October 4, 2018 - On October 2nd, Paul Haskel and James Walker, partners at Richards Kibbe & Orbe LLP, enlightened LSTA members on “Litigation Funding for Credit Investors: 7 Things you Need to Know”. Speakers explained that increasingly funds that specialize in purchasing distressed credit have been looking to litigation funding as a potential new investment opportunity. This new area of finance provides commercial plaintiffs and law firms with the capital to prosecute complex claims, and can reap large rewards for the litigation funder if the litigation is successful. Moreover, investment returns are uncorrelated with other asset classes, which makes this investment category very attractive to alternative lenders and multi-strategy funds looking to build diversified investment portfolios. Commercial litigation funding (particularly in the areas of intellectual property, bankruptcy and arbitration) may be seen where under-funded plaintiffs and contingency fee law firms find litigation funding necessary; other parties may also find litigation funding attractive, whether for accounting advantages, claim monetization or to hedge the litigation risk. Litigation funding is generally non-recourse (other than to litigation proceeds) and may be funding for a single claim or a portfolio of claims. Parties may enter into a funding arrangement at any time during the pendency of the case, for example, at the outset of litigation or even at the appeals stage. While investment rewards can be high, the speakers cautioned new investors on the many complexities in this area and the unique legal and business risks that are distinct from those associated with more traditional areas of investment. Diligent claim due diligence is key (prospective funders should note that, to preserve attorney client privilege, review may be limited to pleadings and publicly available documents). A critical eye is needed to examine the merits of the prospective claim, the likelihood of success, the duration of the prospective litigation and importantly the cost. Legal expenses, which in addition to attorneys’ fees may include fees for expert witnesses and high e-discovery bills, should be estimated realistically. Parties must also be careful when structuring the funding arrangement: is it a purchase or is it a loan? What are the tax implications? Finally, loan market participants may be familiar with state champerty and usury law concerns that can arise in this area. Specific to litigation funding, however, parties must also be cognizant of issues of third parties not interfering with the professional judgment of the attorneys trying the case as well as rules around splitting legal fees with non-lawyers. For a webcast replay, please click here.
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