportionate share to Financer
  • Extent of officious intermeddling

42
Enforceability of Arbitration Clause
  • ST Oil Equipment Machinery, Ltd v. Juridica
    Investments Limited 2011 WL 864637 (S.D. Tex.
    March 10, 2011)

43
How can you protect against intrusive discovery
about alternative litigation financing?
  • Is attorney-client privilege waived by disclosure
    to potential financer?
  • Are documents shared with a potential financer
    discoverable?

44
Leader Technologies, Inc. v. Facebook, Inc., 719
F.Supp.2d 373 (D.DE. 2010)
Held discoverable, but that doesnt necessarily
mean admissible
45
Whats the Federal Rule?
  • 9th Circuit exemplifies the trouble
  • Hewlett-Packard Co. v. Bausch Lomb, Inc. (1987)
    115 F.R.D. 308
  • Unless it serves some significant interest
    courts should not create procedural doctrine that
    restricts communication between buyers and
    sellers, erects barriers to business deals, and
    increases the risk that prospective buyers will
    not have access to important information that
    could play key roles in assessing the value of
    the business or product they are considering
    buying.
  • Nidec Corporation v. Victor Company of Japan
    (2007) 249 F.R.D. 575
  • While JVC litigation abstract might have been
    helpful to facilitate the potential commercial
    transaction, it did not further a common legal
    strategy in connection with the instant
    litigation.

46
How different are state privileges?
  • Titan Investment Fund II, LP v. Freedom Mortgage
    Corp. 2011 WL 532011 (Supp. Ct. DE, February 2,
    2011)
  • Held failed to meet burden to show common
    interest doctrine extends to parties engaged in a
    collaborative business venture
  • STI Outdoor LLC v. Superior Court (2001) 91
    Cal.App.4th 334
  • Held no waiver because disclosure to third party
    was reasonably necessary to further the interest
    of both parties in finalizing negotiations.

47
Discovery Summary
  • Confidentiality Agreement
  • Argue Prejudice
  • Argue Work Product
  • Maybe its discoverable, but not admissible
    (argue prejudice)

48
Alternative Litigation Financers Privilege?
  • Do we need one?
  • Should we have one?
  • Less Funding of Weak Cases
  • Lower Cost of Money

49
Litigation Financers Privilege What would it
look like?
  • Nebraska
  • No communication between the attorney and the
    civil litigation funding company as it pertains
    to the nonrecourse civil litigation funding
    contract shall limit, waive, or abrogate the
    scope or nature of any statutory or common-law
    privilege, including the work-product doctrine
    and the attorney-client privilege.R.R.S. Neb.
    25-3306

50
Liability for Attorneys Fees?
  • Abu-Ghazaleh v. Chaul, 36 So. 3d 691, 692 (Fla.
    Dist. Ct. App. 3d Dist. 2009)

51
Litigation Finance as the Newest Asset Class and
Wall Street
  • Selection Criteria
  • Need to balance the competing interests -
    client, law firm, investors
  • Risk of adverse selection
  • Likelihood of recovery is one component of the
    calculus, another is the potential amount of
    recovery.

52
Sir Peter Middleton Chairman of Burford in 2010
annual report
  • Were focused on building a long-term
    sustainable business the majority of litigation
    investments are inherently of medium duration and
    will produce lumpy results given their
    character, and the real value in this business
    comes from selecting and investing over time in a
    diversified portfolio of high quality
    investments.

53
Burford
  • Chevron case invested 4MM up to 15 MM for
    1.5 increasing to 5.5 stake in any recovery.
  • Seeks cases in which legal fees run from 5MM to
    15MM
  • Does not control litigation strategy or
    litigation decisions in any cases that they
    finance.
  • Burford does not hire or fire the lawyers, direct
    strategy or make settlement decisions.
  • Burford is a purely passive provider of
    nonrecourse financing to a corporate party.
  • A car lease is not a bad comparison. The leasing
    firm simply provides finance it does not tell
    the driver how to drive the car.

54
Global Arbitration Litigation Services
  • requires at least a 70 chance of success

55
Allianze PozessFiananz
  • only funds claims in excess of 100,000 pounds and
    10 of its portfolio is invested in international
    arbitral claims

56
IMF
  • Only funds less than 5 of the 350 cases it looks
    at each year.
  • Mostly shareholder actions.
  • Between 10/01 through 12/10,
  • In AU IMF is projecting 450,000 profit per
    claim with 31 claims currently underway.
  • Funded 118 cases to completion, 79 resulted in
    settlements, 9 were outright victories, while 5
    were lost and 25 withdrawn.
  • IMF netted 187 MM in this period
  • Investment managers are all ex-lawyers

57
IMF
  • Investment Criteria
  • Primary factors
  • Reprehensible conduct,
  • in addition to breach of contract, inadvertence
    or bad forecasting.
  • Strength of the claim
  • Potential value of claim
  • Ability of defendants to pay settlement or
    judgment

58
IMF
  • Secondary factors
  • Cases that are as straightforward as possible.
  • The richer the fact pattern, the less likely IMF
    is to fund the case.
  • Avoids cases involving multiple defendants.
  • As each named defendant increases the litigation
    costs as well as the risk of adverse-cost
    liability.
  • Clients who come in insisting a defendant will
    pay a big settlement just to avoid publicity tend
    to get cold shoulder.

59
IMF
  • Representative examples of cases
  • Case 1
  • settled for A 145MM (158 MM USD)
  • IMF netted A37MM or USD 40MM
  • 37 / 145 40 of recovery
  • Facts
  • gaming machine maker
  • allegedly misstated earnings on 2 occasions
  • and issued a highly misleading profit forecast.

60
IMF
  • Case 2
  • Grain distributor defendant was found by a U.N.
    investigation to have paid kickbacks to the Iraqi
    government of Saddam Hussein in exchange for
    wheat contracts under the prewar oil-for-food
    regime,
  • criminal charges were brought, which were
    eventually dropped,
  • a civil suit brought a A40MM or 43.5 MM USD
    settlement,
  • of which IMF got A 7MM (USD 7.6MM)

61
Future of the Industry
62
QUESTIONS?
  • Contact information
  • Kenneth A. Linzer, Esq.
  • Elisha E. Weiner, Esq.
  • Linzer Associates, P.C.
  • 12100 Wilshire Blvd., Suite 1275
  • Los Angeles, California 90025
  • (310) 826-2627
  • klinzer_at_linzerlaw.com
  • eweiner_at_linzerlaw.com
Write a Comment
User Comments (0)
About PowerShow.com