ABI Journal

Third-Party Litigation Funding: Where Do We Go Now?

Issue link: https://insolvencyintel.abi.org/i/954366

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Third-Party Litigation Funding: Where Do We Go Now? 3 the TPLF provider funded litigation and acquired an interest in litigation proceeds or other assets as a result. Once a bankruptcy case has begun, a chapter 11 debtor in possession (DIP) may obtain TPLF in order to finance mission-critical post-petition litigation. A post-confirmation creditor trust created under a reorganization plan may use TPLF to pursue its claims. The emergence of TPLF in bankruptcy cases is a relatively new development in the U.S. It has spawned numerous challenges and concerns that continue to develop and evolve in real time. This article focuses on seven areas where TPLF intersects with other legal considerations — and not always neatly: (1) calls for and against additional regulation of TPLF; (2) TPLF providers as possible non-statutory insiders; (3) the potential applicability of nonbankruptcy law restrictions on TPLF; (4) a TPLF provider's standing; (5) fiduciary duty issues related to TPLF; (6) discovery issues related to TPLF; and (7) potential ethical considerations for counsel in TPLF situations. These are rapidly developing areas to be carefully consid- ered and reconsidered. The "New Game in Town" Numerous players have entered the TPLF marketplace. 4 Burford Capital, Bentham IMF, Gerchen Keller Capital (acquired in December 2016 by Burford), Therium Group Holdings (which announced a $300 million fund for commercial TPLF in April 2016), Longford Capital Management, Lake Whillans Litigation Finance, Harbour Litigation Funding, Vannin Capital, Pravati Capital, Juridica, Icahn Capital, Argo Partners and TownCenter Partners are just a few examples. These well-capitalized funds recognize that TPLF returns can be enormous. Burford reported $378 mil- lion new investments in TPLF in 2016 (up 83 percent), with total investments in TPLF totaling more than $2 billion. 5 Burford announced a 75 percent increase in after-tax profits for 2016 compared with 2015, and $216 million in cash from investment returns in 2016 (48 percent increase over 2015). 6 These lucrative returns for TPLF providers are not reserved for only the largest funds. An advertisement in the New York Times solicits investors for the creation of new funds daily. 7 By one account, it currently represents a $5 billion market in the U.S. 8 Of course, despite how lucrative TPLF can be, funders do not always win. 9 The fact that TPLF invest- ments do not always pay off has not prevented TPLF's critics from portraying it as predatory and unseem- ly — undisclosed third-party financiers harassing litigants and corrupting the legal process. Whether real- world evidence supports this jaundiced view of TPLF is an open question, and much of the anecdotally based opinions about TPLF depend on the perspective of those forming those opinions. For its part, the TPLF industry is masterful at churning out positive press. 10 4 See, e.g., Henry Meier, "Litigation Costs Go Third Party," Los Angeles Business Journal (July 4, 2016) ("[TPLF] industry growth has been rapid."); Amy G. Pasacreta, "United States: Litigation Finance: A Brief History of a Growing Industry," Mondaq (April 4, 2016) ("[TPLF] firms now invest about $1 billion a year, and the industry seems to be growing."). 5 See Paul Barrett, "The Business of Litigation Financing Is Booming," Bloomberg Businessweek (May 30, 2017). It also should come as no surprise that "mainstream financial institutions" will likely enter this field. See Jay Greenberg and Max Volsky, "Litigation Finance Trends to Watch in 2018," Law360 (Jan.4, 2018) ("On the investor side, as litigation finance evolves into a mainstream asset class, diversified investment managers will look to add litigation finance exposure to their portfolios. The industry, therefore, is expected to attract a more mainstream audience as established financial institutions and large multi-strategy asset managers alike continue to look for entry points in the litigation finance market."). 6 See Victor Li, "Litigation Funder Burford Had 75% Profit Increase in 2016— and Thinks This Year Could Be Bigger," ABA Journal (March 15, 2017). Burford is a public company, and with returns like this, it is only a matter of time before the same people who brought securitized mortgage securities to the investing market will find ways to offer securitized litigation recoveries for every pension plan. On the plus side, interest in the judicial system will skyrocket as investors will demand that trials be televised so they can monitor their investments like a gambler watches a football game he wagered on. Judges will need to pause the proceedings for television timeouts. See also Adam Rhodes, "Litigation Financing Co. Closes Second Fund at $500M," Law360 (Sept. 18, 2017) (reporting on new $500million TPLF fund by Longford Capital Fund II LLP); Andrew Strickler, "Why Investors Are Taking the Leap to Third-Party Funding," Law360 (Dec. 11, 2017) ("There have been [TPLF] failures, yes, but there is clearly evidence of significant earnings over time and generally really impressive returns.... We think there is significant runway for additional deployment of capital."). 7 From p.3 of the Dec. 11, 2017, national edition of the Times: "PRIVATE BRIDGE FUNDING WANTED Private bridge funding and litigation funds wanted for large commercial, consumer and civil rights matters. All amounts considered. NDA-POF. Major results mentioned in Fortune Forbes Bloomberg Financial Times, etc. Principals only." The advertisement ends with the obligatory toll-free phone number. 8 See Kevin LaCroix, "The Latest on Third-Party Litigation Financing," The D&O Diary (Jan. 15, 2018). 9 See, e.g., Natalie Rodriguez, "Going Mainstream: Has Litigation Finance Shed Its Stigma?," Law360 (Dec. 12, 2017) ("And as the presence of litigation funding has grown, so have incidents where judges or other counsel have questioned its role— and effect— on a case, which recently occurred in a National Football League concussion lawsuit. On Friday, a Pennsylvania federal judge barred a host of funders from getting their proposed cut of the suit's more than $1 billion settlement. The judge found that the settlement language barred any funding deals and noted that the players are cognitively impaired. The funders had argued that the arrangements were forthright and did not hurt the players' interests. 'Third-party litigation financing puts investors' interests ahead of the plaintiffs,' incentivizes questionable lawsuits and threatens the integrity of our civil justice sys- tem,' said Lisa Rickard, president of the U.S. Chamber of Commerce's Institute for Legal Reform, a longtime opponent of litigation funding."). 10 Burford even puts out an annual Litigation Finance Research Whitepaper so all the statistics are easy to access. See, e.g., 2017 Litigation Finance Survey: Litigation Research Shows Continued Strong Growth, Burford Capital Publication (2017), available at burfordcapital.com/2017-litigation-finance-survey (unless otherwise specified, all links in this article were last visited on Jan. 30, 2018).

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