A Brief History of Commercial Litigation Funding

At the outset of litigation of any size, we can make two predictions: First, it will last

longer than most plaintiffs will expect, despite what their attorneys warn them to

prepare for. Second, the case will cost a lot of money to prosecute. At its best, litigation

is expensive. At its worst, litigation is backbreaking.


Enter the lawsuit funding industry. Until just a few years ago, lawsuit funding was a

largely untapped - and unregulated - industry. But in those few years, the idea of

injecting funds into some phase of ongoing litigation has gripped entrepreneurs, hedge

funds, venture capitalists and even some banks like few other money making

opportunities. As a result, the lawsuit funding industry has exploded.

How to Make Money in Complex Litigation

There are several avenues that a litigation funding company can use to make money in

a lawsuit. These avenues may look different, but they all have one thing in common.

The litigation funder will advance money to finance a party or its law firm at little or no

risk to the funder’s client.


The early lawsuit funders worked with mostly injured and unemployed personal injury

plaintiffs to cover their basic expenses, like rent and food, until the case settled. That is

still a lucrative investment, but in recent years, funding companies have ventured into

higher dollar commercial and class action lawsuits working with all players in the

game. Not only plaintiffs, but defendants, corporate legal departments, and the law

firms that represent any of these parties can benefit from commercial litigation funding.

For the funding companies, the opportunities are almost endless and the potential

rewards are soaring.

The Plaintiff

The plaintiff side is probably the easiest to picture. Just like with the individual personal

injury plaintiff, the commercial plaintiff has been damaged in some way, often

jeopardizing on-going business operations. Perhaps a vendor reneged on a contract to

supply a cornerstone component in the manufacturing process. Or, another company

infringed on a patent. The plaintiff files suit, but the damage has jeopardized its ongoing

business operations. Enter the litigation funder. The money provider will assess

the litigation to determine whether the lawsuit is viable, how much it is liable to net, the

financial strength of the defendant, and other factors that will indicate the value of the

litigation to the plaintiff. Based on this vetting, the litigation funding company will

agree to advance money to the plaintiff against any eventual settlement or award.

Whereas an individual suing an insurance company over a car accident might receive

advances totaling a few thousand dollars, the commercial case could require that

hundreds of thousands or even millions of dollars change hands in tranches tied to

milestones in the case. For this service, the litigation funding company will charge a fee,

sometimes different kinds of fees for different purposes.

These transactions are not loans. They are non-recourse investment vehicles. The

transaction is set up so that the plaintiff company is only required to pay back the

advance when the case settles or the plaintiff obtains a final judgment against the

defendant. If the plaintiff loses or the case is resolved with no money due the plaintiff,

the litigation funding company receives nothing. Consequently, it is the funding

company, not the plaintiff, that takes on virtually the entire risk in this type of

transaction.

The Law Firm

The law firm representing the plaintiff can find itself in similar straits. It may have

taken the case on a contingency basis, which could run 33% to as much a 50% of the

plaintiff’s eventual recovery. In the meantime, it will find itself advancing tremendous

amounts on the plaintiff’s behalf with little hope of replenishment for months or even

years. These expenses can be considerable. Relatively simple commercial cases can

require dozens or even hundreds of depositions at a thousand dollars or more a day for

a court reporter and transcript. Plus, the attorney can be fronting fees for court costs,

travel to depositions and hearings, hourly fees for legal research databases, contract

attorneys for company document reviews during discovery. Even the penny-ante

expenses like mail and delivery fees add up. All the while the law firm has to pay its

regular expenses like rent, salaries, phone, and equipment purchases, while it waits for

its fees to be paid.


When they need help, law firms will seek out funding resources that will advance funds

based on the attorney’s contingency fees. As with the plaintiff’s transaction, the funding

company makes a dividend on its investment in the law firm’s participation only when

the case is decided in the plaintiff’s favor and the law firm is paid its contingency fee. If

the plaintiff loses or receives no money, the law firm will not be paid its fee or obtain

any reimbursement of expenses. Because the funding transaction is structured as non-recourse

to the law firm (as it is to the plaintiff), the law firm is not required pay back

the funding company, which loses its investment in the case. Again, the investment

company takes on virtually the entire risk.

The Defendant

Litigation funding on the defense side is not as obvious as it is with the plaintiff.

Nevertheless, there is fertile ground for litigation funders working with defendants.

How this works may be more difficult to comprehend because we see litigation not as a

source of money for the defendant but as a source of expense. How can litigation do

anything but cost a company money, even if it wins the case? Litigation funding for

defendants is designed to limit the defendant’s exposure by reducing the risk of loss

and increasing the defendant’s bargaining power.

Imagine a defendant is sued for $100 million. It vehemently contends that the suit has

no merit. Despite that, it still has to defend the case in court. The defendant, however is

pragmatic. It recognizes that litigation is expensive. It estimates that attorney’s fees and

expenses alone will cost $3 million. Because of the expense, the inherent uncertainties of

litigation, and many other intangibles like opportunity costs and unfavorable publicity,

the defendant decides early in the case that it is willing to settle for $30 million.

That is not the end of the story. The funding company can reduce the defendant’s

potential exposure, which will allow the defendant to increase its bargaining position

and in effect hold out for a better deal. This is how it works: The funding company

agrees to put up as much as $3 million to cover costs of litigation, then take twice that

for a fee if the case settles for less than $30 million. Since the defendant doesn’t have to

put out the cost of litigation and it knows its potential outlay is lower, it will hold out

for better settlement terms.

Now imagine that the defendant settles the case for $15 million, half of its original

estimate, the funding company will be paid $3 million to reimburse it for the litigation

expense outlay plus $6 million in fees, or twice the cost of the litigation. The defendant’s

total cost is $24 million ($15 million to the plaintiff and $9 million to the litigation

funding company) instead of the $33 million it would have paid absent the funding

agreement.

Because its exposure is capped at the company’s original estimate of settlement amount

Plus the costs of litigation, if the company settles for an amount at or higher than the

estimate, it is still no worse off and could be significantly better off with the funding

agreement in place.

Conclusion

Litigation funding companies have opened new territory and developed investment

products that reduce the uncertainty inherent in large scale litigation for plaintiffs,

defendants and their law firms. The industry is poised for virtually unlimited growth as

more litigants and their attorneys come to understand the benefits of law suit funding.

Resources

If you or your business find yourself in lengthy and expensive legal battle and want to level the playing field against deep pocketed litigants, then you should consider reaching out to a commercial litigation funding company. One of the premier legal funding companies is Tribeca Capital Group’s lawsuit loan division; Tribeca Lawsuit Loans. Applying for a legal funding with Tribeca is quick and easy, you can visit our website https://tribecalawsuitloans.com and you can to speak with one of our seasoned and knowledgeable representatives. It is completely no risk and there aren’t any upfront fees or costs. So what do you have to lose? Better yet, we can help you win. Call Tribeca Lawsuit Loans today at 866-388-2288. One of our friendly and courteous staff will explain the process and help you get the funding you need.

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