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How to Secure Financing for Commercial Litigation

© 2017 The Texas Lawbook.

By Eric Chenoweth and Priya Pai of Bentham IMF
(Oct. 23) – Litigants interested in monetizing litigation assets, along with their lawyers, should consider their options when researching which funders to approach for financing.

To get started, explore what criteria the funders require to consider a case for investment. Check their websites or request their funding eligibility questionnaires to determine:

• if they invest amounts equal to the financing needed for the case,
• what they look for in terms of potential damages, and
• if they fund the type of case at issue.

Next, determine which funders match your criteria, which may include:

• how long they have been in business,
• if they have the resources to stay in business and provide capital for the duration of the case,
• their record of funding successful cases and returning fair recoveries to the litigants, and
• if they been involved in disputes with funded litigants or their attorneys.

Established funders will make this information available in their public disclosures or upon request.

The importance of the NDA

Once you have narrowed your options, you will need to reach out to your preferred funder with a general description of the case and the funding amount sought. Before any substantive discussions occur, the funder will require signature on a non-disclosure agreement to show the intent of the parties to maintain confidentiality over shared information under the attorney work product doctrine.

Getting to the term sheet

Next, the funder will want to understand the merits of the claim, as well as any collection risks, the amount needed to prosecute the case to completion and a reasonable estimate of potential recovery. If the funder’s interest is strong upon reviewing this information, it will typically issue a term sheet that outlines the economic terms of the proposed investment and provides for a due diligence period to fully assess the merits of the case and related issues. The term sheet will likely require exclusivity during the due diligence process.

If the case involves a niche practice area, ask while negotiating the term sheet whether any additional expenses related to the funder engaging outside expert consultation will be borne by you or them. Reputable, well-resourced funders will incur due diligence costs without seeking reimbursement from you.

Additionally, the term sheet will describe the funder’s proposed return structure. Returns are often calculated as a multiple of the disbursed funding amount, a percentage of the litigation proceeds or the greater of the two. Beware of funders who propose taking a multiple of the committed funding amount as opposed to the amount deployed as of the date of any resolution in the case.

Also look at the proposed return priority structure. Generally, the funder will require a first-priority position to receive, at minimum, the return of its principal. If your lawyers have agreed to a full contingency arrangement and the funding is for working capital, the lawyers may want input in such an arrangement.

Addressing issues like these sooner rather than later will benefit all parties and help facilitate the positive relationship necessary to make a litigation financing partnership work.

Presenting a matter for funding

Once the NDA and term sheet are agreed upon, the ensuing due diligence process typically takes 30 to 45 days. The funder will want to meet with you, review relevant documents, speak with your lawyers, and possibly hire outside experts.

The funder will ask for pleadings that best summarize the legal and factual arguments from each side and any documentary or other evidence that supports the claims and refutes any facially strong arguments from the adversary.

A legally sound and objectively measurable theory of damages – even if preliminary – is important, and a pre-litigation damages analysis conducted by your lawyers or their consultants is a huge plus from a funding perspective.

If materials are voluminous, set up a data room or file-sharing account with this information and provide it soon after the term sheet is signed.

While each case presents a unique set of issues, funders at a minimum look for the following in any investment opportunity:

• a cogent liability theory supported by documentary evidence that indicates strong prospects of success,
• a sound damages theory that results in sufficient damages to cover the funder’s return, the lawyers’ contingency stake (if any) and enough remaining for you to recover at least 50 percent of any award or settlement, and
• a high likelihood of collectability.

Once an investment decision has been made, you can expect to finalize and execute a funding agreement.

Closing a litigation finance transaction

Finally, the parties will begin to consider the funding agreement itself.

The funding agreement represents the funder’s contractual obligation to finance litigation expenses or working capital in exchange for a portion of any award or settlement. This contract is the major protection the funder has over its investment. Thus, the funder likely may not be willing to diverge substantially from the terms that impact returns and return priority.

But beware of litigation finance contracts that allow the funder to exert control over decisions you or your lawyer are entitled to make. Such control may take the form of veto power over litigation strategy, ultimate sign-off on settlement or your ability to choose counsel.

A reputable funder will typically ask to be apprised of settlement negotiations and may offer non-binding views. Good faith acceptance or rejection of a settlement offer typically remains fully within the client’s purview. But you should understand exactly what portion of the litigation proceeds you must turn over to the funder in exchange for the capital the funder has provided as of the date of that decision.

It is also important to understand that the funder may require approval of any substitute counsel but will often agree that such approval will not be unreasonably withheld. The new counsel must be comfortable with the fundamental deal arrangements for the underlying partnership with the funder to work.

Once the transaction closes and the case is funded, your partnership with the funder begins.

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