Ed. NB: Litigation financing is transforming the fields of law and finance. To help our readers gain a better understanding of what litigation financing involves, we have partnered with Lake Whillans to provide an ongoing report. Series It explains in detail how litigation financing works, its pros and cons, past, present, and future.
Much of the litigation financing discussion naturally focuses on the underwriting stage of the financing process. We previously wrote about diversity Flavors Of litigation financing deals and the fact that it is Never too early or too late To find funding. We’ve also discussed an Pricing That the claimant should expect when negotiating a litigation financing agreement.
But what about the time when all the conditions were agreed upon and both the claimant and the funder signed the financing agreement? What role does the funder play? Who controls settlement? What kind of interaction should the claimant expect to have with the funder on an ongoing basis? How do the financing mechanisms work? How does the money flow to cover litigation expenses and to divide the proceeds from a successful claim? Lake Whillans Many litigation finance investments have come to an end, and although each case has unique elements, there are some standard practices.
Stability control and strategy
Unless the funder has obtained the claim in full, the funder generally has no right to control litigation, and an experienced and normally reputable funder will not attempt to guide the case strategy. For example, the funder should not generally have the contractual right to dictate things such as the suggestions to be made or not to be made, the arguments to be made or not to be made, the experts to keep or the witnesses to subpoena. A good financier works in investment, not litigation, and lawyers will be allowed to sue. A typical Lake Whillans financing agreement would deny all rights to direct or control the course of the lawsuit. (Whether the non-obligatory input of the taxpayer is a matter of preference will be discussed below).
Most importantly, in the Lake Whillans transaction, the claimant generally reserves complete freedom in deciding whether to accept any settlement offer. While most funders operate in this way, some may nonetheless include punitive economic clauses or “hammer clauses” if the claimant rejects settlements that are beneficial to the funder.
Because control over the settlement rests with the claimant, it is important to ensure that the funder’s incentives and the claim are consistent throughout the litigation period and especially with regard to settlement offers. The financiers seek to avoid the situation in which the claimant is motivated to decline the offer of a fair settlement because only the funder will be paid out of the settlement. For example, Lake Whillans is unlikely to fund a case if the reasonable settlement is only $ 5 million, and the claimant seeks an investment of $ 3-4 million. In this scenario, it is possible that a settlement of almost entirely $ 5 million would be used to fulfill the obligations to Lake Whillans, and thus the claimant would have no reason to accept this settlement, which could lead to unjustified risk taking. As part of the stewardship process, Lake Whillans estimates and discusses with the claimant what a reasonable settlement would be and makes an investment only if the economic conditions of the deal allow the claimant to share the benefit from these settlements.
Communicate with claimants
Claimants and advisors often wonder (and are concerned about) the role the funder will play once the case is funded. While the connection is expected to continue, funders such as Lake Whylans will not play an interventionist role. At a minimum, the financing agreement will specify that the funder has the right to be informed about the progress of the case and to be informed of any major developments. Such communication is generally protected from disclosure of liabilities: communications with the funder Understood as protected At a minimum through franchising a work product.
In addition to the contractually required updates, the frequency of contact between the funder and the claimant is largely driven by the preferences of the claimant and the attorney, the size and experience of the claimant’s internal legal team, the stage / activity level in litigation or arbitration, and other special factors. The claimant and advisor often view the financier as a valuable soundboard, between his in-depth knowledge of the case, his focus on the big picture rather than the day-to-day litigation battles, and his experience with similar situations in previous investments. Lake Whillans has shared a range of communication styles across its investments – from official and non-periodic updates, to personalized communications as needed, to scheduled phone calls (generally monthly). It has been our experience that the process of reaching a bargain often constitutes a mutually respectful relationship that naturally lends itself to continued constructive and needed communication.
Once the financing agreement is concluded, the financier is of course obligated to disburse funds according to the investment agreement between the parties. Lake Whillans will initially create a Reserved facility, representing an amount set aside to cover the full amount of the financier’s obligation. Some financiers do not keep the full amount of capital to invest and instead, rely on financial management to fulfill their investment obligations. It is always helpful for claimants to ask potential financiers how to ensure that the investment obligation is available. Typically financiers make a series of payments over the course of the case, with drawdowns of the reserved facility, in which the payments are triggered by various events depending on the nature of the investment.
If the transaction involves an advance payment (which can be all or part of it), then that payment will be made immediately after the transaction is closed, usually within 10 business days. Advance payments can include realizing the full or partial income of a claim paid to the claimant or using it to pay legal costs owed to attorney.
In a one-case investment that includes payments to the claimant’s attorney for hourly rates and / or expenses, the law firm will send its standard periodic invoices to the claimant, which are either mailed or copied to the funder. The financier will pay these bills directly to the company when they are due after being approved by the claimant. If the funder has transacted with a law firm related to a portfolio of issues, the payments will usually be made according to a set schedule (including in some cases, all in advance), when the firm’s requests are withdrawn, or upon reaching certain milestones.
If the case is successful and the proceeds are collected from the successful claim, the refund is usually placed in escrow and distributed to the funder, attorney, and claimant as specified in the financing agreement. The agreement will contain a “waterfall” negotiating chart Refund priority arrangement is to be paid to the due parties. Usually, the financier recovers any capital spent before any other party has been paid and his profit either takes precedence over the remaining stakeholders or, in some cases, shares it proportionately with the attorney (assuming the attorney has an emergency stake in litigation) and / or the owner Claim. The claimant takes any rest.
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Ensuring a seamless interaction between the financier, the claimant, and the attorney begins with due diligence before investing. A claimant seeking funding should assess whether the potential funder has a proven track record of working effectively with claimants and advisors. Lake Whillans is pleased to discuss its experiences in this regard and what to expect in light of your particular circumstances. The best way to determine whether your company or organization could benefit from litigation funding is call us.