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City Bar Center for Continuing Legal Education
THE NEW YORK CITY BAR
42 West 44th Street, New York, New York 10036
Borrowing from Peter to Sue Paul:
Legal & Ethical Issues in Financing a
Commercial Lawsuit
April 15, 2013
6:00 9:00 p.m.
Sponsoring Committees:
Commercial Law & Uniform State Laws
Janet M. Nadile, Chair
Professional Ethics
Jeremy R. Feinberg, Chair
Borrowing from Peter to Sue Paul:
Legal & Ethical Issues in Financing a
Commercial Lawsuit
Program Chair
James M. Haddad
Law Office of James M. Haddad
Faculty
Harvey R. Hirschfeld
Chairman of the
American Legal Finance Association
LawCash
Professor Anthony Sebok
Benjamin N. Cardozo School of Law
Selvyn Seidel
Chairman & Principal
Fulbrook Capital Management LLC
Sandra Stern
Nordquist & Stern PLLC
Aviva O. Will
Managing Director
Burford Capital LLC
Borrowing from Peter to sue Paul:
Legal & Ethical Issues in Financing a Commercial Lawsuit
April 15, 2013
AGENDA
6:00 6:05 p.m. Introduction & Overview of Program
James M. Haddad
6:05 6:45 p.m. Legal Lending, Financing, Funding & Investing
Legal & Ethical Issues from the Funders Perspective
How it works, whats available, what it looks like, individual plaintiff vs.
divorce vs. class vs. commercial, etc., ethical concerns and constraints,
regulatory framework, privilege, confidentiality, conflicts, control,
involvement, funder liability, duty to know, duty to advise, lawsuits,
Spitzer agreement, proposed legislation, social policy, etc.
Harvey R. Hirschfeld, Selvyn Seidel & Aviva O. Will
6:45 6:50 p.m. Break
6:50 7:10 p.m. Funders Perspective (continued)
When to use various types of funding, how third party funding impacts
tactics and strategy, privilege, confidentiality & the lenders involvement
& liability
7:10 7:20 p.m. Panel Q&A
7:20 7:25 p.m. Break
7:25 8:00 p.m. Litigation Funding View from the Counsels Table
A view of the practical, tactical, ethical, legal, regulatory, legislative and
social issues from the viewpoint of the practitioner/professional/ethicist.
Professor Anthony Sebok
8:00 8:05 p.m. Break
8:05 8:15 p.m. Panel Discussion & Q&A
8:15 8:20 p.m. Break
8:20 8:50 p.m. Securing, Collecting & Alienating the Collateral
Sandra Stern
8:50 9:00 p.m. Final Q&A Session
Panel



This program will fulfill 3.0 CLE credits total: 1.0 skills & 2.0 ethics for the
MCLE requirement for NY, NJ & CA & 1.0 general credits & 1.75 ethics (pending) for Illinois &
1.0 general credits & 1.5 ethics for PA.

Borrowing from Peter to Sue Paul:
Legal & Ethical Issues in Financing a
Commercial Lawsuit
April 15, 2013
Table of Contents
Time to Pass the Baton? .......................................................................................................1
By: Selvyn Seidel
[Law School's] Duty to Know [and to Teach Third Party Funding] ...................................5
By: Selvyn Seidel
The above two articles are reprinted with permission from
www.CDR-News.com
The Lawyers Duty-to-Know & Duty-To- Tell in Third Party
Party Funding: A Time to Recognise & Respect these [Legal and Ethical] Obligations ....8
By: Selvyn Seidel
Investigating in Commercial Claims; New York Perspectives
NYSBA, New York Dispute Resolution Lawyer .............................................................11
By: Selvyn Seidel
Reprinted with permission from: New York Dispute Resolution Lawyer,
Spring 2011, Vol.4 No. 1, published by the New York State Bar Association,
One Elk Street, Albany, New York 12207
Investment Arbitration Claims Could be Traded like Derivatives .................................16
By: Rebecca Lowe
This article was first published for IBA Global Insight online news
analysis, 8 February, 2013. [available at www.ibanet.org] and is
reproduced by kind permission of the International Bar Association,
London, UK International Bar Association
Third Party Litigation Financing: A New York City Bar
Formal Ethics Opinion .......................................................................................................19
American Bar Association Commission on Ethics 20/20: White Paper
on Alternative Litigation Finance ......................................................................................20
Copyright 2011 by the American Bar Association.
Reprinted with permission.
The New, New Thing: A Study of the Emerging Market in Third-Party
Litigation Funding, November 2010..................................................................................61
Reprinted with permission of Fox Williams LLP.
Professional Responsibility and Third Party Litigation Funding A
Brief Tour of the ABA White Paper ..................................................................................84
By: Anthony J. Sebok
This report was prepared by Anthony Sebok. Reprinted with permission.
American Bar Association Commission on Ethics 20/20: Informational
Report to the House of Delegates ......................................................................................90
By: Anthony Sebok & W. Bradley Wendel
Copyright 2011 by the American Bar Association.
Reprinted with permission.
Litigation Finance: A Market Solution to a Procedural Problem ....................................130
By: Jonathan T. Molot
The above article was reprinted with permission from the author
Jonathan T. Molot and from Georgetown University Law Center
Georgetown Law Journal 2010
Stopping the Sale on Lawsuits: A Proposal to Regulate Third-Party
Investments in Litigation .................................................................................................181
Prepared for the U.S. Chamber Institute for Legal Reform by John H. Beisner
& Gary A. Rubin, Skadden, Arps, Slate, Meagher & Flom LLP.
October 2012. All rights reserved.
Litigation Financing .........................................................................................................201
By: Sandra Stern
This section is adapted from Sandra Stern, Structuring and Drafting Commercial
Loan Agreements (copyright 2012 Thompson Media Group). Reprinted with
permission of the publisher and sole copyright owner. All rights reserved. Structuring
and Drafting Commercial Loan Agreements is available at a 10 percent discount
to program participants through June 30, 2013.
To receive the discount when ordering, please go to
http://www.sheshunoff.com/products/Strucutring-and-Drafting-Commerical-Loan-
Agreements.html and enter the code SCLA13.
Or you can contact customer service at 800.456.2340
Notes on the Faculty .................................................................................................................. i
Conference preview
46
THIRD-PARTY FINANCE: CONTROL
long smouldering
issue in the third-party
funding industry relates
to what might be called
the control doctrine.
Control in this
context has generally
been understood to
mean decision making authority, the basic
purport being that decision making must
remain with the claimant, with advice from
their lawyer. Te funder can consult and
advise, but only within that fenced-in area.
The control doctrine and its
current status as an inhibitor
Funders have always been challenged on the
ground that they, as third parties, should
be prohibited from taking over control of
anothers claim.
1
A key fash point has been
the decision regarding whether to settle a case.
Tis decision, which is central to any dispute,
can and does generate conficting interests
and positions between the claimant and the
funder. Te control doctrine says that this
decision remains with the claimant (on advice
of counsel) at all times.
A
TIME TO PASS THE
1
f
47
Commercial Dispute Resolution
NOVEMBER-DECEMBER 2012
Selvyn Seidel of Fulbrook Capital
Management argues that the long held
control doctrine in third-party financing is
long past its sell-by date, and needs to be
replaced by a new set of guiding principles
for the industry to reach its full potential
www.cdr-news.com
In some jurisdictions such as the UK, the control doctrine also
means that the claim owner might be handicapped or prohibited
altogether from selling the claim in its entirety. In the US, sale of
the entire claim has been condemned in diferent circles such
as where patent claimants sell their claim to a third party to
prosecute it as that partys own. Te buyers in such instances are
ofen non-practicing entities (NPEs), more commonly known as
patent trolls.
For one who runs afoul of the control doctrine, the penalties
can be painful. Tey range from making the funding agreement
unenforceable to imposing sanctions on the funder, exposing
the funder to civil and ethical liability or perhaps even to
criminal sanctions.
Te purpose and policy behind these restrictions and
prohibitions are varied and not subject to convenient and
comprehensive summary. But they seem traceable to at least
several concerns. One is that a claim is personal to the holder, to
have and to hold until death do them part. Te two simply cannot
be delinked through commercial barter or otherwise.
According to some observers, it is also wrong to consider
parting the owner from the claim. Comparisons are sometimes
made with elderly peoples interests in life proceeds from
insurance policies, on grounds that here too the owner
should not be divorced from his or her right. Comparisons
are also made to sales of interests in patents.
Basic champerty concerns have underpinned the purpose
and policy pronouncements. Champerty has from its birth
in the Middle Ages refected concerns that a claimant is
generally in such a helpless position that it is vulnerable to a
third party purchaser taking advantage of it in the transfer.
Te champerty champions also fear that free trade in claims
enhances the possibility that litigation will itself be increased
intolerably by mercenaries.
Te doctrine of control has thus far been respected by
the industry. Actually, it might be said that the industry has
gone overboard in its deference to and fear of the doctrine.
For example, the common position of established members
of the funding industry is that once a case is funded, they
are hands of. Tat position refects champerty-fear at
work.
Despite the doctrines long history and serious challenges
to the funding industry, the doctrine itself is now not only
being challenged, it is in fact being diluted and discarded.
Why the control doctrine is on its way out
Critics of the control doctrine have, in strictly limited
numbers, just started to step up. Moreover, without fanfare,
the doctrine is in reality already gone or rapidly receding
2
Conference preview
48
THIRD-PARTY FINANCE: CONTROL
in important areas. For example, the transfer of control has been
allowed in part or in its entirety in a number of situations, including
when a mortgagee transfers its total interest to a third party (which
has already occurred in New York where the mortgagees have on
default of mortgagor sold the claims to another);
2
in bankruptcy
claims; and in certain European and Far Eastern jurisdictions. In
June, 2010, the New York City Bar Association issued an ethics
opinion on funding, indicating that control was acceptable. Consider
this alongside the contingency law relationship of lawyer to claimant
and claim, where the law in the US has carved an exception of
contingency lawyering from the champerty restrictions.
Further, at the urging of the bench, bar and government in
the UK, a group of funders issued a voluntary Code of Conduct
in November 2011. Despite the drafers expressed position that
restraints on control should in general exist, the Codes language
concerning control appears to leave some ambiguities that allow
for infuence, and more, on the part of the funders.
Te Code provides:
A Funder will . . . not seek to infuence the Litigants solicitor or
barrister to cede control or conduct of the dispute to the Funder. . .
(Clause 7 (c))
Within the four corners of this Code, can the funder accept
control if it does not seek control but the lawyer or barrister ofer it?
Beyond this, can the funder sidestep the lawyer altogether and go
directly to the claim owner itself and ask it to cede control, rather
than going to the lawyers?
Te Code might even be construed as creating an
accommodation for funders seeking infuence. It states
that where there is an irreconcilable diference of opinion between
the funder and the claimant, the parties can agree in their contract
to appoint an independent barrister to resolve the dispute fully and
fnally, and even though contrary to the wishes of the claim owner
(or the funder). Can this provision sustain an attack that it actually
crosses the line, giving the funder too much infuence? It is not too
far-fetched to raise this question when we see that some arguments
have already surfaced claiming that a funder who establishes
certain parameters agreed to at the beginning of the contract
with the claimant that assist in determining whether the case
should be settled, are themselves going too far in controlling a
settlement situation.
Furthermore, there is now a serious development in the industry
where some recently-established funders (including Fulbrook) are
acknowledging they are not hands of, but are hands on. Tey
assert that they are dedicated to supporting the claim afer funding,
from cradle to grave. Tey stop short of control, of course, but turn
the dial from hands of to hands on. Teir premise is that if
the claim is meritorious, then they can, by bringing their human
and capital resources to bear, enhance the value of the claim more
towards its true value.
The doctrine needs a push to finish it exit
Do not these developments and the current situation tell us that it
is time to revisit the doctrine and explicitly clarify, change, or even
discard it? Prior to now, it was probably politically premature to
raise this question too loudly (or at all). Te industry was too new,
struggling with too many issues, and trying to gain some traction
and credibility as a new development, to add a question about a
doctrine which had become so entrenched.
Now, with the industry gaining credibility and use, champerty
concerns fading in the commercial area, the doctrine itself causing
conspicuous problems, and with other developments in the industry
that cushion the removal of the doctrine, it seems to be a reasonable
time to ask this question.
In fact, the time is especially ripe in view of some developments in
the UK. For example, in the UK a law will come into efect in April
2013 which in efect allows lawyers to act as contingency lawyers.
Tis practice has been allowed in the US for a long time; it is
frequently compared to funding insofar as what third parties might
be allowed to do with regard to anothers claim, and it is treated as
an exception to the champerty rules. Tis major development in the
UK refects a mindset that comprehends third-party support of a
claim. Tat should bode well for the funding industry, and
the market.
It is also noteworthy that with the recent launch in the UK of the
Alternative Business Structures Act, third party business and fnance
parties can invest in law frms, and also be partners within such
frms. Among other things, and although there are restrictions on
amounts that can be invested and the degree of involvement of the
third party to make decisions in the lawsuit, this arrangement allows
third parties to put funds behind a claim, and to be involved in the
progress of the dispute. Te law frms can in turn commit capital to
various business ventures. Te Alternative Business Structures Act
is afrming, in one fashion or another, the concept of a third party
non-lawyers involving itself in a lawsuit, and indeed in a law frm.
Interested parties have been quietly and for some time
undermining and abolishing the control rules. A perfect example
can be drawn from the corporate world. Here, there is no doubt that
a third party can buy control of a company through, say, acquiring
30% with a stockholders agreement bestowing control over the
company. Tat control leaves complete control over any litigation
in the company. Te control is vested in a party who likely has little
idea what the litigation is about, let alone the best way to handle it. If
that is acceptable, what justifcation can there be to barring control
in a single case situation, particularly when the control in that case
should be far more informed and benefcial to a meritorious claim?
Similar questions can be asked about a private equity party which
buys a company, and is free to control it and its litigations. In a
forthcoming article, Professor Maya Steinitz, a leading expert on
funding, argues that funders are analogous to venture capitalists,
f
The original purpose of a limitation on a claimants transferring control over the claim protecting
the claimant as a self-appointed trustee is no longer alive because that claimant is not
helpless and in need of a guardian, but commercial
3
and that like such investors they should be
accorded the right to exercise substantial
control over a lawsuit.
3
In such a setting, is explicitly
acknowledging the right to control such a
revolutionary step? Mortgage, bankruptcy,
and patent cases already say the claim can
be transferred lock, stock and barrel, or that
a partial interest can be taken by a third
party. Contingency law supports the same
conclusion. Some courts both within and
outside the UK and US have already indicated
that this is possible. Te New York City Bar
association has indicated support
for a funders taking control under
circumstances that otherwise comply with
a lawyers ethical duties.
In this context it is worth noting that
the doctrine of champerty itself has been
debunked in the UK with legislation and
court decisions. It has, overall, fared
somewhat badly in the US as well, with at
least half the states abolishing the doctrine
altogether, and others restricting severely or
prohibiting its application when commercial
cases are involved.
4
As a result, champerty and maintenance
no longer can be used as they were to argue
that funding is by nature illegal and unethical.
Courts in the UK, the US and Australia leave
little doubt here.
Champertys marginalisation in the
commercial setting is well justifed. Te
original purpose of a limitation on a
claimants transferring control over the
claim protecting the claimant as a self-
appointed trustee is no longer alive because
that claimant is not helpless and in need of a
guardian, but commercial.
Indeed, it is the claimant that ofen wants
the option to transfer control, in return for
cash or other consideration. Te prohibition
is in fact a restraint on freedom of contract.
Moreover, it turns a deaf ear to the market. If
an informed market wants access to funding,
and thus to all the potential features of a
funding arrangement, who in the government
should be authorised to thwart that wish and
to deny access as a matter of public policy?
Second, since the predicate of a funded
case is its merit, the doctrine of champerty
serves no public policy purpose. True, the
courts may be overcrowded, but that is not a
reason to bar access by good claimants with
good claims. To the extent that there is a fear
that bad funders will support bad claims
and increase the frivolous population in the
courts, it should be addressed sufciently
by safeguards and rules already in the legal
system, and other rules that if needed can
be devised.
Tird, supporting good claims by
supporting good funding adds a fnancial
instrument and service to an economic
environment that needs them. Tese add to
both commercial and civil justice, and this
virtue is at the heart of the value of funding.
Exit a doctrine,
enter some new rules
It is thus submitted that no genuine
question should exist about whether the
control doctrine deserves to be buried. Te
only valid questions here are how related
rules and other protections that already exist
can be co-ordinated with this development,
and what new rules and protections might be
put in place. Tese questions can be illustrated
by asking how control enhances the funders
exposure to:
- liability for costs and fees if the claim loses
- sanctions along with the claimant, for
asserting a claim that turns out to be frivolous
- being treated as a full-fedged party for
various purposes, such as in determining
whether there is jurisdiction under an ICSID
Treaty, which requires or prohibits nationals
of certain countries, or someone subject to
discovery, or in determining the applicability or
non-applicability of the attorney-client privilege
or work product doctrines
- possible fduciary or other responsibilities,
such as from a controlling funder to a claimant
who is not in a control position, just as a
majority shareholder might have certain duties
imposed on it relating to the minority
W
ith the industry and market
active and growing, this
project cannot be put
on the back burner. All
stakeholders in the market, industry, and
among the defendant community, should
step up in this efort it afects each and
every interest.
Hopefully enough individuals will take an
ownership interest in the area and make an
efort to study the issues and help to enact
good rules that will protect the market, the
funders, and the defendants. Te time to start
this is today, not tomorrow.
www.cdr-news.com
49
Commercial Dispute Resolution
NOVEMBER-DECEMBER 2012
About the author
Selvyn Seidel is the
founder, chairman and
CEO of Fulbrook Capital
Management LLC. He was
previously a co-founder and
chairman of the Burford
Group. Sandra Sherman
of Fulbrook assisted in the
production of this article.

1
See S. Seidel, Control, Commercial
Dispute Resolution Magazine,
September 2011.
2
S. Seidel, Investing in Commercial
Claims: New York Perspective, NYSBA
New York Dispute Resolution Lawyer,
Spring, 2011
3
Maya Steinitz, Te Litigation Finance
Contract, forthcoming, William &
Mary L. Rev. __ (2012), http://papers.
ssrn.com/sol3/papers.cfm?abstract-
id=2049528, comparing Funders to
Hedge Funds and Private Equity entities,
and indicating that these comparisons
support allowing greater infuence
by Funders coupled with greater
responsibilities.
4
See e.g., Anthony Sebok, Te
Inauthentic Claim, 64 Vanderbilt
Law Review 61, 30 January 2011,
http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=1593329.. http://
papers. Ssrn.com/sol3/papers.
cfm?abstract-id=1593329##
4
Third-party finance
xx
EDUCATING THE WORLDS FUTURE LAWYERS
or much of its life, third-party funding has
been an industry known to only a few, most
of whom were the funders themselves. Te
rest were essentially lawyers scattered here
and there. In fact, the industry was so young
that it somewhat embarrassingly struggled
to invent terminology defning its own
activities. Tis situation made third-party
funders vulnerable to those in more established quarters
who wished to challenge the industry, scare the market and
inspire regulators to action. Lack of public awareness and
understanding were for a long time public enemy number one.
Tis situation has however changed. Over time and afer
some heated debates and various studies the industry has
caught the eye and pen of the news media. It is also on the
agenda of conference planners who are launching ever-more
frequent events on the topic. Te market is learning, wants to
know more, and more parties are turning to funders to access
justice. Regulators are starting to sit up and take serious notice.
A growing number of insiders and interested observers alike
seem to have concluded that regulators should be involved
in some form or another. In the UK, for example, we see an
association of funders being formed to impose voluntary
rules and regulations. Additionally, in the US, we see Bar
organisations (the American Bar Association, the New York
City Bar Association, other state Bar associations) writing
reports and issuing guidelines, and some state legislators
starting to enact some legislation. Similar moves are afoot in
Australia, where the modern funding industry started more
than a generation ago.
Much however remains to be done. Tis articles position
is that while the overall process and these developments are
healthy, laudable and must continue, nobody should be resting
on their laurels just yet.
Lawyers duties and position
A critical part of this forward push is the drawing in of other
stakeholders. Lawyers have a robust duty here. With some
oor m
bbeen
of w
rrest
aand
that
to in
activ
fu fu fund nd nder ers vulnerable to t
who wished to challen
F
Lawyers need to start spreading the message about third-party finance options to the
clients, says Selvyn Seidel of Fulbrooke Capital Management. But in order to engender
this new awareness, the process has to start in the classroom at law schools
5
f
xx
Commercial Dispute Resolution
SEPTEMBER-OCTOBER 2012
www.cdr-news.com
resistance and some expressed chagrin,
this author has written journal articles,
supposedly discovering, and then
emphasizing this discovery in conferences
and other presentations, a duty to know
and duty to tell on the part of lawyers
a duty to know about funding and to
adequately inform their clients so the
clients can choose whether to pursue
funding. Tis publication has been
among the frst to give due attention to
and regularly cover this feld. Indeed, in
a prior articles it has canvassed private
practitioners and others for their views,
and the results have revealed the truth and
beneft of this duty).
But sadly, most clients currently are not
adequately informed about funding or are
not informed at all. Linked with this is the
fatal fact that most lawyers are not yet able
to explain the concepts and pros and cons
in sufcient depth or in some cases at all.
Te lawyer however cannot decide
autonomously whether or not to inform
their clients, simply because they have
no choice in the matter. Tey must. Tey
have a legal and ethical duty to be aware
of third-party funding and to inform their
clients of its existence and purpose.
Tis is especially pivotal in a world
where lawyers potential vulnerability to
allegations of negligence is the topic of the
day. Continued tough economic times are
still afecting the legal market, with frms
downsizing, placing extra workloads on
those that remain and potentially teeing up
an environment for overworked lawyers to
get themselves into trouble.
The law schools duties
In order to help attack the knowledge
vacuum among private practitioners, law
schools must start seriously educating
their students about funding so that
when students qualify the concept will
be already familiar. It will have been a
learned tool and skill they can, from the
start, use to assist their clients to the extent
of their abilities. In addition, it will also
be knowledge that can protect them as
practicing professionals.
Without trying to be overly dramatic,
the need in this area is fundamental,
particularly given the development of the
industry and the markets growing appetite
for funding, as well as the responsibilities
and vulnerabilities, noted above, faced by
lawyers. While no scholarly study has yet
6
f
Third-party finance
xx
EDUCATING THE WORLDS FUTURE LAWYERS
been done here, it is safe to assume that no leading law school in
the world has a course on third-party funding. A brief although
not exhaustive survey of course oferings among the leading law
schools in the US, UK, Australia and Germany supports this.
Nor have we seen (although this is harder to detect) the use of
third-party funding taught as a module within a larger and more
comprehensive course, such as courses on law and fnance, or law
and business.
Tis is particularly worrisome and puzzling given the pace at
which third-party funding is developing. It is hardly profound
to say that the future demands made by the integration
of law, fnance and business with each other and with the
transformations going on inside each of these disciplines, mean
that law schools also need to keep up with todays evolutions to
provide students with an education that will be relevant to the
needs of tomorrow.
It might be noted that this need obviously applies beyond
third-party funding. Law schools in general have to become
more attuned to the current and future needs of their students.
Teaching what was good in the past does not do the trick.
Students need to become all-around practitioners, equipped to
understand and handle both issues and challenges, present and
future. Having a frm grasp of the nexus between law and fnance
as well as other areas of business and economics is essential.
Law Schools know this. Oxford Laws new joint degree
program of law and fnance, sponsored and run as a joint venture
between Oxford Law and the the Oxford Business School (Said
Business School), is perfect evidence of a willingness to move
with the times and lead the way into the future.
Te stakeholders of the legal education world are not oblivious
to the need to improve. In fact, the balance of evidence suggests
that they are, such as the recent 18-person study group assembled
by the American Bar Association to analyse over the next two
years the needs of the law school community to be more current
in its approach.
At the same time, we see reports coming out predicting an
increase of claims against lawyers as a result of challenging
economic conditions. Tis trend should be coupled with the fact
that law frms themselves are sufering from reduced profts and
diminished opportunities, a fact which can encourage lawyers
and law frms to travel a bridge too far in terms of their push for
greater efciency in client service and greater proftability, thus
enhancing their potential vulnerability to claims of malpractice
and other forms of misfeasance.

The takeaway
Law Schools everywhere need to open a new chapter perhaps
even write a new book. Just as lawyers have a duty to know and
a duty to tell, so do law schools or rather a duty to know and
a duty to teach. But semantics aside, the obligations are clear,
present and compelling.
Law schools can do a host of things to start this process. Tey
can, as suggested as an example by one of the leading US law
professors and experts in third-party funding, professor Maya
Steinitz of Iowa Law School, have teachers put together syllabi on
this topic to use as a module within another related course. On
the other hand, there is defnitely scope for full courses on the
topic, and lectures by lawyers or funders would be helpful. Online
courses might be another path for some. But these are just a
sample of what seem like manifold possibilities.
Te Bar should also be demanding more from law schools,
and the schools in turn should be demanding it from themselves.
Students, equipped with sufcient awareness, would be the most
vocal and important community of all. Once they start to learn
then their collective voice, as with young people in general,
should carry the day and point the way to the future.
About the author
Selvyn Seidel is the founder, chairman and
CEO of Fulbrook Capital Management LLC.
He was previously a co-founder and chairman
of Burford Capital. Clementine Travis, Bahar
Semani and Inge Mecke of Fulbrook Capital
Management all assisted with this article.
f

7
The Lawyers Duty-to-Know & Duty-to-
Tell in Third Party Funding: A Time to
Recognise & Respect these Obligations
Posted: 30th July 2012 08:53
By Selvyn Seidel
Introduction & Overview
A lively focal point in the Third Party Funding industry has been the obligations of the Funders. In the UK that
interest and related inquiries and analyses have resulted, after three years of study and debate, in the November
2011 launch of a UK Code of Funding about the Funders obligations. In the US, we have seen similar studies by
the American Bar Association and others, with publications of white papers and other reports relating to Funders
obligations.
It is now time that the obligations of others in the market and industry receive equal attention and helpful
guidelines. In this respect, the spotlight should fall, as a priority, on the legal and ethical obligations of the
lawyers for the claimants. In a recent media article, the question of lawyers obligations was raised with various
professionals, and those interviewed said that there should be obligations imposed on the lawyers. This article
was first published by Commercial Dispute Resolution, a leading journal on litigation, arbitration and funding, on
9
th
July 2012.
To kick off what hopefully will be a deep research dive into the area, this article contends that lawyers have what
should be called a Duty-to-Know, and Duty-to-Tell their clients about Third Party Funding. Only if the lawyer
has and fulfills these duties can their clients be given what they need to decide whether or not to seek Funding,
and if so, how? what kind? and from whom?
Ethical Duty
The duty seems to be both an ethical duty and a separate legal one. This is the case at least if one focuses on
the two most active litigation and funding jurisdictions in the world, the UK and the US. The ethical duty might be
found in various explicit and implicit rules in various jurisdictions. For example, in the UK, the newly modified (15
June 2011) Ethical Code of Conduct for Solicitors, the SRA Code of Conduct 2011, lays down this requirement.
Here, in the Code as well as the Indications of Behavior to the Code, there are any number of separate and
independent provisions that identify and generate these duties. Collectively, they say the same thing. (The prior
Code also contained a provision, RULE 9 that was often read to carry the same obligation).
Indeed the Code emphasises, as does this Article, the overriding importance that the public interest plays in this
situation (as in others). It reads:
Where two or more Principles come into conflict the one which takes precedence is the one which best serves
the public interest in the particular circumstances, especially the public interest in the proper administration of
justice. Compliance with the Principles is also subject to any overriding legal obligations.
8
The situation in the U.S. is similar. In general, lawyers of course owe clients a variety of ethical duties with
regard to Funding. This was discussed in an important and far reaching ethical opinion issued in June of 2010
by the Ethics Committee of the New York City Bar Association. (For example, the lawyer and the client may face
a conflict of interest when the lawyer is negotiating a financing agreement with the Funder.) Among the ethical
duties a US lawyer has, it would not be hard to spell out explicitly and/or by inference the Duty to Know about
third party funding and when appropriate, the Duty to Tell the client about it.
Legal Duty
Beyond ethics, a legal obligation can be taken from various possible legal sources. In the UK, an illustration of a
court decision supporting this position is the Queens Bench decision in 2010,Adris v. Royal Bank[2010] EWHC
941 (QB). There, the Court found that a solicitors failure to obtain costs insurance for his client, protecting
against adverse costs that later were incurred, was a gross breach of the Consumer Credit Act of 1974 s. 78.
Such a duty here, as in the area of Funding, is one that is rooted in the basic requirement that a lawyer be
competent in what the lawyer is doing, and provides his or her client with competent advice. The branches of this
fundamental requirement spread far and wide.
Specific Questions & Duties
Within the general duties posited, there is also a need to address concrete specific questions that abound. Can a
lawyer avoid culpability for lack of knowledge on the back of an argument that the industry is a young one
unknown to many or indeed most lawyers? Is actual knowledge the test, versus should have known? Is there
mandated knowledge, and automatic liability?
Does a duty apply in the UK not only to solicitors but also to barristers under the ethical and legal rules that apply
to barristers? Can an unknowing barrister maintain that knowledge and guidance here is the responsibility of the
solicitors only.
What do the duties entail? How much must be known? Must one know all the basic subtleties that go into
Funding? Should, for example, the lawyer be concerned about his or her potential lack of experience or capacity
to adequately understand and advise on the topic? What about an actual or potential conflict of interest?
Should independent advice be sought by the lawyer on behalf of the client?
What differences exist between common law systems as found in the U.S. and U.K., and civil law systems, as
found in Germany and France? What about nuanced differences within different legal systems? How are
conflicts resolved or harmonised?
In the study that should go into this area, there should of course be an opportunity for all stakeholders to voice
their views. The lawyers are of naturally at the head of the queue among that group. So also is anyone who has
challenged the industry on various grounds. The most vocal and well known one is the U.S. Chamber of
Commerce. It and any kindred spirit should have the chance to voice their views.
Conclusions & Recommendations
This article is of necessity short and summary, but that should not mask the scope of the need and
responsibilities to fill they are broad and deep. The market and industry are young. The guidelines are
relatively few, and a work in process. The emphasis to date has been on the requirements imposed on the
funders.
That emphasis on funders is producing results. However, alone, the results are inadequate. The market and
industry requirements weave a seamless web. The time has come to expand the emphasis to the other
stakeholders. The legal communitys duties are compelling, as ones instincts can confirm. Those duties should
be spelled out. The health of the market and industry need this. So does the legal community itself. The project
is not a small one. It requires collaboration of the different participants in the industry, clarifying the duties and
rights of each segment.
But most of all it takes leadership and time from the legal community. The Law Society in U.K., the bar
associations in the U.S. and elsewhere, are logical candidates to take this forward, as they have taken forward so
many other projects effecting the law and legal services. The industry should work hand in hand with these
groups.
In fact, the duties here go well beyond the practicing lawyers. Law schools and educational programs should be
informing their students about the industry and market, and how to act within them. A few are starting to do this.
But very few. At one point all the law schools should put this topic on their standard teaching programs.
In the meantime, regardless of the actual state of the ethical and legal responsibilities, it seems sensible to
assume there is a duty to adequately know, with a corresponding duty to tell. The assumption in practice will, in
9
the end, not only better serve the client, the market, and the industry. It will, in the end, better serve the lawyer.
It will also by itself provide impetus to the overall and more formal analysis of and reporting on the situation.
Selvyn Seidel is Founder and Chairman of Fulbrook Management LLC, and Co-Founder and former Chairman of
Burford. Clementine Travis, an associate at Fulbrook, contributed valuable assistance.
Selvyn Seidel can be contacted via email at sseidel@fulbrookmanagement.com

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Investment arbitration claims could be
traded like derivatives
By Rebecca Lowe
Third-party funding of investment arbitration disputes is
rapidly growing into a lucrative financial market where cases
could ultimately be traded like derivatives, according to
insiders. And serious ethical concerns remain over the
growing power of an industry lacking both transparency and
regulation.
Funding bodies for both litigation and arbitration have
multiplied over recent years, but it is investment arbitration
funding that has provoked the most controversy. Proponents
say the funds improve access to justice and help keep costs down. Opponents argue they
encourage frivolous claims, create potential conflicts of interest and give funders
unwarranted control over public policy.
Selvyn Seidel, who co-founded Burford Group in 2009 one of the worlds biggest third-
party funders and has since founded Fulbrook Capital Management, describes the
change in the industry over the past two years as like night and day. I see it in front of
me, growing and growing, getting more credibility and spreading, he tells IBA Global
Insight. It is no longer an emerging industry, it is maturing, and in my view it will
inevitably reach maturity and be a good part of financial day-to-day life.
A commercial claim is no different from any other asset, Seidel explains, and can be
compared to a security or share. They can be bought, sold, financed, pledged. I think
they will eventually be part and parcel of derivatives. Some people say, isnt that a bad
thing? Well, they are good and bad. They can be good just like any other derivatives.
[Third-party funding] is no longer an emerging industry; it is
maturing, and in my view it will inevitably reach maturity and be a good
part of financial day-to-day life.
Selvyn Seidel
Co-founder, Burford Group; founder, Fulbrook Capital Management
Related links
x Have your say
x IBA Dispute
Resolution Section
x The impact of
third-party fundng
- DRI 6:1
16
Maya Steinitz, associate professor of law at the University of Iowa and a leading scholar
on third-party funding, believes the rise in interest in investment arbitration funding was
prompted by the global financial crisis. In forthcoming, unpublished research she draws a
parallel between investment arbitration funders and the so-called vulture funds that
grew up in the 1990s, which buy the debt of struggling nations at a discounted rate and
then claim for a higher rate than the creditor expected to receive.
There are certainly hedge funds and other entities that are paying close attention to see if
therell be the kinds of opportunities that the sovereign debt crisis in the 90s presented,
she says. The vulture funds that bought the arbitration awards against states [which gave
them control over the debt] are in a way what started this. Other investors thought, why
wait until there is an award? Why not get involved earlier?
Robert Volterra, co-founding partner of Volterra Fietta law firm and one of the worlds
top public international law specialists, is sceptical about the vulture fund argument. In
terms of third-party funders, I do not see the overlap with vulture funds, he says.
Apart from the fact that some NGOs do not like the fact that they are part of a process
that makes governments keep their promises and punishes them for stealing from foreign
investors without paying compensation.
Steinitz stresses that her research is in the early stages and she is yet to make a judgement
on the full ethical implication of investment arbitration funding. She is however clear that
it should be subjected to more rigorous scrutiny than the funding of commercial
arbitration due to the public policy issues at stake. Investment arbitration is waged
against governments, which means that it is ultimately the public who end up paying
when there is a loss. It is a different dynamic. Traditionally we have regarded states as
having sovereignty over deciding how to deal with public policy issues such as a
financial crisis. Now they have to deal with third-party funders who, unlike the original
claimant, never had a direct stake in the country.
The funder will have an influence over the case, but lawyers have to be
very, very careful in saying my duty is to the client, not to the funder,
There are very serious ethical issues that have to be looked at here.
Andrea Dahlberg
Arbitration practice manager, Allen & Overy
The US Chamber of Commerce has been one of the most vehement critics of third-party
litigation funding, arguing that it increases the volume of unmeritorious claims as funders
17
are willing to bet money on weak cases that have a chance of a large reward something
Seidel and other funders strongly deny. It also compromises the independence of lawyers,
the Chamber claims, by making them feel an obligation to funders rather than their
clients.
While the UK and US have voluntary regulation in place for third-party funding,
international investment arbitration remains unregulated. There are no requirements for
disclosure or the amount of control a funder can take over a case, and concerns remain
over potential conflicts of interest between arbitrators, counsel and funders.
Even lawyers who support arbitration funding in principle concede that such issues need
urgently to be resolved. The funder will have an influence over the case, but lawyers
have to be very, very careful in saying my duty is to the client, not to the funder, warns
Andrea Dahlberg, arbitration practice manager at Allen & Overy. There are very serious
ethical issues that have to be looked at here.
Seidel agrees that third-party funding should be disclosed. This would not only improve
transparency, he believes, but potentially speed up settlements and increase their value.
If its a respectable funder, it may give the defendant cause to think it is dealing with a
meritorious and credible claim, he says. So it may make it more likely to settle.
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Released by the U.S. Chamber Institute for Legal Reform, October 2012
STOPPING THE SALE ON
LAWSUITS: A PROPOSAL
TO REGULATE THIRD-
PARTY INVESTMENTS
IN LITIGATION
181
Prepared for the U.S. Chamber Institute for Legal Reform by:
John H. Beisner and Gary A. Rubin
Skadden, Arps, Slate, Meagher & Flom LLP
All rights reserved. This publication, or part thereof, may not be reproduced in anyform without the written
permission of the U.S. Chamber Institute for Legal Reform. Forward requests for permission to reprint to:
Reprint Permission Office, U.S. Chamber Institute for Legal Reform, 1615 H Street, N.W., Washington, D.C.
20062-2000 (202-463-5724).
U.S. Chamber Institute for Legal Reform, October 2012. All rights reserved.
182
Third-party investments in litigation
represent a clear and present danger to
the impartial and efcient administration
of civil justice in the United States. Such
third-party litigation nancing (TPLF)
occurs when a specialized investment
company provides money to a plaintiff
(or counsel) to nance the prosecution
of a complex tort or business dispute. In
exchange for this nancial assistance,
the plaintiff (or counsel) agrees to pay
the investor a portion of any proceeds
obtained through the litigation.
TPLF investments create the threat
of at least four negative public policy
consequences for the administration
of civil justice:
TPLF investments can be expected
to increase the volume of abusive
litigation. TPLF companies view
disputes as investments and they
I. EXECUTIVE SUMMARY
can hedge any investment against
their entire portfolio of cases. This
makes them more willing to put
money into cases that are weak
on the merits but have at least a
chance of a large award.
TPLF undercuts plaintiff and lawyer
control over litigation because the
TPLF company, as an investor in the
plaintiffs lawsuit, presumably will seek
to protect its investment, and can
therefore be expected to try to exert
control over the plaintiffs and counsels
strategic decisions.
TPLF investments prolong litigation by
deterring plaintiffs from settling. The
TPLF investor is a third party that,
like the plaintiff and the plaintiffs
lawyer, demands a share of any
litigation proceeds. The plaintiffs
obligation to satisfy this extra demand
STOPPING THE SALE ON
LAWSUITS:
A PROPOSAL TO REGULATE
THIRD-PARTY INVESTMENTS
IN LITIGATION
183
2
makes reasonable settlement
offers less attractive.
TPLF investments compromise the
attorney-client relationship and diminish
the professional independence of
attorneys by injecting a third party
into disputes. Lawyers will inevitably
feel at least some obligation to the
TPLF investors, who are paying their
bills and who might be a source
of future business. As a result,
counsel may give less attention to
the clients interests, which should be
counsels sole concern.
Given the risks inherent in third-party
investments in litigation, the U.S. Chamber
Institute for Legal Reform (ILR)
supports establishing a robust oversight
regime to govern this type of TPLF at
the federal level. The risks of TPLF are
simply too acute to be left to industry self-
regulation. And since TPLF substantially
affects interstate commerce and the
federal courts, the federal government
has jurisdiction to oversee TPLF on a
uniform, nationwide basis.
The focus of a federal oversight regime
should be on TPLF investors. The lawyers
involved in TPLF-funded cases should
continue to be governed by state bar
associations and courts, and the states
respective rules of professional conduct.
ILR has engaged vigorously in recent
and ongoing debates about the impact
of TPLF investments on professional
conduct issues and will continue to do
so. But at this point, the most pressing
need is for investor oversight.
ILR favors legislation that appoints a federal
agency to regulate third-party investments
in litigation an agency empowered to
make rules and regulations in pursuit of its
mandate and to enforce any laws, rules, or
regulations governing TPLF. Substantively,
the federal oversight regime should include
legislative and rule-based safeguards against
the risks inherent in TPLF, including statutes
and court rules requiring the disclosure
of TPLF investments and requiring TPLF
investors to pay costs associated with
the litigation they generate (particularly
defendants discovery costs).
TPLF investments compromise
the attorney-client relationship
and diminish the professional
independence of attorneys by injecting
a third party into disputes.
184
3
has no other connection. In exchange,
the investor is promised a portion of any
recovery from the dispute. The nominal
borrower in these cases may be a
company involved in commercial litigation
or an individual or group of individuals.
In cases involving individuals or groups,
the plaintiffs law rm typically is heavily
involved in nding and securing the third-
party nancing and, in some instances,
is the real party in the TPLF relationship
that receives the funds.
In TPLF investment nancing, the investors
return is usually a portion of any recovery
that the plaintiff receives from the resolution
of the dispute, whether through litigation
or settlement. The amount of recovery the
TPLF provider will receive usually turns on
several factors, including the amount of
money advanced, the length of time until
recovery, the potential value of the case
and whether the case is resolved by trial
or settlement. In this type of TPLF, the
nancing entity essentially invests money in
the outcome of the plaintiffs case, betting
that it will be successful. TPLF nancing
arrangements generally are nonrecourse (in
whole or in part); the recipient of the funds
obtains money to pursue a proceeding and
is required to provide a return to the TPLF
company only if the recipient is awarded
damages at trial or settles on favorable
terms.
1
Third-party litigation nancing (TPLF)
describes the practice of a stranger
to a lawsuit providing money to a
party in connection with the lawsuit
for prot. TPLF generally falls into
two broad categories:
Consumer Lawsuit Lending, which
typically involves individual personal-
injury cases, and
Investment Financing, which
includes investments in large-
scale tort and commercial cases
and alternative dispute-resolution
proceedings.
In consumer lawsuit lending, a lawsuit
lending company advances money to
an individual plaintiff to cover living or
medical expenses essentially giving
him or her upfront cash while his
or her lawsuit is still pending. The
plaintiff agrees to repay the lender, with
interest, out of any proceeds from the
lawsuit. Interest rates on these loans
are commonly in the range of 3-5% per
month (which, even without compounding,
can mean 60% annually). These loans
are generally nonrecourse, which means
the plaintiff need not repay the loan if the
lawsuit is not successful.
In the investment nancing variant of
TPLF, which is the subject of this paper,
a specialized investment rm provides
nancing to plaintiffs or their attorneys for
litigation costs (including attorneys fees,
court costs, and expert-witness fees)
regarding litigation to which the investor
II. INTRODUCTION: WHAT IS TPLF?
185
4
As noted in the executive summary,
TPLF investments have at least four
negative consequences for the sound
administration of civil justice. Several
ILR publications, as well as commentary
by other authors, have explained these
consequences in more detail. Briey,
however, they are as follows:
First, TPLF can be expected to prompt
an increase in the ling of questionable
claims. TPLF companies are mere
investors and they base their funding
decisions on the present value of their
expected return, of which the likelihood of
success at trial is only one component. In
addition, TPLF providers can mitigate their
downside risk by spreading the risk of any
particular case over their entire portfolio
of cases and by spreading the risk among
their investors. For these reasons, TPLF
providers can be expected to have higher
risk appetites than most contingency-fee
attorneys and to be more willing to back
claims of questionable merit.
2
The most notorious example of this
problem was the investment by a fund
associated with Burford Capital Limited
in a lawsuit against Chevron led in an
Ecuadorian court alleging environmental
contamination in Lago Agrio, Ecuador.
Burford made a $4 million investment with
the plaintiffs lawyers in the Lago Agrio suit
in October/November 2010 in exchange
for a percentage of any award to the
plaintiffs. In February 2011, the Ecuadorian
trial court awarded the plaintiffs an $18
III. PROBLEMS POSED BY TPLF INVESTMENT
FINANCING
billion judgment against Chevron, which
is on appeal.
3
In March 2011, Judge Lewis
Kaplan of the Southern District of New York
issued an injunction against the plaintiffs
trying to collect on their judgment because
of what he called ample evidence of
fraud on the part of the plaintiffs lawyers.
4

Indeed, long before Burford had made
its investment in the case, Chevron had
conducted discovery into the conduct
of the plaintiffs lawyers under a federal
statute that authorizes district courts to
compel U.S.-based discovery in connection
with foreign proceedings, and at least four
U.S. courts throughout the country had
found that the Ecuadorian proceedings
were tainted by fraud.
5
According to a December 2011 press
release, as a result of [f]urther
developments, Burford conclude[d] that
no further nancing w[ould] be provided
in the Lago Agrio case.
6
Nevertheless,
its year-long involvement and its initial
decision to invest $4 million with the
plaintiffs lawyers despite allegations of
fraud in the proceedings powerfully
demonstrate that TPLF investors have
high risk appetites and are willing to back
claims of questionable merit.
Second, TPLF changes the traditional
way litigation-related decisions are made.
When no TPLF investment has been made,
the plaintiff, advised by counsel, decides
the legal strategy for pursuing the claims
asserted. TPLF can be expected to change
that dynamic. As an investor in the plaintiffs
186
5
lawsuit, the TPLF company presumably
will seek to protect its investment, and
can be expected to try to exert control
over the plaintiffs strategic decisions. The
plaintiffs lawyer, as the person being paid
by and possibly even retained by the
investor, may accede to those efforts.
Even when the TPLF providers efforts
to control a plaintiffs case are not overt,
the existence of TPLF funding naturally
subordinates the plaintiffs own interests
in the resolution of the litigation to the
interests of the TPLF investor.
Recent commercial arbitration between
a company called S&T Oil Equipment
& Machinery Ltd. and the Romanian
government provides an example. S&T had
sought nancing for its case from Juridica
Investments Limited, and, under their
agreement, Juridica paid some legal fees
for S&T in exchange for a percentage of
arbitration proceeds. After Juridica withdrew
funding, causing S&Ts case to collapse,
a sealed complaint led by S&T against
Juridica in Texas federal court alleged that
S&Ts own lawyers had begun seeking legal
advice from Juridica after Juridica began
paying their fees, and that Juridica required
the lawyers to share with Juridica their legal
strategy for the arbitration and any factual or
legal developments in the case.
7
The lawsuit-investment industry makes
no secret of its interest in protecting
litigation investments by inuencing cases.
A principal of investor BlackRobe Capital
Partners, LLC, was quoted as saying his
rm would take a pro-active role in
lawsuits.
8
A former Burford chairman said
that his new investment company would
not control litigation, but would do[]
more than was done before.
9
Third, TPLF prolongs litigation by deterring
settlement. A plaintiff who must pay a
TPLF investor out of the proceeds of any
recovery can be expected to reject what
may otherwise be a fair settlement offer,
hoping for a larger sum of money.
10
This
problem is illustrated by litigation between
a network-security company called Deep
Nines and a TPLF provider that had invested
in Deep Niness prior commercial litigation
against a software company. Deep Nines
had entered into an agreement with the
TPLF company to nance patent litigation
with an $8 million investment. Deep Nines
had a strong case, and eventually, the case
settled for $25 million. After paying off the
investor, as well as paying its attorneys and
court costs, how much did Deep Nines
actually keep? $800,000 about three
percent of the total recovery. The TPLF
investor took $10.1 million (the return of
its $8 million investment, plus 10% annual
interest, plus a $700,000 fee). Remarkably,
though, the investor wasnt satised
and sued Deep Nines in New York state
court for even more money.
11
More than
four years after the TPLF company rst
invested in Deep Niness suit, the parties
nally settled in May 2011. No settlement
terms were disclosed.
12

The Chevron/Lago Agrio case also
powerfully demonstrates this problem.
The investment agreement in that case
included a waterfall repayment provision,
which provided for a heightened percentage
recovery on the rst dollars of any award.
Under the agreement, Burford would receive
187
6
approximately 5.5% of any award, or about
$55 million, on any amount starting at $1
billion.
13
But, if the plaintiffs settled for less
than $1 billion, the investors percentage
would go up in fact, all the way down to a
mathematical oor of about $70 million, the
investor would get the same $55 million.
The effect of a waterfall is to maximize
the investors recovery early on, but it
incentivizes plaintiffs to continue litigating
in hopes of a higher settlement.
Fourth, TPLF investments compromise
the attorney-client relationship and diminish
the professional independence of attorneys
by inserting a new party into the litigation
equation whose sole interest is making a
prot on its investment. In recent litigation
regarding injuries to 9/11 Ground Zero
workers, for example, one of the plaintiffs
rms representing the workers was nanced
by a TPLF investment that provided for
passing the interest on the investment on to
the plaintiffs, to be paid out of any recovery
by them. After settling with the defendants,
the rm sought to pass along $6.1 million
in interest payments to the plaintiffs. The
plaintiffs lawyers argued strenuously
in support of their position. The judge
overseeing the settlement acknowledged
that passing on the interest to the plaintiffs
may be permissible, but disapproved doing
so in this case because it wasnt clear that
the plaintiffs had understood or approved the
charges.
14
Investor
5.5% of
any award
Plaintiffs
[I]f the plaintiffs
settled for less than $1
billion, the investor's
percentage would
go up...
188
7
for attorneys are not compromised, and
to continue to build awareness of the
dangers of TPLF and the need for reform.
While ILR addresses the ethical dangers
of TPLF with the ABA, it is simultaneously
addressing TPLFs other policy dangers
through public advocacy, including the
proposals contained in this paper.
B. Government Oversight
Is Necessary
ILR proposes to implement safeguards
against the dangers inherent in TPLF
through a regime of government oversight
and regulation. ILR believes that the
risks posed by TPLF investments are so
serious, and the incentives for misconduct
by TPLF investment companies so great,
that industry self-regulation is not a viable
option to protect the administration of
civil justice. Government oversight and
regulation is particularly appropriate because
TPLF investors use litigated proceedings
and compulsory court process as their
investment vehicles. In other words, TPLF
investors make money by co-opting the
coercive power of government to command
defendants to appear in court or before
arbitrators, turn over documents, and defend
themselves. In these circumstances,
regulating TPLF investors actions is an
entirely proper function of government.
A. TPLF Investors Should
Be Regulated
Given the serious risks to the sound
administration of civil justice posed by
TPLF investments, an oversight regime
that implements safeguards against these
risks is necessary. This raises the threshold
question, however, whether such a regime
should be targeted to TPLF investors, to
attorneys who represent clients receiving
TPLF investments, or to both.
ILR believes that the focus for safeguards
should be on the TPLF investors, whose
activities are presently not subject to
regulation. To be sure, attorneys involved in
funded cases need oversight as well. But
merely regulating such attorneys will not
address most risks posed by TPLF. That
can only be achieved by direct regulation of
the investors, the parties who provide the
nancing and therefore yield the clout. In
any event, attorneys are already governed
by existing state bar requirements and
rules of professional conduct at the state
level.
15
The American Bar Association
(the ABA) currently is analyzing how the
Model Rules of Professional Conduct apply
to TPLF, including by soliciting the views
of stakeholders. ILR has engaged in this
important discussion and has highlighted for
the ABA the inherent dangers of TPLF to the
administration of civil justice and to the legal
profession. ILR will continue to be engaged
in that debate to ensure that existing rules
IV. THE NEED FOR FEDERAL OVERSIGHT OF
TPLF INVESTORS
189
8
C. Government Oversight
Should Be Federal
Having concluded that government oversight
of TPLF investments is necessary and
proper, the next question is whether federal
or state regulation is most appropriate. ILR
supports a robust federal regulatory regime
for at least four reasons:
16
First, TPLF investors operate nationally (and
internationally), and use the means and
instrumentalities of interstate commerce
(e.g., the mails, telecommunications,
and money transfers) to carry out their
business. Congress accordingly has the
power to regulate TPLF investors because
they are engaged in interstate commerce,
or, at least, are engaged in economic
activity that substantially affects interstate
commerce.
17
Under the effects test for
federal jurisdiction enunciated in United
States v. Lopez, Congress may regulate
economic activity that substantially
affects interstate commerce,
18
as TPLF
does. Moreover, Congress could even
enact legislation governing a TPLF investor
that operates only in a single state and
does not provide nancing or engage in any
economic activities beyond its borders as a
necessary and proper component of an
effective national effort to regulate interstate
TPLF.
19
After all, if domestic providers
could escape uniform federal regulation by
forming entities that only operate intrastate,
they could thwart efforts to create a unied
national regulatory regime.
20

Second, in addition to interstate commerce,
TPLF also implicates commerce with
foreign entities. Many of the largest TPLF
investors are organized under foreign
laws. For example, Burford and Juridica
are both registered in Guernsey; Calunius
Capital LLP is organized under the laws
of England & Wales; and IMF (Australia)
Ltd., which operates a subsidiary in the
United States called Bentham Capital
LLC, is organized under the laws of
Australia. Congress may regulate foreign
TPLF investors based on the portion of the
Commerce Clause that empowers Congress
to regulate commerce with foreign
Nations, provided that a nexus exists
between the foreign providers nancing
activities and the United States.
21
Such a
nexus exists when foreign TPLF providers
engage in TPLF in connection with matters
pending in the United States.
Third, as discussed below, one of the
prongs of ILRs proposed safeguards regime
involves amending court rules to address
cases in which TPLF is involved. Since
TPLF naturally ows into large, complex
cases, we believe most TPLF investment
activity will occur in the federal court
system, and focusing on amending federal
court rules is therefore logical. In addition,
many states have modeled their rules of
civil procedure on the federal rules and
periodically adopt changes in the federal
rules for use in their own courts. Thus,
amending the federal rules would inuence
state court rules as well.
Finally, from a practical standpoint, we
believe that attempting to implement a
federal regulatory regime to govern TPLF
will be more effective than attempting to
achieve harmonized state regimes. Adopting
federal TPLF rules, laws, and regulations
190
9
would ensure that one oversight regime is
in place that covers all 50 states. Such an
approach would avoid a checkerboard of
disparate state laws, rules, and regulations
that apply only within any given state, and
which, owing to the differences among the
state oversight regimes, likely would funnel
TPLF-nanced cases to the state courts in
the jurisdictions with the weakest oversight
regimes. In this respect, ILR believes that
seeking adoption of uniform state-level
oversight regimes in all jurisdictions would
be far more difcult than simply adopting
a single federal standard. Moreover,
implementing uniform state-level regulations
might not be possible, because some
states might not possess a regulatory
apparatus with the maturity and expertise
to regulate TPLF adequately.
For these reasons, ILR proposes creation
of a uniform federal system as the
most sensible way to regulate a cross-
border industry like TPLF.
D. Regulating TPLF: Policy
or Ethics?
Before discussing the substance of ILRs
proposed regulatory regime, we note that
we are proposing laws, regulations, and
rules to address TPLF as a policy (rather
than an ethical) matter. As noted above,
the ABA recently considered TPLF from
the point of view of lawyer ethics, and
ILR contributed to that discussion.
22
The
ABA concluded that, while attorneys are
not per se prohibited from representing
clients who have received TPLF, TPLF
does implicate a number of professional
responsibility rules, and attorneys should
therefore exercise extreme caution in such
cases. In our submissions to the ABA in
connection with its TPLF consultation, we
noted that TPLF could result in violations of
a number of ethical standards, and the ABA
commission studying TPLF adopted that
position in the Informational Report to the
House of Delegates on Alternative Litigation
Finance that the commission submitted
after concluding its analysis.
As noted above, ILR will continue to remain
engaged in the ABA debate about TPLF,
to raise awareness about its dangers, and
to build support for ethics reforms. In
this paper, however, we address a more
fundamental question whether TPLF has
serious adverse effects on the administration
of civil justice beyond those concerned with
existing ethical rules. Thus, this paper is part
of ILRs continuing effort to address TPLF
broadly as a policy matter.
191
10
ILR proposes a three-pronged approach to
federal TPLF oversight: (a) designation of
a federal agency to oversee TPLF investors
and make regulations concerning TPLF
investments, (b) a regime of statutory
safeguards to be enforced by the federal
agency; and (c) court rules requiring
disclosures when TPLF is being used. We
address below what would be involved
in each of these efforts.
A. Appointment Of A
Federal Agency To Oversee
TPLF Investments
The rst step in our proposed oversight
regime is to appoint a federal agency
to regulate TPLF. ILR believes that
Congress should empower the Federal
Trade Commission to regulate the TPLF
investment industry. The FTC was created
in 1914 to prevent unfair methods of
competition in commerce. This agency
has a long, successful record of bringing
enforcement actions against entities
that engage in unfair or deceptive acts or
practices. In the past year, for example, the
agency has obtained over $9 million in civil
penalties from companies that engaged
in unfair or deceptive practices.
23
During
this same period, the FTC has obtained
numerous cease-and-desist, disgorgement,
and civil-contempt orders against companies
that have violated the Federal Trade
Commission Act.
24

V. THE SUBSTANCE OF THE PROPOSED
OVERSIGHT REGIME
If it is designated as the federal agency
to oversee TPLF investments, the FTC
should be given three specic grants of
authority: (1) to license TPLF investors,
(2)to make rules and regulations
governing TPLF investments, and (3) to
enforce any laws, rules, and regulations
governing TPLF investments.
1. Licensing
ILR proposes that the FTC should be
empowered to create and oversee a
licensing regime for TPLF investments.
Licensing will permit effective oversight of
TPLF investors and guard against potential
abuses by them. ILR proposes that any
applicant for a license to invest in lawsuits
be required to pay a $1 million fee. This
money would remain in an account
administered by the FTC, with any interest
or dividends going to fund enforcement and
oversight activities by the agency.
2. Rules And Regulations
As the TPLF regulator, the FTC must be
authorized to promulgate such rules and
regulations as are necessary to carry out its
mandate. We would anticipate that the FTC
would, over time, create a comprehensive
regulatory regime appropriate to carry
out the intent of Congress in enacting our
proposed legislative safeguards, much as the
Securities and Exchange Commission has
done with respect to the various statutes,
like the Securities Act and the Securities
Exchange Act, that are within its purview.
192
11
3. Enforcement
Finally, the FTC should have meaningful
authority to enforce all laws, rules, and
regulations governing TPLF investments.
As part of this authority, the FTC should
be empowered to bring lawsuits in
federal court and obtain civil penalties
for violations. Again, Congresss grant of
authority to the SEC to bring civil actions
to enforce the securities laws and its rules
and regulations is instructive. The FTC
should (like the SEC) have the power to
seek scaled monetary penalties against
violators, based upon the seriousness
of the offense and to seek enhanced
penalties for repeat violations.
B. Statutory Safeguards
Against Abuses In TPLF
Investments
In addition to legislation designating the
FTC to oversee TPLF investments, ILR
also believes that Congress should, by
legislation, implement specic safeguards
that the FTC may enforce. These safeguards
would be of two types: statutory provisions
that would govern TPLF investors generally,
and statutory provisions governing TPLF
investors conduct in particular disputes.
1. Provisions Governing TPLF
Investors Generally
a) Prohibition On Ownership
By Law Firms Or Investors With
Interests In Law Firms
TPLF companies should not be owned by
law rms or have membership interests in
law rms; nor should persons who engage
in TPLF be permitted to hold themselves out
to the public as attorneys for hire. Permitting
TPLF investors to become part of a law
rm or to offer legal advice to others would
diminish the quality of legal advice available
to clients. There is a substantial risk that
non-lawyer owners of rms will focus
only on their own prot and not on client
interests or the advancement of the legal
profession (of which they are not a part).
For similar reasons, non-lawyer involvement
in law rm management would threaten
to further dilute the already-diminishing
role of the client in the U.S. legal system
because lawyers may feel pulled by the
interests of inuential investors more so
than the interests of their clients.
b) Prohibition On Contracts
Between TPLF Investors And
Lawyers
A robust safeguards regime would prohibit
any direct funding contracts between a TPLF
investor and a lawyer that does not also
include the client as a party because such
contracts would cut out the very person the
lawyer is supposed to represent. Above,
we discussed the attempt by the attorneys
for the 9/11 Ground Zero workers to pass
on to the workers $6.1 million in interest
payments on nancing obtained by the rm
without the workers approval. Legislation
should specically provide that any person
responsible for repaying a TPLF investment,
or whose recovery may be diminished by
any payment to the investor, must be a party
to the investment agreement and must
explicitly consent to all of its terms.
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12
c) Case Control
Legislation should prohibit any attempt by
TPLF investors to control the litigation they
are nancing. All litigation decisions must
be made independently by the plaintiff, with
the advice of his or her attorney, consistent
with governing ethics rules. The interests of
TPLF investors are not necessarily aligned
with those of the plaintiffs. TPLF investors
incentives are to maximize the amount of
their recovery, even at the expense of the
plaintiffs wishes. This safeguard will help
assure that the plaintiff remains in control of
the prosecution of the lawsuit.
2. Provisions Governing TPLF
Investors Conduct In Particular
Cases
a) Requirement Of Bond
Each TPLF investor should be required to
post a bond with respect to each lawsuit it
funds. This bond would be posted with the
clerk of the court in which the funded action
is pending and would be in the face amount
of 25% of the damages claimed by the
TPLF investors borrower. The bond would
be for the benet of the party not receiving
TPLF and would help ensure that the TPLF
investor has sufcient money to satisfy any
adverse cost awards. The bond may be
released at the conclusion of the case, and
after the TPLF investor satises any order
for costs issued by the court.
b) TPLF Provider Jointly And
Severally Liable For Costs Awarded
Against The Plaintiff
In the event that a plaintiff whose case is
funded by a TPLF investor has an order
to pay costs entered against it, the TPLF
investor should be jointly and severally
liable with the plaintiff for satisfying the
cost award. TPLF investors make litigation
possible when they invest in claims and
provide the funding for the conduct of
litigation. They should also be responsible
for paying all costs that the court awards
to the opposing party.
c) Limited Fee Shifting
When the party that receives funding
does not prevail in a civil action, the party
and the TPLF investor that invested in the
case should be jointly and severally liable
for paying the attorneys fees and costs
of the prevailing party. The American
Rule against fee shifting in civil actions is
meant to ensure that a plaintiff who would
not be able to satisfy an order to pay the
defendants costs, expenses, and attorneys
fees if the plaintiff loses the case will not
be deterred from bringing a meritorious
claim. When the plaintiffs case is funded by
a TPLF investor, however, the need for the
protection of the American Rule evaporates.
Moreover, given that the TPLF investor
stands to make a prot if the funded plaintiff
prevails, it is fair to make the TPLF investor
responsible for paying the expenses incurred
by the prevailing party if the TPLF investors
party loses.
d) Shifting Discovery Costs
Generally, in U.S.-based litigation, parties
are responsible for the costs they incur
in responding to discovery requests by
opposing parties. The original rationale for
this policy is unclear perhaps a concern
194
13
about facilitating court access for plaintiffs.
But the practice is traceable to an historical
era in which discovery costs were minimal.
Plaintiffs are able to issue discovery
requests to defendants that impose
substantial costs because the defendants
themselves generally are responsible for
paying them. When a plaintiffs case is
supported by a TPLF investment, however,
any argument about facilitating court access
disappears. Prot-seeking investors with
the wherewithal to pay such costs are
involved indeed, they have deliberately
involved themselves. In fairness, discovery
costs should be borne by the investors who
are backing the party making the request.
ILR therefore proposes that in any action
in which a plaintiff has received TPLF, if the
plaintiff seeks to depose any person not
receiving TPLF, the plaintiff must pay that
persons travel and lodging expenses for
appearing at the deposition. In addition, if
such a plaintiff requests documents from
any person not receiving TPLF, the plaintiff
must pay the respondents reasonable costs
of production. Such safeguards would force
investors to pay the costs of the litigation
they make possible with their investments.
e) TPLF Prohibited In Class
Actions
Congress should enact legislation barring
TPLF in class actions. Proponents of
TPLF insist that it is necessary to increase
access to justice for plaintiffs. In the
United States, however, we already have
two methods to increase court access:
contingency fees and the American rule
against fee shifting. A plaintiff wishing to
commence a suit can thus do so in the
United States without risk. There is no
cost to the plaintiff to retain an attorney to
le and prosecute the suit, and generally
no consequences if the plaintiff loses.
This is true from the simplest individual
slip-and-fall case to the most complex
class action. Because plaintiffs attorneys
are willing and available to take class
representations on a contingency-fee basis
that can produce far greater compensation
than individual cases (and indeed, they
often compete for the opportunity to
do so), TPLF is simply not necessary in
the class action context.
Moreover, by their nature, class actions
already raise signicant concerns regarding
lawsuit abuse because the individual class
members generally do not control the
litigation, which is spearheaded by class
counsel. In a large consumer class action,
the average plaintiff often has only a dollar
or two at stake. The representative
plaintiffs who are empowered to speak
for the class in such cases tend to be
friends, neighbors or even employees
of the attorney bringing the suit. As
a result, the lawyers fully control the
cases not the plaintiffs.
This concern is exacerbated when the
person driving the litigation is not even a
lawyer with duciary obligations to the
supposed clients or the court. In a case
with a legitimately aggrieved plaintiff who
is following the litigation and concerned
about its outcome, there is, at least,
someone watching the lawyer and the
funding company and that person can
raise concerns if the funding company acts
against his or her interests. In a class action,
195
14
by contrast, there is often no interested
plaintiff. Thus, the TPLF company can
effectively run the litigation with no check on
its actions. For these reasons, TPLF should
not be permitted in class actions.
C. Promulgation Of Court
Rules
The last aspect of a comprehensive federal
TPLF oversight regime would be new
rules of civil procedure. The focus of such
rules, like the proposed licensing scheme
discussed above, would be disclosure
of TPLF arrangements at the outset of
civil litigation. Meaningful disclosure
requirements would shine much-needed
light on TPLF investments. As previously
discussed, one of the biggest consequences
of TPLF is the erosion of a plaintiffs control
over his or her own lawsuit. Lawsuit
investors seek to control their investments
by managing strategic decisions in litigation
they nance. As a result, TPLF undermines
the bedrock principle that a party to a lawsuit
has the ultimate decision-making authority
with respect to that suit. The pernicious
effect on defendants is clear: because TPLF
agreements are typically made under a veil
of secrecy,
25
a defendant facing a claim
funded by TPLF may not even realize who
is guiding litigation strategy and decisions
on the other side, making it unfairly difcult
to mount an adequate defense. Strong
disclosure requirements will correct this
problem.
In particular, ILR proposes amending Federal
Rules of Civil Procedure 26 (requiring initial
disclosures) and 7.1 (requiring corporate
disclosure statements) to provide for
specic disclosures of TPLF investments
in funded cases. Requiring disclosure of
information pertaining to TPLF investments
through Rule 26 is sensible. If a company
has an interest in litigation that is contingent
on the outcome, it is in many respects a
real party to the litigation (especially if it
is funding it to any degree). Parties have
the right to know who is on the other side.
Thus, our proposed amendment to Rule 26
would require disclosure of any agreements
that give rise to such contingent interests.
Those agreements presumably would
identify the parties, and, to the extent the
agreements do not contain full information,
the parties then could pursue additional
information through discovery. In addition,
ILR proposes an amendment to Federal
Rule of Civil Procedure 7.1 to require parties
funded by TPLF to disclose any TPLF funder.
196
15
ILR is, and always will be, a champion of
free enterprise. ILR believes, however,
that TPLF is antithetical to all notions of
free enterprise. In order for American
businesses to thrive, we need a reliable,
predictable judicial system whose
judgments all of us plaintiffs, defendants,
consumers, businesses trust as impartial.
VI. CONCLUSION
TPLF is antithetical to the free enterprise
system because it allows private parties
to subject businesses involuntarily to the
coercive effects of our litigation system,
all for the purpose of prot. For these
reasons, a federal oversight regime that
implements the safeguards described
in this paper is necessary.
In order for American
businesses to thrive, we
need a reliable, predictable
judicial system...
197
16
1. The non-recourse nature of TPLF is what
differentiates it from other forms of credit.
TPLF does not include extensions of credit
where the return to the investor is not
contingent upon the outcome of a specied
dispute.
2. See generally Paul H. Rubin, On the Efciency
of Increasing Litigation, paper presented
to the Public Policy Roundtable on Third
Party Financing of Litigation, Northwestern
University Searle Center on Law, Regulation,
and Economic Growth (Sept. 24, 2009).
3. The Ecuadorian trial court awarded $9 billion
in damages to the plaintiffs, which would be
doubled if Chevron did not publicly apologize
to them. Chevron did not apologize, and the
damages were doubled to $18 billion.
4. See Chevron Corp. v. Donziger, Case No. 11-
cv-0691 (S.D.N.Y. Mar. 7, 2011), at 82-83. The
Second Circuit later vacated Judge Kaplans
injunction on jurisdictional and procedural
grounds, but his factual ndings stand.
5. On the Lago Agrio suit, see generally Roger
Parloff, Have You Got a Piece of this Lawsuit?
The Bitter Environmental Suit Against Chevron
in Ecuador Opens a Window on a Troubling
New Business: Speculating in Court Cases,
Vol. 163, Issue 8 (June 13, 2011), at 68.
6. See Press Release, Burford Capital Limited,
Burford Reports Continued Activity and Entry
into UK Market (Dec. 12, 2011), available at:
http://www.burfordnance.com/pressroom/
press-releases.
7. See B.M. Cremades, Jr., Third Party Litigation
Funding: Investing in Arbitration, Transnational
Dispute Management, Vol. 8, Issue 4 (Oct.
2011), at 25-33, 27 n.105 (citing S&T Oil Equip.
& Mach. Ltd. v. Juridica Invs. Ltd., Civil Action
No. H-11-0542 (S.D. Tex. Feb. 14, 2011), sealed
complaint, 29, 30.
8. Nate Raymond, Sean Coffey Launches New
Litigation Finance Firm with Juridica Co-
Founder, Vows to Move Beyond Litigation
Funding 1.0, The American Lawyer (June 17,
2011).
9. Id.
10. See Rancman v. Interim Settlement Funding
Corp., 789 N.E.2d 217, 220-21 (Ohio 2003)
(noting that the amount the plaintiff-appellant
owed to litigation nanciers was an absolute
disincentive to settle at a lesser amount).
11. See Alison Frankel, Patent Litigation
Weekly: Secret Details of Litigation
Financing, The Am Law Litigation Daily
(Nov. 9, 2009).
12. See Altitude Nines, LLC v. Deep Nines,
Inc., No. 603268-2008E (N.Y. Sup. Ct.); see
also Joe Mullin, Patent Litigation Weekly:
How to win $25 million in a patent suit
and end up with a whole lot less, The Prior
Art (Nov. 2 2009), http://thepriorart.typepad.
com/the_prior_art/2009/11/altitude-capital-
partners-altitude-nines-v-deep-nines.html.
13. See Funding Agreement Between Treca
Financial Solutions and Claimants, Chevron
Corp. v. Donziger, Case No. 11-cv-0691
(S.D.N.Y.), Docket No. 356, Ex. B.
14. See In Re World Trade Center Disaster Site
Litig., No. 1:21-mc-00100 (S.D.N.Y. Aug. 27,
2010).
15. Even when attorneys wish to practice
before federal courts, they typically need
only show that they are admitted to
practice before the highest court of a state
and are active and in good standing in the
bar of that state.
16. We are proposing a federal regulatory
regime for TPLF investments. The
legislative activity related to consumer
lawsuit lending has been at the state level,
and ILR will continue to engage at the state
level to prevent abuses in that form of TPLF.
17. See U.S. Const. art. 1, 8, cl. 3 (granting
Congress the power [t]o regulate
Commerce with foreign Nations, and
among the several states).
18. 514 U.S. 549, 558-60 (1995) (holding that
[w]here economic activity substantially
affects interstate commerce, legislation
regulating that activity will be sustained).
This conclusion is unaffected by the
recent opinion in National Federation of
Independent Business v. Sebelius, which
summarized existing Commerce Clause
jurisprudence in concluding that it would
not permit Congress to compel commercial
activity i.e., purchasing health insurance
where none existed. See 132 S. Ct. 2566
(2012).
19. See Gonzalez v. Raich, 545 U.S. 1, 38
(2005) (Scalia, J., concurring) (quoting
Shreveport Rate Cases, 234 U.S. 342, 353
(1914) (noting that Congress is empowered
to take all measures necessary or
appropriate to the effective regulation of
the interstate market, although intrastate
transactions may thereby be controlled)
(internal quotation marks and alterations
omitted)).
20. This analysis depends upon courts
recognizing that TPLF which involves
investing in litigation as a money-making
endeavor is an economic activity
inasmuch as the Supreme Court has
declined to use the Commerce Clause to
regulate non-economic activity that affects
interstate commerce. See United States
v. Morrison, 120 S. Ct. 1740, 1750 (2000);
Lopez, 514 U.S. at 549 (noting that where
the Court had permitted Congress to
regulate purely intrastate activities, they
had at least been economic activities). The
Supreme Court came close to outright
classifying litigation as an economic activity
in Southland Corp. v. Keating, 465 U.S. 1
(1984), where it held that enforcement
of arbitration clauses was an economic
activity that Congress could regulate.
21. See Anthony J. Colangelo, The Foreign
Commerce Clause, 6 Va. L. Rev. 949, 970-
71 (2010); see also Restatement (Third) of
the Foreign Relations Law of the United
States 402 (1987) (providing the bases
upon which states have jurisdiction to
prescribe law); Ronald D. Rotunda & John
E. Nowak, Treatise on Constitutional Law
4.2(a) (2007) (arguing that Constitution
confers a broad congressional power to
regulate foreign commerce).
22. See Am. Bar Assn Comm. on Ethics 20/20,
Informational Report to the House of
Delegates on Alternative Litigation Finance
(Feb. 2012).
23. See The FTC in 2012, Stats & Data, Federal
Trade Commission (Mar. 30, 2012), available
at: http://www.ftc.gov/os/highlights/2012/
stats.shtm.
24. Id.
25. Parloff, supra note 5, at 68, 72.
198
199
U.S. CHAMBER INSTITUTE FOR LEGAL REFORM
1615 H Street, N.W.
Washington, D.C. 20062-2000
Phone: 202-463-5724 | Fax: 202-463-5302
InstituteForLegalReform.com
200
Chapter 27
Litigation Financing
Sandra Stern
27.01 Introduction
[1] What Is Litigation Finance?
[a] Funding the Plaintiff
A common type of litigation finance consists of the provision
of funds by an entity not engaged in the practice of law (finan-
cier or funder) either to a plaintiff or to the attorney
representing the plaintiff, in return for a contractual commit-
ment to receive a portion of the award or settlement (or, in the
case of the attorney, a portion of the contingency fee). Generally,
these advances are nonrecoursei.e., if the claim is not success-
ful, neither the litigant nor the attorney has any obligation to re-
turn funds to the funder.
Although the term litigation finance may encompass the fi-
nancing of any type of lawsuit, including those involving person-
al injuries, the focus of this chapter is on commercial litigation.
Some advances that finance commercial litigation may be struc-
tured so as to give the funder a security interest in the claim and
its proceeds. In this chapter, this structure is assumed.
[b] Funding the Attorney
Although the reason for financing the plaintiff is evidentin
many cases, it assists David (sometimes an inventor or small
technology firm) not only to litigate against Goliath but also to
hold out until a reasonable settlement is offeredthe appeal of
financing the attorney is less immediately obvious. The first rea-
son why such financing is useful is that some potentially reward-
ing lawsuits are expense heavy, particularly those that rely on
expert testimony, with the result that even a law firm that typi-
cally works for plaintiffs on a contingency fee basis may not be
able to fund these expenses on its own. Second, since 2008, bank
201
credit, particularly for small law firms, has been more difficult to
obtain than in the years prior to the financial crisis.
One significant reason that may be even more important
than the first two is that litigation finance is an emerging indus-
try so that in litigation finance (as opposed to bank lines of cre-
dit) there are no standard terms and conditions throughout the
industry. Following is an example of an innovative use of litiga-
tion finance to obtain both the security of an hourly rate and the
uptick of a contingency fee arrangement:
Outside financing might also be of value to a risk-averse law
firm that generally bills by the hour and is presented with at-
tractive contingent fee opportunities. For example, the pre-
viously mentioned hypothetical software startup that might
benefit from litigation financing might approach an hourly fee
law firm because of its strong reputation in patent law. The law
firm may receive many such opportunities from a broad array
of contingent fee clients with promising patent law claims.
Some of the law firms partners may be eager to take the cases
on a contingent fee basis, recognizing that successful plaintiffs
firms can be much more profitable than even the most success-
ful hourly fee firms. Other, more risk-averse partners may wor-
ry about giving up a steady stream of billable hours in the hope
of winning a large contingent fee. Partners with mortgages and
school tuitions may care more about maintaining their annual
incomes than about striking it rich.
If a third-party financier were able to absorb some of the risk
of these lawsuits, this might enable an hourly fee law firm to
take cases for a contingent fee. The financier could do so in two
ways. First, the funder could structure a deal with the client
exchanging money for a share of the clients recovery, which
the client would subsequently pass along to the law firm in
payment of hourly fees. Under such a structure, the law firm
would bill by the hour and take no risk at all. Under an alterna-
tive structure, however, the law firm might take the case on a
contingent fee basis, the financier might lend money to the law
firm in amounts that would cover its hourly fees (or an agreed
upon amount that might be discounted from its regular hourly
fees), and the law firm would repay the loan plus interest out of
its contingent fee. Under this latter scenario, the law firm
would be guaranteed its hourly fee, for if the case results in a
lower recovery, the terms of the nonrecourse loan would not
entitle the lender to recover any more than the law firm col-
lected in the case. But if the contingent fee ended up exceeding
the hourly billings by an amount large enough to cover accrued
interest and leave extra profit for the law firm, the law firm
202
would reap those benefits.1
[c] Funding the Defendant
While funding for the plaintiffs side of a lawsuit is an estab-
lished practice, funding for the defendants side has many bene-
fits, even if the defendants ability to sustain the costs of pro-
tracted litigation is not an issue. As has been noted by Jonathan
Molot, a leading theoretician of litigation finance, protracted liti-
gation has many undesirable secondary consequences:
When the company decides to borrow money to finance its op-
erationseither in a private placement or through a public
bond offeringits ability to do so and its cost of financing will
depend upon how these third parties view its future earnings
and cash flow. When a company seeks an equity investment or
is the potential subject of a private sale or public offering, the
due diligence into the companys future prospects will be even
more intense. To the extent that future earnings will depend
upon the companys core business abilitiesfactors like pro-
duction prowess, marketing skill, cost control and management
experiencepotential lenders or investors are reasonably well
equipped to assess the companys future earnings. That is, after
all, what public and private capital markets are all about
bringing capital to productive enterprises based on predictions
about how that capital is best employed. But when a companys
future prospects depend upon high-stakes litigation, potential
lenders and equity investors are even less likely than the com-
panys own management to be able to assess the relevant risks.
In some instances, potential investors or lenders may consider
large, pending litigation a deal breaker.2
For example, a company might be facing protracted products
liability litigation with a possible risk of a significant judgment or
settlement. The funder might agree to assume the litigation costs
and indemnify the defendant for the amount of the verdict or
settlement in return for the payment of an agreed-upon sum by
the defendant to the funder. Even if the transaction is structured
so that the defendant retains some risk, the resulting number
may be small enough so that it does not present an SEC reporting
1. Jonathan T. Molot, Litigation Finance: A Market Solution to a Procedural
Problem, 99 Georgetown LJ 65 (2010), at 100.
2. Jonathan T. Molot, A Market in Litigation Risk, 76 U. Chi. L. Rev. 367
(2009), at 372.
203
obligation or prove troublesome to outside investors.
From the funders perspective, if it is able to make an in-
formed judgment about the value of the case, it may be able to
recover profitably if the case settles for an amount less than the
amount paid to it by the defendant. From the defendants pers-
pective, it must also do its due diligence in order to assure itself
that the funder will have the resources to pay the judgment or
settlement when it occurs.
27.02 Recent Developments
[1] The ABA White Paper
There have been several recent developments that have con-
verged to make litigation finance appealing to litigators and their
clients. One of the most important of these has been the Ameri-
can Bar Associations White Paper on Alternative Litigation
Finance.3
Prior to the dissemination of the white paper, a litigator con-
sidering whether (s)he should recommend litigation finance to a
client may have dismissed the idea out of hand because of possi-
ble ethical considerations andpossibly more significantlythe
lawyers duty to identify all of the various rules that may be im-
plicated in such financing and analyze each of their implications.
In the white paper, the Working Group on Alternative Litigation
Finance brought all of these considerations to the forefront and
analyzed each in turn.
As indicated by the Executive Summary, there are a number
of Model Rules potentially implicated in litigation finance.
A lawyer must always exercise independent professional
judgment on behalf of a client, and not be influenced by finan-
cial or other considerations. Moreover, a lawyer must not per-
mit a third party to interfere with the exercise of independent
professional judgment. Numerous specific provisions in the
3. American Bar Association Commission on Ethics 20/20, Informational
Report to the House of Delegates, submitted February 2012 (previously
titled White Paper on Alternative Litigation Finance).
Available at:
http://www.americanbar.org/content/dam/aba/administrative/ethics_2
020/20111212_ethics_20_20_alf_white_paper_final_hod_informationa
l_report.authcheckdam.pdf (last visited 10/26/12). Hereinafter, ABA
White Paper.
204
American Bar Association Model Rules of Professional Conduct
(Model Rules), including conflicts of interest rules and rules
governing third-party payments of fees, reinforce the impor-
tance of independent professional judgment.
In addition, lawyers must be vigilant to prevent disclosure of
information protected by Model Rule 1.6(a), and to use reason-
able care to safeguard against waiver of the attorney-client pri-
vilege. Any infringement on rights that clients would otherwise
have, resulting from the presence of alternative litigation
finance, requires the informed consent of the client after full,
candid disclosure of all of the associated risks and benefits.
Lawyers who are not experienced in dealing with these fund-
ing transactions must become fully informed about the legal
risks and benefits of these transactions, in order to provide
competent advice to clients. Because this is a new and highly
specialized area of finance, it may be necessary for a lawyer to
undertake additional study or associate with experienced coun-
sel when advising clients who are entering into these transac-
tions.
Nevertheless, the white paper concludes that, with due con-
sideration (and, perhaps, the informed consent of the client),
litigation financing may be consistent with the Model Rules.
Lawyers must adhere to principles of professional indepen-
dence, candor, competence, undivided loyalty, and confiden-
tiality when representing clients in connection with ALF trans-
actions. In the event that the lawyers involvement in the fund-
ing process significantly limits the lawyers capacity to carry
out these professional obligations, the lawyer must fully dis-
close the nature of this limitation, explain the risks and bene-
fits of the proposed course of action, and obtain the clients in-
formed consent.
[2] The Association of the Bar of the City of New
York Concurs
At roughly the same time as the ABA was considering its
white paper, the Association of the Bar of the City of New York
issued its Formal Opinion 2011-2.4 Examining the applicable
New York Rules of Professional Conduct, the Report concludes
4. Association of the Bar of the City of New York, Formal Opinion 2011-2,
available at www.nycbar.
org/ethics/ethics-opinions-local/2011-opinions/1159-formal-opinion-
2011-02, last visited on September 12, 2012.
205
that:
It is not unethical per se for a lawyer to represent a client
who enters into a non-recourse litigation financing arrange-
ment with a third party lender. Nevertheless, when clients con-
template or enter into such arrangements, lawyers must be
cognizant of the various ethical issues that may arise and
should advise clients accordingly. The issues may include the
compromise of confidentiality and waiver of attorney-client
privilege, and the potential impact on a lawyers exercise of in-
dependent judgment.5
[3] The Rand Corporation Report
The Rand Corporation, in its white paper entitled Alterna-
tive Litigation Financing in the United StatesIssues, Knowns,
and Unknowns,6 explored the implications of litigation finance
in the broader context of ethics, social morality, and economic
effects. The white paper essentially adopted the conclusion of
Jonathan Molot that litigation finance promotes overall fairness
in the settlement process by bolstering the bargaining power of
the party financed, thus resulting in settlements that are more in
line with the legal merits of the litigants positions than their re-
spective appetites for protracted litigation.
Another issue of substantial social concern is the degree to
which plaintiffs are compensated appropriately given the laws
that apply to their cases. (In some circumstances, no compen-
sation is appropriate because the legal claims lack merit.) Mo-
lot (2009b) considers this issue in detail, treating accuracy as
synonymous with fairness. Regarding the meaning of accura-
cy, Molot (p. 2) writes,
A principal goal of civil procedureindeed, the principal
goalis the accurate application of law to fact. If we want
to promote the accurate application of law to fact, we need to
ensure not only that adjudicated cases are resolved accurate-
ly, but also that settlements are based on trial expectations.
A fundamental point made by Molot is that when a litigant is
5. Id.
6. Steven Garber, Alternative Litigation Financing in the United States
Issues, Knowns, and Unknowns, available at
http://www.rand.org/pubs/occasional_papers/OP306.html (last visited
on November 1, 2012).
206
at a bargaining disadvantage relative to the litigant on the oth-
er sidebecause of greater risks, less tolerance for risk, fewer
resources available for disputing and negotiating, or some
combinationthen providing ALF to the disadvantaged party
could avert settlements that reflect primarily bargaining power
rather than legal merit. Molot focuses on plaintiff-side ALF in
his analysis but reminds readers that defense-side ALF would
tend to promote accuracy if it is the defendant who is at a bar-
gaining disadvantage for reasons other than legal merit. The
basic point is that if ALF levels the playing field between plain-
tiffs and defendants, this will tend to improve the accuracy or
fairness of settlements.7
Additionally, the Rand white paper put to rest another dis-
comforting considerationthe often-voiced argument that litiga-
tion finance encourages frivolous litigation.
There are reasons to doubt that, currently or in the near fu-
ture, ALF suppliers would knowingly choose to invest in such
cases, however. First, it appears that ALF companies are able to
find ample profitable investment opportunities in claims with
fairly high probabilities of resulting in recoveries. Second,
building their portfolios with high-probability claims may be
part of their best risk-management strategies.8
By directly addressing two of the major concerns that may
have served as threshold barriers to a litigators decision to rec-
ommend litigation finance, the white paper was a significant de-
velopment in the history of litigation finance in the United
States.
27.03 Search, Filing, and Other Article 9 Issues
[1] How Is the Claim Categorized Under UCC Article
9?
If the funder is financing the client (rather than the attor-
ney), it should structure its transaction so as to take a security
interest in the claim, rather than relying on an unsupported con-
tract right. That interesta right to payment arising out of litiga-
tionmay be characterized in different ways, depending on the
7. Id. at 34 (footnotes omitted).
8. Id. at 32.
207
underlying nature of the lawsuit.
Article 9 distinguishes commercial tort claims, which are a
separate type of collateral, from other claims. Under UCC 9-
102(a)(13), a commercial tort claim is:
A claim arising in tort with respect to which
(A) the claimant is an organization; or
(B) the claimant is an individual and the claim:
(i) arose in the course of the claimants business or pro-
fession; and
(ii) does not include damages arising out of personal in-
jury to or the death of an individual.
The problem with this definition is that many commercial
lawsuits contain both contract and tort claims (for example,
breach of contract as well as fraud and misrepresentation arising
therefrom). Does the definition encompass actions that sound
primarily in tort, even though there are other claims as well?
Does the definition require that the claim list only tort causes of
action? The notes to the definitions do not further provide any
guidance as to the difference between a commercial tort claim
and any other type of commercial claim.
If the claim is not a commercial tort claim, it may in some
circumstances be an account, if one looks through the claim to
the underlying obligation. Thus, for example, if A enters into a
contract with B in which A agrees to perform services for a fee,
payable by B, the contract rights thus created are an account
under the UCC 9-102(a)(2) definition of account as
a right to payment of a monetary obligation, whether or not
earned by performance, (i) for property that has been sold or is
to be sold, leased, licensed, assigned, or otherwise disposed of;
(ii) for services rendered or to be rendered.The term does not
include (ii) commercial tort claims or (vi) rights to pay-
ment for money or funds advanced or sold, other than rights
arising out of the use of a credit or charge card.
The fact that the account has not been paid voluntarily and is
now disputed, or even in litigation, should not make any differ-
ence as far as its UCC characterization is concerned.
If the claim is not an account, and is also not a commercial
tort claim, it may be a general intangible, the residual category
including all other collateral and defined in UCC 9-102(a) (42)
as:
Any personal property, including things in action, other than
208
accounts, chattel paper, commercial tort claims, deposit ac-
counts, documents, goods, instruments, investment property,
letter-of-credit rights, letters of credit, money, and oil, gas, or
other minerals before extraction. The term includes payment
intangibles and software.
Ordinarily, the distinction among the three may not be im-
portant to the searcher concerned with prior rights in the colla-
teral, or to the filer. All of these three categories are filing colla-
terali.e., collateral in which a security interest is perfected by
filing, rather than by another perfection method.
The searcher may assume, for example, that a filing describ-
ing accounts or general intangibles may potentially cover the
claim if it is not a commercial tort claim, and that such a filing
warrants further inquiry. The filer should describe the collateral,
for purposes of the security agreement, specifically (i.e., that cer-
tain lawsuit identified by docket # [__] filed in the [name of
court] by [Plaintiff] against [Defendant]), and may file in the
same manner, irrespective of its Article 9 characterization. Occa-
sionally, however, uncertainty as to characterization may make a
difference.
[2] Is the Claim a Commercial Tort Claim?
[a] Filing Against the Claim
The distinction between a commercial tort claim and an ac-
count or general intangible is important to the person drafting a
security agreement and subsequently filing a financing statement
to perfect a security interest in the claim. If the claim is a com-
mercial tort claim, UCC 9-108(e) provides that the claim must
be specifically described for purposes of the security agreement
and cannot be subsumed under a phrase such as all of the Deb-
tors accounts and general intangibles, even if the debtor ap-
proves of this broad phraseology. UCC 9-108(e) provides that:
A description only by type of collateral defined in [the Uniform
Commercial Code] is an insufficient description of
(i) a commercial tort claim.
The comments to this section explain that:
Subsection (e) requires greater specificity of description in
order to prevent debtors from inadvertently encumbering cer-
tain property.
Although UCC 9-504 would permit a more general descrip-
tion of the claim for filing purposesincluding a statement that
the filing covers all assetsit is the general practice to file a
209
collateral description that exactly or closely replicates the colla-
teral description in the security agreement. Such a filing is good
practice as it alerts future potential funders that the collateral is
already encumbered.
[3] Financing the Attorney
If the attorney is being financed, the categorization issues
described above do not exist. Irrespective of the classification of
the claim as a commercial tort claim, or otherwise, the funders
collateral is the attorneys right to be paid under its engagement
agreement (frequently, in practice, a contingency fee agreement).
This right is clearly an account, as the definition of account in
UCC 9-102(a)(2) includes presently unearned fees:
Account means a right to payment of a monetary obli-
gation, whether or not earned by performance for services
rendered or to be rendered.
[4] Subordinating the Prior Security Interest
Whether the claimant or the attorney is being financed, it is
possible that the searcher will find potentially conflicting security
interests. Although litigation funding may be a relatively new
type of financing, a prior secured party should analyze a request
to subordinate or release its interest in the claim the same way it
would analyze a request by any other type of subsequent party
providing funds to it debtor. Because the subsequent financing
makes it more likely that the prior secured creditor will be repaid
in a timely manner, there is no principled reason why the request
should be refused.
[5] Locating Prior Interests
[a] Automatic Perfection
Litigation funding presents one challenge for the searcher
that is frequently not present in other types of financings. If a
financier is advancing funds against the accounts and general
intangibles of an operating business, it is likely that prior secured
parties will have filed a financing statement to put the world on
notice of their interests. This may not be the case when a prior
party has taken an interest in a legal claim.
UCC 9-309 addresses two situations in which prior claimants
may be entitled to automatic perfectioni.e., perfection that oc-
curs when the security interest attaches, irrespective of whether
or not a filing is made. This section creates a blind spot in the
210
search process. Because of the automatic perfection rule, the
prior interest cannot be discovered.
The following security interests are perfected when they attach:
(2) an assignment of accounts or payment intangibles which
does not by itself or in conjunction with other assignments
to the same assignee transfer a significant part of the as-
signors outstanding accounts or payment intangibles a
sale of a payment intangible.
These exclusions from the filing requirement relate to differ-
ent circumstances. The occasional assignment exclusion may
potentially apply to a claim that cannot be classified as a com-
mercial tort claim.
[b] Occasional Assignments
Suppose, for example, that a claimant operates a factory that
produces widgets. It sells the widgets on open account. Because
it deals with a number of distributors, it has a number of such
accounts.
If, then, it has a contract claim against one such distributor,
and a funder takes a security interest in that claim, and the ac-
count from which the claim arose, the assignment will be an oc-
casional assignment because it does not relate to a significant
number of the widget-makers accounts.
The comments to UCC 9-309 indicate that the section was
intended to protect casual assignees that would have no reason
to suspect that a filing is required.
Paragraph 2 expands upon former Section 9-302(1)(e) by af-
fording automatic perfection to certain assignments of pay-
ment intangibles as well as accounts. The purpose of paragraph
(2) is to save from ex post facto invalidation casual or isolated
assignmentsassignments which no one would think of filing.
Any person who regularly takes assignments of any debtors ac-
counts or payment intangibles should file.
The reasoning behind this section does not always apply to
litigation funders, many of which are, in fact, legally sophisti-
cated and not unacquainted with the filing system. As a saving
grace, many persons taking an assignment of an isolated account
view it as an advantage to file and thereby put the world on no-
tice as to their security interest. However, the possibility exists
that a search of the filing system will not reveal all previously
perfected security interests.
211
[c] Payment Intangibles
The second exception would apply, for example, if a claimant
had received a judgment against the defendant. The judgment is
being appealed, and the appeal is being financed. That settle-
ment would likely be classified as a payment intangible, which,
under UCC 9-102(a)(61) is:
A general intangible under which the account debtors princip-
al obligation is a monetary obligation.
An assignment of the payment obligation would not require
a filing and, therefore, would not necessarily be discovered in the
course of a search of the filing records.
[6] The Attorneys Lien
[a] Financing the Claimant
In addition to a competing security interest, the lien of the li-
tigating attorney may potentially be entitled to priority over the
security interest of the funder. The discussion that follows ad-
dresses the rights of the funder vis--vis the right of the attorney
to a charging lien, which is a right to the proceeds of the litiga-
tion (as distinguished from the attorneys retaining lien, or
right to retain certain papers and/or records in the possession of
the attorney until payment).
UCC 9-317 establishes the general rule that a person who be-
comes a lien creditor has priority over an unperfected security
interest.
A security interest is subordinate to the rights of:
(1) a person entitled to priority under 9-322; and
(2) a person that becomes a lien creditor before the
earlier of the time:
(A) the security interest or agricultural lien is per-
fected; or
(B) one of the conditions specified in Section 9-
203(b)(3) is met and a financing statement cover-
ing the collateral is filed.
When does the attorney become a lien creditor? A lien
creditor is defined in UCC 9-102(a)(52) as:
A creditor that has acquired a lien on the property involved by
attachment, levy, or the like.
The answer to the when question depends on state law. For
example, the New York statute provides that:
212
From the commencement of an action, special or other pro-
ceeding in any court or before any state, municipal or federal
department, except a department of labor, or the service of an
answer containing a counterclaim, the attorney who appears
for a party has a lien upon his clients cause of action, claim or
counterclaim, which attaches to a verdict, report, determina-
tion, decision, judgment or final order in his clients favor, and
the proceeds thereof in whatever hands they may come; and
the lien cannot be affected by any settlement between the par-
ties before or after judgment, final order or determination. The
court upon the petition of the client or attorney may determine
and enforce the lien.9
This language suggests that the lien arises when the attorney
first appears in court for its client. Because a sophisticated litiga-
tion funder is unlikely to invest in a nascent claim, it is likely
that, before it has taken the actions specified in UCC 9-317, an
attorneys lien will have arisen under the foregoing language.
The foregoing result may be different, however, in a jurisdic-
tion in which the lien is established by the common law, and is
not considered to have arisen until such time as a court, upon
application made by the attorney, recognizes the lien. Additional-
ly, in some jurisdictions, the lien may arise by contracti.e., be-
cause it is specifically provided for in the engagement letter.
[b] Financing the Attorney
If the attorney is being financed, the attorneys lien is not a
competing interest. Indeed, the financier and the attorney are
aligned with respect to the lien. Since the security interest will be
in the attorneys recovery, the financier should be interested in
the attorneys preservation and assertion of the lien.
[7] The Commercial Tort Claim as Proceeds of Other
Collateral
[a] General Requirements
There are two requirements that a secured creditor must ob-
serve in order to take a security interest in a commercial tort
claim as original collateral (as opposed to the proceeds of other
collateral). First, the claim must be in existence when the securi-
ty agreement is authenticated. Under UCC 9-204(b):
9. NY Jud. 475.
213
A security interest does not attach under a term constituting an
after-acquired property clause to
(2) a commercial tort claim.
Second, even if the claim exists at the time the security
agreement is authenticated (electronically or manually ex-
ecuted), it must be specifically described in the security agree-
ment. UCC 9-108(e) provides that:
A description only by type of collateral defined in [the Uniform
Commercial Code] is an insufficient description of
(1) a commercial tort claim.
Because it is the general practice for a secured lender to file a
financing statement that replicates the collateral description con-
tained in the security agreement, it will often be possible for the
funder financing a commercial tort claim to determine whether
or not the claim is covered by a previously filed financing state-
ment. (In cases where the financing statement simply reads all
assets of the debtor, however, it will be necessary to make fur-
ther inquiry of the claimant.)
[b] Tort Claims as Proceeds
The foregoing considerations do not apply if the tort claim is
the proceeds of other collateral in which a security interest is
claimed. The definition of proceeds in UCC 9-102(a)(64) is
broad enough to cover commercial tort claims as proceeds:
Proceeds means the following property:
(A) whatever is acquired upon the sale, lease, license, ex-
change, or other disposition of collateral;
(B) whatever is collected on, or distributed on account of, col-
lateral;
(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of
the loss, nonconformity, or interference with the use of,
defects or infringement of rights in, or damage to the colla-
teral; or
(E) to the extent of the value of collateral and to the extent
payable to the debtor or the secured party, insurance pay-
able by reason of the loss or nonconformity of, defects or
infringement of rights in, or damage to, the collateral.
It is clear from Comment 5(g) to UCC 9-102 that commercial
tort claims were included within this definition:
A security interest in a tort claim also may exist under this Ar-
214
ticle if the claim is proceeds of other collateral.
[c] The Ferry Road Case
[i] The Mortgage and the Claim
When is a commercial tort claim the proceeds of other prop-
erty? The case of In re Ferry Road10 explored this issue in the
context of an underlying real property financing.
The case arose out of the following events: Ferry Road, the
bankrupt, acquired a parcel of real property for the purpose of
constructing a retail store that it would lease on a long-term ba-
sis to a commercial tenant. In order to finance the construction,
it obtained a construction loan from a local bank, in the course of
which it executed a deed of trust and an assignment of leases and
rents, which were duly filed in the land records. Ultimately, the
note, deed of trust, and assignment of rents and lease were as-
signed to RL BB, the defendant in this action.
Ferry Road then began construction. In order to render the
real property suitable for use as a retail store, it needed to build a
retaining wall. It hired several contractors to design and con-
struct the wall. After the wall was constructed, however, several
prospective retail tenants to which the premises were offered
refused to execute a lease, asserting that the retaining wall was
dangerously defective. Ferry Road ultimately became a plaintiff
in a litigation against these contractors, claiming:
$1.5 million in compensatory damages as a result of defen-
dants negligence and/or malfeasance for loss of [plaintiffs]
contracts, the insufficiency of the construction, attorney fees
and additional damages which all are reasonably foreseea-
ble....11
[ii] Was the Claim Proceeds of the Realty?
The issue posed by the case was whether the claim was the
proceeds of the deed of trust and assignment of rents and leas-
es held by RL BB.
10. In re Ferry Road Properties, LLC, 2012 WL 3888201 (Bankr. ED Tenn.
2012).
11. Id. at 1.
215
The court held that the claims relating to the construction of
the retaining wall were not the proceeds of the real property.
Distinguishing situations in which there is loss of the realty or
direct damage to itsuch as a casualty or condemnationthe
court held that a claim for the loss of a mortgagors business,
even though related to the real property, is not proceeds.
To the extent that Ferry Roads state court action encom-
passes claims beyond property damage, RL BB has no lien in-
terest. As set forth in the state court complaint, Ferry Road also
seeks damages resulting from defendants negligence and/or
malfeasance, caused by the loss of [plaintiffs] contracts,
which Ferry Road characterizes in its brief in support of its mo-
tion for summary judgment as lost income expectancy. A
claim for business losses is personal property of Ferry Road,
see Tenn. Code Ann. 13105(21) (Personal property in-
cludes money, goods, chattels, things in action, and evidences
of debt;), and constitutes a commercial tort claim. See Tenn.
Code Ann. 479102(a)(13) (Commercial tort claim means
a claim arising in tort with respect to which: (A) the claimant is
an organization; or (B) the claimant is an individual and the
claim: (i) arose in the course of the claimants business or pro-
fession; and (ii) does not include damages arising out of per-
sonal injury to or the death of an individual.); see also Helms
v. Certified Packaging Corp., 551 F.3d 675, 67981 (7th
Cir.2008) (negligence claim for business losses is a commercial
tort claim under the UCC).
There is simply no authority for the proposition that RL BB has
a security interest in Ferry Roads commercial tort claim as
proceeds under RL BBs deed of trust or assignment of leases
and rents.12
[iii] Implications of Ferry Road for Commercial
Tort Financiers
The decision may be disturbing to personal property secured
lenders, who may otherwise have assumed that the broad defini-
tion of proceeds contained in Article 9 would cover all com-
mercial torts related in any way to the collateral. But it is correct-
ly decided.
First, although the definition of proceeds is broad, it re-
quires something more than a nexus between the pledged colla-
teral and the tort claim. In this case, the defective wall may have
12. Id. at 7.
216
restricted the commercial use of the premises, and reduced its
value, but the property had not been damaged by the faulty con-
struction. It had just not been improved.
To permit a tort claim to become proceeds merely on the
basis of some connection between the collateral and the claim
would be to defeat the policy underlying the treatment of com-
mercial tort claims in current Article 9. The drafters required
existence of the claim at the time of the execution of the security
agreement and specificity of the collateral description therein in
order to prevent debtors from inadvertently pledging future tort
claims. This policy would be defeated if courts required only
some nexus between the two, rather than destruction or damage
directly to the pledged collateral, as the debtor would never be
sure when it had encumbered a future tort claim.
Second, as the court noted,
Even if the deed of trust and/or assignment of leases and rents
otherwise qualified as a security agreement that encompassed
Ferry Roads commercial tort claims, Tennessee law is clear as
pointed out by Ferry Road that a security interest in these
claims is perfected by the filing of a financing statements,
which did not occur in this case. See Tenn Code Ann. 479
310.13
This is a crucial point, although the court did not elaborate
upon it. Under UCC 9-315(d), continued perfection of a security
interest in proceeds requires the filing of an initial financing
statement covering the collateral from which it springs:
A perfected security interest in proceeds becomes unperfected
on the 21
st
day after the security interest attaches to the
proceeds unless:
(1) the following conditions are satisfied:
(A) a filed financing statement covers the original colla-
teral;
(B) the proceeds are collateral in which a security interest
may be perfected by filing in the office in which the fi-
nancing statement has been filed; and
(C) the proceeds are not acquired with cash proceeds .
Here, a financing statement was not filed, and, more signifi-
cantly, could not have been filed. A deed of trust is recordable in
13. Id. at 8.
217
the real property records, not the personal property records. Ar-
ticle 9 does not cover:
the creation or transfer of an interest in or lien on real proper-
ty, including a lease or rents thereunder (9-109(d)(11)).
Finally, had the case held that the claim was proceeds of
the real property, funders (and other subsequent secured parties)
would be required to consult the real property records, as well as
the UCC filing office records, in order to determine whether a
prior creditor might assert that it had a perfected security inter-
est in the claim. Real property rules (and the registrations related
thereto) and personal property rules (and the filings related the-
reto) exist in different spheres. Although they have points of in-
tersectionfixtures being among themit is generally unneces-
sary for a prospective personal property creditor to search the
land records in order to determine whether the personal proper-
ty lender will have a first priority security interest. Thus, al-
though the case may be disappointing to personal property se-
cured lenders in general, it is helpful to those financing commer-
cial tort claims.
[8] Default and Enforcement
[a] Judicial and Nonjudicial Enforcement
[i] In General
As is true of any other type of collateral, the Uniform Com-
mercial Code permits the secured party to use a judicial proceed-
ing to enforce its rights or to proceed in the absence of a judicial
proceeding by using one or more of the remedies set forth in Part
6 of Article 9. The nature of this collateral, however, makes its
disposition in the commercially reasonable sale contemplated by
UCC 9-610 problematic. The requirement of a commercially rea-
sonable sale works well in the case of chattels; it was not de-
signed for application to lawsuits.
Although the author is unaware of any case law addressing
the commercially reasonable sale of a lawsuit, there is at least no
explicit Article 9 obstacle to doing so. As in the case of any other
type of unique collateral, the universe of realistically likely poten-
tial bidders is limitedperhaps to the funder and the defendant
in the litigation. If the funder were to credit bid and to be the
successful bidder, it would then be in a position to generate
proceeds by settling with the defendant.
Additionally, as is the case with any other type of collateral,
218
the debtor may consent to the secured partys acceptance of col-
lateral in full or partial satisfaction of the obligation to the se-
cured party. These requirements are set forth in UCC 9-620(c):
[1] A debtor consents to an acceptance of collateral in partial
satisfaction of the obligation it secured only if the debtor
agrees to the terms of the acceptance in a record authenti-
cated after default or the secured party
(A) sends to the debtor after default a proposal that is un-
conditional or subject to a condition that collateral not
in the possession of the secured party be preserved or
maintained;
(B) in the proposal, proposes to accept collateral in full
satisfaction of the obligation it secures; and
(C) does not receive a notification of objection authenti-
cated by the debtor within 20 days after the proposal
is sent.
Additionally, the secured party must send its proposal to cer-
tain other persons. Under UCC 9-621(a):
A secured party that desires to accept collateral in full or partial
satisfaction of the obligation it secures shall send its proposal
to:
(1) any person from which the secured party has received, be-
fore the debtor consented to the acceptance, an authenti-
cated notification of a claim of an interest n the collateral;
(2) and other secured party or lienholder that, 10 days before
the debtor consented to the acceptance, held a security in-
terest in or other lien on the collateral perfected by the fil-
ing of a financing statement that:
(A) identified the collateral;
(B) was indexed under the debtors name as of that date;
and
(C) was filed in the office or offices in which to file a fi-
nancing statement against the debtor covering the col-
lateral as of that date; and
(3) any other secured party that, 10 days before the debtor
consented to the acceptance, held a security interest in the
collateral perfected by compliance with a statute, regula-
tion, or treaty....
The potential universe of persons to be notified, in the case
of a litigation claim, might include the claimants attorney and
any bank or other person that had filed a financing statement
potentially identifying the claim, even if its interest had been
subordinated to that of the financier.
219
As is true in the case of a default involving tangible collateral,
if a dispute has arisen between the secured party and the debtor,
a debtor may be unwilling to agree to acceptance of the collateral
in full or partial satisfaction of the debt or, even if it does agree, a
person to whom notice is required to be sent may exercise its
right to object to such retention (UCC 9-620(a)). Finally, a legal
claim as to which litigation has already commenced will be sub-
ject to a court-imposed timetable that may not permit the funder
adequate time to fulfill the notice requirements discussed above
[ii] Application to Litigation Finance
Part 6 of Article 9, the part that addresses default and en-
forcement, begins with the statement that a secured party may
use judicial means to enforce its security interest. Under UCC 9-
601(a):
After default, a secured party has the rights provided in this
part and, except as otherwise provided in 9-602 [relating to
rights that cannot be waived], those provided by agreement of
the parties. A secured party:
(1) may reduce a claim to judgment, foreclose, or otherwise
enforce the claim, security interest, or agricultural lien by
any available judicial procedure.
Although secured parties holding other types of collateral,
particularly tangible collateral, may generally be reluctant to en-
force rights judicially, that is largely because Article 9 is intended
to be self-enforcing with respect to saleable collateral, and, se-
condarily, because judicial enforcement is rarely used, with the
result that there is no established body of precedent on which to
draw in order to predict results.
Here, however, the collateral is not readily saleable and is al-
ready under the aegis of a court. Therefore, as litigation financing
becomes increasingly used to fund litigation, it is to be expected
that funders may increasingly turn to the courts to enforce their
rights.
[iii] Filings to Be Made with the Court
Secured parties seeking the aid of a court in enforcing rights
relating to litigation financing should be aware that Article 9 is
not exclusive. Other law may require a filing in court. Under New
Yorks CPLR 5019, for example,
(c) Change in judgment creditor. A person other than the
party recovering a judgment who becomes entitled to enforce
it, shall file in the office of the clerk of the court in which the
220
judgment was entered or, in the case of a judgment of a court
other than the supreme, county or a family court which has
been docketed by the clerk of the county in which it was en-
tered, in the office of such county clerk, a copy of the instru-
ment on which his authority is based, acknowledged in the
form required to entitle a deed to be recorded, or, if his author-
ity is based on a court order, a certified copy of the order. Upon
such filing the clerk shall make an appropriate entry on his
docket of the judgment.
[b] The Remedy of Collection
[i] In General
As in the case of any other type of collateral in which a per-
son owes a debt to the debtor, the secured party may exercise the
remedy of collection. Under UCC 9-607:
If so agreed, and in any event after default, a secured party:
(1) may notify an account debtor or other person obligated on
collateral to make payment or otherwise render perfor-
mance to or for the benefit of the secured party;
(2) may take any proceeds to which the secured party is en-
titled under Section 9-315;
(3) may enforce the obligations of an account debtor or other
person obligated on collateral and exercise the rights of the
debtor with respect to the obligation of the account debtor
or other person obligated on collateral to make payment or
otherwise render performance to the debtor, and with re-
spect to any property that secures the obligations of the
account debtor or other person obligated on collateral.
[ii] From Whom Can the Secured Party Collect?
Note that the remedy of collection exists whether or not the
person obligated on collateral (in the case of a legal claim, typi-
cally the defendant) is technically an account debtor as defined
in Article 9.
Under UCC 9-102(a)(3), an account debtor is
A person obligated on an account, chattel paper, or general in-
tangible.
A commercial tort claim is a separate collateral classification
and is not an account, chattel paper, or general intangible. How-
ever, the defendant to a commercial tort claim is another person
obligated on collateral under UCC 9-607.
221
[iii] Collection Rights Are Independent of Ownership
The second observation that may be made about the right to
collect is that it does not stem from ownership of the legal claim.
Ownership of the claim, as discussed above, requires either a
commercially reasonable sale and the financiers successful cre-
dit bid at that sale, or acceptance of the collateral in full or partial
satisfaction of the debtors obligation to the secured party.
Instead, the right of collection is completely independent of
such ownership. As noted in Comment 6 to UCC 9-607:
This section permits a secured party to collect and enforce
obligations included in collateral in its capacity as a secured
party. It is not necessary for a secured party first to become the
owner of the collateral pursuant to a disposition or acceptance.
[iv] The Secured Partys Right to Settle Claims
The third observation about this right is that it includes not
only the right to collect debts that are liquidated but also the
right to settle and compromise those debts. Not only is this clear
from the language in UCC 9-607(a)(3):
exercise the rights of the debtor with respect to the obligation
of the account debtor or other person obligated on collateral to
make payment or otherwise render performance to the deb-
tor
but it is explicitly stated in Comment 9 to UCC 9-607:
These rights include the right to settle and compromise claims
against the account debtor.
[v] The Duty to Act in a Commercially Reasonable Manner
The fourth observation that may be made is that, in most
cases, the funder will have no obligation to act in a commercially
reasonable manner in settling or compromising the obligations
of the account party or other person obligated on collateral to the
debtor. The commercially reasonable collection duty applies
only to instances in which there is recourse to the debtor. Under
UCC 9-607(c):
A secured party shall proceed in a commercially reasonable
manner if the secured party:
(1) undertakes to collect from or enforce an obligation of an
account debtor or other person obligated on collateral; and
(2) is entitled to charge back uncollected collateral or other-
wise to full or limited recourse against the debtor or sec-
ondary obligor.
222
As Comment 9 explains,
Subsection (c) provides that the secured partys collection and
enforcement rights under subsection (a) must be exercised in a
commercially reasonable manner. These rights include the
right to settle and compromise rights against the account deb-
tor. The secured partys failure to observe the standard of
commercial reasonableness could render it liable to an ag-
grieved person under Section 9-625, and the secured partys
recovery of a deficiency would be subject to Section 9-626.
Subsection (c) does not apply if, as is characteristic of most
sales of accounts, chattel paper, payment intangibles, and
promissory notes, the secured party has no right of recourse
against the debtor or secondary obligor. The obligation to
proceed in a commercially reasonable manner arises because
the collection process affects the extent of the sellers recourse
liability, not because the seller retains an interest in the sold
collateral (the seller does not).
In the case of litigation finance, such transactions are typi-
cally structured as nonrecourse investments. Additionally, there
is typically no secondary obligoronly the debtor owes the obli-
gation to the financier. Thus, in most cases, the secured party
need not be concerned about a claim that the collection process
was not conducted in a reasonable manner.
[vi] Expenses of Collection Against Account Debtor or Other
Third Party
The final point is that the expenses of collection are automat-
ically chargeable to the debtor, whether or not the drafter of the
transaction documents has so provided. Under UCC 9-607(d),
A secured party may deduct from the collections made pur-
suant to subsection (c) reasonable expenses of collection and
enforcement, including reasonable attorneys fees and legal ex-
penses incurred by the secured party.
The right to recover legal fees without an express provision
for the same is limited to the legal fees incurred in proceeding
against the account debtor or other person obligated on collater-
al. This clause does not include the legal fees incurred in pro-
ceeding against the debtor, for which express provision must be
made. Comment 10 to UCC 9-706 states that:
The phrase reasonable attorneys fees and legal expenses,
which appears n subsection (d), includes only those fees and
expenses incurred in proceeding against account debtors or
other third parties. The secured partys right to recover these
expenses from the collections arises automatically under this
223
section. The secured party also may incur other attorneys fees
and legal expenses in proceeding against the debtor or obligor.
Whether the secured party has a right to recover those fees and
expenses depends upon whether the debtor or obligor has
agreed to pay them .
[9] Financing the Appeal
Can an appeal be financed? Under UCC 9-109(d)(9), the
scope section of Article 9, Article 9 does not cover
an assignment of a right represented by a judgment, other than
a judgment taken on a right to payment that was collateral.
The comment to this subsection states merely that:
subsection (d)(9) retains the exclusion of assignments of
judgments under former Section 9-104(h)
The comments to former UCC 9-104(h) state that judgments
were excluded from former Article 9 because they do not custo-
marily serve as commercial collaterali.e., because there is no
practical need for such financing. In litigation as it is currently
conducted, a successful claimant may find itself faced with an
appeal that is essentially intended only to delay the plaintiffs
receipt of funds and perhaps to compel the plaintiff whose re-
sources may have been exhausted by the litigation to accept a
modest settlement. In such a situation, the need for financing is
obvious. The exclusion, therefore, should be read as: an assign-
ment of a right represented by a final, nonappealable judg-
ment, which would be consistent with the purpose of the rule.
27.04 The Common Interest Doctrine
[1] The Attorney-Client Privilege and the Common
Interest Doctrine
The attorney-client privilege protects the client from disclo-
sure of information during the discovery phase of a lawsuit. Its
elements have been summarized as follows:
(1) the asserted holder of the privilege is or sought to become a
client; (2) the person to whom the communication was made
(a) is a member of the bar of a court, or his subordinate and (b)
in connection with this communication is acting as a lawyer;
(3) the communication relates to a fact of which the attorney
was informed (a) by his client (b) without the presence of
strangers (c) for the purpose of securing primarily either (i) an
opinion on law or (ii) legal services or (iii) assistance in some
legal proceeding, and not (d) for the purpose of committing a
224
crime or tort; and (4) the privilege has been (a) claimed and (b)
not waived by the client.14
The common interest doctrine is an exception to this rule.
Historically, it developed to permit counsel for criminal co-
defendants to share information without waiver of the privilege.
Today it is invoked in civil litigation as well. It is less clear how,
or to what extent, the common interest exception applies to the
work product privilege.15
The parties to a prospective litigation funding transaction
cannot assume that a disclosure that breaches one privilege will
necessarily breach the other. There are some indications that in
recent years courts have held the work product privilege to be
more robust that the attorney-client privilege, and that it is
breached only when disclosure increases the likelihood that the
adversary will thereby obtain the information that was dis-
closed.16
[2] The Leader Technologies, Inc. v. Facebook, Inc.
Case
In Leader Technologies, Inc. v. Facebook, Inc.,17 a patent
infringement case, Leader Technologies sought, but did not con-
summate, a financing arrangement with a litigation funder.
Leader contended that information disclosed to the prospective
funder during negotiations was privileged under the common
interest doctrine. After a hearing, Magistrate Judge Stark ruled
that the information was subject to discovery.
14. Bray & Gillespie Management, 2008 WL 5054695 (MD Fla. 2008), at 2.
15. See Elisha E. Weiner, Price and Privilege, 20 Los Angeles Lawyer April
2012, at 22, and Bray, op. cit., at 4. Both suggest that the doctrine applies
to both privileges.
16. See Straus, Paul A. and Maslo, Paul B., Protection of Work Product
Shared with Outside Auditors, New York Law Journal, Dec. 16, 2010,
and Sack, Jonathan S. and Ruben, Eric M., Analyzing Selective Waiver of
Privilege Under New York Law, New York Law Journal, October 9, 2012.
17. Leader Technologies, Inc. v. Facebook, Inc., 719 F. Supp. 2d 373 (Dist. Ct.
D. Del., 2010).
225
Leader contested Judge Starks ruling:
With respect to the production of privileged documents,
Leader contends this portion of the Order is clearly erroneous
because it was based on the finding that no common legal in-
terest protecting attorney-client or work product privileged in-
formation could exist because a deal was not consummated be-
tween Leader and the litigation financing companies. Howev-
er, according to Leader, there was a common legal interest be-
cause the litigation financing companies were interested in fi-
nancing the litigation.The documents were exchanged only
after a common legal interest was created, and therefore, Lead-
er contends that Judge Starks finding that no common interest
privilege existed was clearly erroneous. 18
The court upheld Judge Starks order, summarizing the state
of the law regarding the common interest doctrine as follows:
The common interest doctrine is an exception to the general
rule that the attorney-client privilege is waived following dis-
closure of privileged materials to a third party.
Communications between clients and attorneys allied in a
common legal cause remain protected because it is reasona-
ble to expect that parties pursuing common legal interests in-
tended resultant disclosures to be insulated from exposure
beyond the confines of the group. In order to give sufficient
force to a common interest claim of privilege, there should be
a demonstration that the disclosures would not have been
made but for the sake of securing, advancing, or supplying legal
representation. Further, for a communication to be pro-
tected, the interests must be identical, not similar, and be le-
gal, not solely commercial.19
The court concluded that Leader had failed to make a show-
ing that the order was clearly erroneous.
Judge Stark noted that the state of the law regarding com-
mon interest is unsettled and that this case presented a close
question. He then conducted a survey of cases demonstrating
the differing views within the Third Circuit on how common
the supposed common interests have to be, and noted the ap-
parent trend favoring Facebooks position. Although Leader
summarily contends that the Order was clearly erroneous be-
18. Id. at 376.
19. Id. at 376.
226
cause documents were exchanged after a common legal interest
was created, Leader has made no argument, and the Court has
no basis on which to conclude, that Judge Stark misapplied the
relevant law. Moreover, Judge Stark took into consideration
that Leader had the burden of establishing existence of the pri-
vilege, and the numerous policy considerations, including the
need for litigation financing companies and the truth-seeking
function of litigation. Additionally, Judge Stark looked to eth-
ical guidelines from both Pennsylvania and New Jersey sug-
gesting that privilege may be waived in a situation such as
this. Aside from disagreeing with the outcome, Leader has
failed to argue that there are any specific deficiencies or flaws
in the ruling. In light of the thorough and well-reasoned analy-
sis conducted by Judge Stark, the Court cannot conclude that
the March 12, 2010 Order was clearly erroneous.20
[3] The Xerox Decision
A similar issue was presented in a subsequent patent in-
fringement case, Xerox Corporation v. Google, Inc. and Yahoo!
Inc.,21 in which the defendants sought production of documents
Xerox exchanged with IPValue Management, Inc., a company
that Xerox retained as its agent for intellectual property licens-
ing. Distinguishing Leader Technologies, Inc. v. Facebook, Inc.
on the ground that the agency relationship had been put into
place before disclosure of the information, the court agreed that
the common interest doctrine shielded the information from dis-
covery.
Xerox has met its burden (including by submitting affidavits
from itself and IPValue as well as the agreements between
them) of establishing that a common interest privilege exists
between it and IPValue. Xerox and IPValue had an allied, uni-
form, agency relationship. The relationship between these two
entities is sufficiently imbued with common legal interests in
that it plainly relates to litigation. Among the tasks Xerox re-
tained IPValue to assist with is licensing strategy and patent
enforcement, including litigation. Because IPValues compen-
sation from Xerox is based on a contingency fee, Xerox and IP-
Value share a common interest in Xerox prevailing in the in-
stant litigation and the two companies have operated with the
20. Id. at 376377.
21. Leader Technologies, Inc. v. Facebook, Inc. 801 F. Supp. 2d 893, C.A.
(Dist. Ct., D. Del. 2011).
227
expectation that any shared privileged communications would
be kept confidential and protected from disclosure.
The circumstances here are unlike those presented in Leader v.
Facebook, in which this Court found no common interest ex-
isted between a patentee and potential investors in litigation to
enforce the patentees patent rights. See generally 2010 WL
845980 (D. Del. Feb. 22, 2010). In Leader, the documents as to
which privilege was being asserted were created at a time when
the patentee and the potential investors were negotiating at
arms-length; at that time, no common interest existed. Here,
by contrast, the documents over which Xerox is asserting privi-
lege relate exclusively to a time frame in which IPValue was al-
ready retained by, and working for and with, Xerox. Accor-
dingly, the Court will deny Defendants request that Xerox be
ordered to produce the documents withheld on the basis of a
common interest privilege.22
[4] Implications of the Decision
If the distinction between the two cases is based solely upon
delivery of information during a due diligence period as op-
posed to the time when the parties have formalized their rela-
tionship, it would seem that the distinction works against the
attorneys ethical obligation to its client. In its Formal Opinion
2011-2 on Third Party Litigation Financing,23 the Association of
the Bar of the City of New York stopped just short of saying that
an attorney may have an ethical obligation to consult more than
one prospective funder in order to make sure that its client rece-
ives financing on terms that mesh well with the clients financial
circumstances and objectives.
And before recommending financing companies, a lawyer
should conduct a reasonable investigation to determine wheth-
er particular providers are able and willing to offer financing
on reasonable terms.
Likewise, the American Bar Association Report states that:
Competent representation and reasonable communication may
also require the lawyer to compare the proposed transaction
with other available means of obtaining funding, and possibly
22. Id. at 303304.
23. See supra note 5.
228
to recommend alternatives.24
Yet, if each disclosure that may be made in the course of
seeking out information about the terms offered by different pro-
viders of litigation financing increases the risk to the client that
the privilege will be waived, the prudent lawyer would be moti-
vated to seek out one financier only, and communicate only one
set of terms to its client.
The better view is that, as a prospective client may commu-
nicate information to an attorney for the purpose of seeking re-
presentation, it may communicate facts to a litigation finance
provider for the purpose of seeking the funds that will enable it
to pursue its claim. Both are equally in furtherance of the truth-
seeking function of litigation.
27.05 Usury Considerations
[1] The State Statutes
[a] General Rule
The defense of usury, if it exists in a particular transaction, is
a serious consideration for the funder because of its potential to
invalidate the entire transaction. New Yorks statute is illustra-
tive; in the case of a lender other than a regulated banking insti-
tution, the entire transaction is void (regulated banking institu-
tions lose interest only).
All bonds, bills, notes, assurances, conveyances, all other con-
tracts or securities whatsoever, except bottomry and respon-
dentia bonds and contracts, and all deposits of goods or other
things whatsoever, whereupon or whereby there shall be re-
served or taken, or secured or agreed to be reserved or taken,
any greater sum, or greater value, for the loan or forbearance of
any money, goods or other things in action, than is prescribed
in section 5-501, shall be void, except that the knowingly tak-
ing, receiving, reserving or charging such a greater sum or
greater value by a savings bank, a savings and loan association
or a federal savings and loan association shall only be held and
adjudged a forfeiture of the entire interest which the loan or
obligation carries with it or which has been agreed to be paid
24. ABA White Paper, supra note 3, at 24.
229
thereon.25
[b] Exception for Large Value Loans
The basic usury rate is established by Section 5-501 of the
General Obligations Law. It is the rate permitted for banks, pur-
suant to Section 14-a of the New York State Banking Law.26
However, there is an exception for loans in an amount exceeding
$2,500,000:
No law regulating the maximum rate of interest which may be
charged, taken or received, including section 190.40 and sec-
tion 190.42 of the penal law, shall apply to any loan or forbear-
ance in the amount of two million five hundred thousand dol-
lars or more. Loans or forbearances aggregating two million
five hundred thousand dollars or more which are to be made or
advanced to any one borrower in one or more installments pur-
suant to a written agreement by one or more lenders shall be
deemed to be a single loan or forbearance for the total amount
which the lender or lenders have agreed to advance or make
pursuant to such agreement on the terms and conditions pro-
vided therein.27
The reference to the aggregation of successive advances is
useful to litigation funders, as a funder may wish to advance an
amount less than $2,500,000 initially, but reserve the option to
make a further advance as the litigation progresses satisfactorily.
It is frequently useful for a funder to make its advances in
tranches. For example, a lawsuit may look promising, but there is
a pending motion to dismiss. The funder may advance a small
amount, reserving the option to fund a larger amount if the
plaintiff prevails. Either the motion succeeds, in which case the
plaintiff will have no further financial obligation to the funder, or
the funder can avoid the usury threshold by advancing an
amount which, when aggregated with the first advance, will ex-
ceed $2,500,000.
25. McKinneys General Obligations Law 5-511.
26. As of October 2012, the rate is 16 percent.
27. McKinneys General Obligations Law 5-501(5).
230
[c] Exception for Entities
A second consideration is that corporations in New York are
not permitted to assert a defense of usury unless the amount of
interest exceeds the criminal usury threshold.
1. No corporation shall hereafter interpose the defense of usury
in any action. The term corporation, as used in this section,
shall be construed to include all associations, and joint-stock
companies having any of the powers and privileges of corpora-
tions not possessed by individuals or partnerships.
3. The provisions of subdivision one of this section shall not
apply to any action in which a corporation interposes a defense
of criminal usury as described in section 190.40 of the penal
law.28
Where the claimant is funded, the commercial litigation
funder is likely to be making that advance to a corporation or a
limited liability company. Likewise, where the lawyer is funded,
the advance will likely be to the law firm with which the lawyer is
affiliated, rather than to the lawyer personally. The law firm is
likely to be an LLC or a similar entity.
[d] Criminal Usury
The final consideration, however, is criminal usury. New
York has two criminal usury statutes. Under McKinneys Penal
Law 190.40:
A person is guilty of criminal usury in the second degree when,
not being authorized or permitted by law to do so, he knowing-
ly charges, takes or receives any money or other property as in-
terest on the loan or forbearance of any money or other proper-
ty, at a rate exceeding twenty-five per centum per annum or the
equivalent rate for a longer or shorter period.
Under Penal Law 190.42:
A person is guilty of criminal usury in the first degree when,
not being authorized or permitted by law to do so, he knowing-
ly charges, takes or receives any money or other property as in-
terest on the loan or forbearance of any money or other proper-
ty, at a rate exceeding twenty-five per centum per annum or the
equivalent rate for a longer or shorter period and either the ac-
tor had previously been convicted of the crime of criminal
usury or of the attempt to commit such crime, or the actors
28. McKinneys General Obligations Law 5-521.
231
conduct was part of a scheme or business of making or collect-
ing usurious loans.
Thus, if the litigation finance transaction is construed as a
loan, the usury statutes will not apply to the transaction if it is
either in excess of $2,500,000 or, if below that amount, is made
to a corporation (or similar entity) and the rate of interest does
not exceed the criminal usury threshold.
[2] Decisions Concerning Nonrecourse Investments
in Lawsuits
These considerations apply, of course, only if the transaction
is a loan. Litigation funding transactions are typically struc-
tured as nonrecourse investments in a particular litigation,
whether it is the claimant or the law firm that is funded. They are
considered nonrecourse investments because, like any invest-
ment, the funder will not receive any return if the plaintiff does
not succeed in its litigation.
A loan, on the other hand, is generally understood to be a
transaction in which the borrower has an unconditional obliga-
tion to repay the funds advanced to it.
There have been several instances in which courts have nev-
ertheless held litigation funding transactions to be loans. They
have been distinguished by two common elements: (1) the ad-
vances were made to individuals in exigent circumstances; and
(2) because of the posture of the case at the time the advance was
made, the court, applying hindsight, concluded that the funder
was never at risk of an adverse outcome.
These factors make these cases distinguishable from the typ-
ical commercial litigation funding transaction. In the commercial
transaction, the plaintiff may be unable to fund the litigation on
its own, or it may be unable to afford its first choice of a law firm,
or it may simply wish to expend its funds in the operation of its
business, rather than in the lawsuit. These transactions are un-
likely to share the exigent circumstances facts presented by the
cases discussed below.
Second, these cases are seldom a sure bet for the funder. In
the typical instance, David is suing Goliath, with the result that,
even if David succeeds on the merits, Goliath may appeal. Addi-
tionally, a large corporation facing an adverse decision may seek
ways to shield its assets so that the claimants recovery is not cer-
tain, even if funding occurs after a verdict in the claimants favor.
232
[a] The Echeverria Case
The case of Echeverria v. The Estate of Marvin L. Lind-
ner29 arose out of injuries sustained by the plaintiff from a fall
from an elevated work platform (a violation of New Yorks Labor
Law 240). The plaintiff was an undocumented alien who, as the
result of the defendants failure to provide workers compensa-
tion insurance, was not able to pay his medical bills. He received
an advance from LawCash in order to do so.
The issue presentedwhether the transaction was an in-
vestment or a loanwas never argued by LawCash, as the issue
was whether the defendant was obligated to pay, as an element of
damages, the amount called for in the plaintiffs agreement with
LawCash, or a lesser amount.
The court held that the advance was a loan, as recovery of a
labor law case was never in doubt.
This leads to another potential problem. In the case before
this court there was a very low probability that judgment would
not be in favor of the plaintiff. It is a strict liability labor law
case where the plaintiff is almost guaranteed to recover. There
is low, if any risk. This is troubling considering the enormous
profits that will be made from the rapidly accruing, extremely
high interest rates they are charging. The Rancman court notes
that a lawsuit is not an investment vehicle. Speculating in law-
suits is prohibited by Ohio law. An intermeddler is not permit-
ted to gorge upon the fruits of litigation. Id. at 125. While the
Attorney General seems to have given these types of funding
institutions his blessing through signing an agreement with
them, the Court feels that the effects of these types of institu-
tions on the legal system and the judiciary need to be examined
in further detail in order to determine whether this type of
business practice is more of a benefit or detriment to society as
a whole.
The court finds that LawCash is lending money at usurious
rates. Also, that it is ludicrous to consider this transaction any-
thing else but a loan unless the court was to consider it lega-
lized gambling. Is it a gamble to loan/invest money to a plain-
tiff in a Labor Law action where there is strict liability? I think
not. In fact, it might be considered a sure thing. In any event,
the only gambling allowed in this state is run by the state or on
29. Echeverria v. The Estate of Marvin L. Lindner, 7 Misc. 3d 1019(A), 2005
WL 1083704 (NY Sup. 2005).
233
Native American facilities. Thus, it is not a gamble, but a sure
thing, therefore, it is a loan, not an investment with great risk.
If it is a loan, then the interest rate charged is usurious and the
court could vitiate the agreement.30
[b] Lawsuit Financial, L.L.C. v. Curry
The case of Lawsuit Financial, L.L.C. v. Curry31 arose out
of a personal injury case in which the plaintiff therein, Mary Cur-
ry, was successful in her action. She had been funded by Lawsuit
Financial, LLC, and had entered into a Transfer and Conveyance
of Proceeds and Security Agreement with the funder, accompa-
nied by instructions to her attorney regarding the disbursement
of funds to Lawsuit Financial. Upon her failure to pay the
amounts due from her proceeds, Lawsuit Financial sued both
Curry and her attorney.
The court held that the advances constituted a loan, relying
largely on the fact that the agreement with the funder was ex-
ecuted after it had become clear that Curry had succeeded in her
litigation.
Plaintiff did not make the first advance until April 19, 2000,
nine days after the original order of judgment was entered in
the personal injury lawsuit.
Though the trial court subsequently struck the $20 million
jury award for exemplary damages and ended up reducing the
underlying $7 million in ordinary damages to a total judgment
of $4,786,144.80 for defendant Curry after the courts Decem-
ber 22, 2000, opinion relating to damages, at the time that the
advances were made, defendant Curry was certain to recover
some damages. There is no genuine issue of material fact that
before the advances were made, the defendants in the personal
injury lawsuit had already admitted liability, the jury had al-
ready returned a $27 million verdict in defendants favor, an
order of judgment had already been entered, and the only re-
maining issue was the amount of recovery, i.e., whether defen-
dant Curry was entitled to exemplary damages and whether the
verdict on damages was excessive. Because liability had already
been admitted when plaintiff advanced the funds, the fact that
defendant Curry would recover some damages for her injuries
30. Id. at 8.
31. Lawsuit Financial, L.L.C. v. Curry, 261 Mich. App. 579 (Ct. App. 2004).
234
was already known. Therefore, plaintiff was entitled to an abso-
lute right of repayment.32
[c] Funding the Law FirmKelly, Grossman & Flanagan,
LLP v. Quick Cash, Inc.
Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc.33 in-
volved advances made to a law firm. Quick Cash made advances
under two separate arrangements. In its recourse situation, the
funder made advances to the firm, collateralized by a lien on the
fees anticipated by the attorney. The attorney repaid these ad-
vances either on a monthly repayment schedule, or upon settle-
ment of the case.
In its nonrecourse transactions, the attorney assigned a por-
tion of the expected fee to Quick Cash. Quick Cash was paid only
if there was a recovery in the case. Although some of the firms
advances were in each category, it appears that the recourse
advances made to the firm were converted to nonrecourse ad-
vances by an amendment to the recourse agreements.
In defending against payment to Quick Cash, the law firm
advanced the following arguments:
Plaintiffs further assert that these loans were never non-
recourse loans, despite their label, because the Defendants
were not at risk. For example, if a judgment debtor were unable
to pay a judgment entered in favor of one of Plaintiffs clients in
an underlying case, the individual Plaintiffs were still personal-
ly liable to Defendants. In addition, Defendants received their
repayment without any reduction for Plaintiffs costs or ex-
penses. Moreover, if Plaintiffs were discharged as counsel and
unable to find replacement counsel, Plaintiffs were required to
find a new case to replace the collateral (i.e. former case) or pay
liquidated damages.34
The court, however, held the firm to the representation in
32. Id. at 588589.
33. Kelly, Grossman & Flanagan, LLP v. Quick Cash, Inc., 35 Misc. 3d
1205(A), 950 NYS2d 723, 2012 WL 1087341, 2012 NY Slip Op. 50560(U)
(NY Sup. Mar 29, 2012).
34. Id. at 1.
235
their agreement:
Attorney represents and warrants that Attorney fully under-
stands that the Advance made hereunder is not a recourse loan,
but a non-recourse financial transaction pursuant to which In-
vestors funds are at full risk.35
The court held that the language of the agreements was not
ambiguous, and that the firm would be held to their representa-
tion:
Plaintiffs contention that the language in the contacts was
ambiguous, that borrower and lender, automatically qualify
the contracts as loans and that the origination fees and
processing fees, typically charged in connection with loans,
qualify the contracts as loans is unpersuasive. In fact, the De-
fendants were always at risk of no recourse whenever one of
the underlying cases went to trial and resulted in no recovery.
Such circumstances simply cannot be stated to constitute a
loan. The Court finds that the language in the contracts was
not ambiguous, and the intent of the parties is clear, as demon-
strated by the plaintiffs express acknowledgment, as sophisti-
cated attorneys, in each contract that a non-recourse agree-
ment for a cash advance was entered into and not a loan.36
Finally, the court noted that the funder was always at risk,
since the law firm may have been unsuccessful on any of the cas-
es funded.
The concept of usury applies to loans, which are typically
paid at a fixed or variable rate over a term. The instant transac-
tion, by contrast, is an ownership interest in proceeds for a
claim, contingent on the actual existence of any proceeds. Had
respondents been unsuccessful in negotiating a settlement or
winning a judgment, petitioner would have no contractual right
to payment. Thus, usury does not apply to the instant case. (See
OFarrell v. Martin, 292 NYS 581 [City Ct. N.Y.1936] [holding
[W]hen payment or enforcement rests on a contingency, the
agreement is valid though it provides for a return in excess of
the legal rate of interest.] ).
Similarly, here, the transactions between the parties create
ownership interests in proceeds of claims, contingent on the
actual existence of any proceeds. Plaintiffs would have no con-
35. Id. at 5.
36. Id. at 5.
236
tractual right to payment had Defendants been unsuccessful in
negotiating settlements or winning judgments in the underly-
ing actions. Therefore, under the circumstances, usury does not
apply and the Defendants motion for summary judgment dis-
missing Plaintiffs complaint is granted.37
27.06 Champerty
[1] What Are Maintenance, Champerty, and
Barratry?
Maintenance, champerty, and barratry are all related in that
they involve assistance provided by a person who is (apart from
such assistance, and any interest in the litigation acquired there-
by) a stranger to the parties and to the lawsuit. They have been
defined as follows:
Maintenance is the assistance in prosecuting or defending a
lawsuit given to a litigant by someone who has no bona fide in-
terest in the case [or] meddling in someone elses litigation.
Champerty is a species of maintenance. Champerty is [a]n
agreement between a stranger to a lawsuit and a litigant by
which the stranger pursues the litigants claim as consideration
for receiving part of any judgment proceeds.. The chief dif-
ference between maintenance and champerty is that the main-
tainer is not rewarded for his support of the litigant. Barratry
is also a species of maintenance: it is the practice of frequently
exciting or stirring up suits in others. In other words, someone
who engages in maintenance or champerty once has not com-
mitted barratry, but may nonetheless have violated the prohibi-
tion on champerty or maintenance.[P]ut simply, mainten-
ance is helping another prosecute a suit; champerty is main-
taining a suit in return for a financial interest in the outcome;
and barratry is a continuing practice of maintenance or cham-
perty. 38
37. Id. at 6.
38. Anthony J. Sebok, The Inauthentic Claim, 64 Vanderbilt Law Review
(2011), at 7273.
237
[2] Why Has Champerty Been Prohibited?
[a] Fear of Frivolous Litigation
As analyzed in the ABA White Paper, the prohibitions on
champerty and maintenance originated under English law and
stemmed from the concern that wealthy and powerful persons
might buy up claims, meritorious or otherwise, and use these
claims to harass their neighbors, who would be less readily able
than such wealthy persons to defend against them.
The historical justifications for prohibiting any form of main-
tenance was that third-party funding of litigation encouraged
fraudulent lawsuits. The wealthy and powerful would buy up
claims and by means of their exalted positions overawe the
courts, secure unjust and unmerited judgments, and oppress
those against whom their anger might be directed. As one
contemporary scholar put it, [b]arons abused the law to their
own ends and bribery, corruption, and intimidation of
judges and justices of the peace [was] widespread.39
In modern times, prohibitions on maintenance and cham-
perty have been said to arise from concerns that such funding
will foment frivolous litigation. To address such concerns, some
courts have drawn a distinction between lawsuits that had been
initiated before the funding was received, and those initiated lat-
er.
Such concerns seem unwarranted. Financiers advancing
funds against commercial lawsuits typically spend a good deal of
time evaluating the probability of success. There is no reason to
believe that a funder would voluntarily put its funds at risk by
financing a frivolous lawsuit. Furthermore, many, if not the ma-
jority, of the commercial lawsuits that are funded are brought by
small companies against brand name defendants who have the
resources to defend vigorously against any lawsuit, including a
frivolous one.
The second reason why such concerns are unwarranted is
that modern law contains remedies for abuse of process, mali-
cious prosecution, tortious interference with economic advan-
tage, and the like. Federal Rule of Civil Procedure 11 provides
that:
(a) Signature. Every pleading, written motion, and other paper
39. ABA White Paper, supra note 3, at 9.
238
must be signed by at least one attorney of record in the attor-
neys nameor by a party personally if the party is unrepre-
sented. The paper must state the signers address, e-mail ad-
dress, and telephone number. Unless a rule or statute specifi-
cally states otherwise, a pleading need not be verified or ac-
companied by an affidavit. The court must strike an unsigned
paper unless the omission is promptly corrected after being
called to the attorneys or partys attention.
(b) Representations to the Court. By presenting to the court a
pleading, written motion, or other paperwhether by signing,
filing, submitting, or later advocating itan attorney or unre-
presented party certifies that to the best of the persons know-
ledge, information, and belief, formed after an inquiry reason-
able under the circumstances:
(1) it is not being presented for any improper purpose, such as
to harass, cause unnecessary delay, or needlessly increase
the cost of litigation;
(2) the claims, defenses, and other legal contentions are war-
ranted by existing law or by a nonfrivolous argument for
extending, modifying, or reversing existing law or for es-
tablishing new law;
(3) the factual contentions have evidentiary support or, if spe-
cifically so identified, will likely have evidentiary support
after a reasonable opportunity for further investigation or
discovery; and
(4) the denials of factual contentions are warranted on the
evidence or, if specifically so identified, are reasonably
based on belief or a lack of information.
Many state courts have rules to the same effect.
[b] Discouraging Settlement
A second justification is that litigation funding discourages
settlement. This concern is not well founded for two reasons.
First, any funder has a finite amount of resources at its disposal.
Most lawsuits (whether or not funded by third parties) are even-
tually settled, rather than tried. Only if the parties reach an ex-
peditious settlement does the funder receive a return on its in-
vestment, which provides the funds that will enable it to fund
successive lawsuits.
Additionally, litigation funding evens out the negotiating
power of the plaintiff and defendant so as to facilitate settlement.
A defendant will often not engage in settlement negotiations
unless the plaintiff has actually expended a great deal of his or
her resources. Bilateral monopoly refers to the fact that,
239
without the allowance of law loans, the defendant is the only
party willing to buy the claim. Therefore, the defendant can
walk away from the table without fear that someone else will
buy the claim. Once law loans are introduced, a plaintiff
will be able to engage in the sale of the claim to other bidders,
and litigate if the defendant is unwilling to bargain. This will
cause deep pocket defendants to engage in settlement talks as if
the parties had equal bargaining power.40
Finally, one form of champerty is so commonplace today
as, perhaps, not to be readily recognized as such. The contingen-
cy fee agreement, in which a lawyer agrees to bring a suit for a
client, exchanging the lawyers services for a specified percentage
of the recovery, is a well-accepted practice.
As the ABA White Paper notes, the contemporary view of
these issues stems largely from a change in societys view of liti-
gation, which is no longer thought to be a social ill, but rather a
socially useful way to resolve disputes. Accordingly, it states
that many jurisdictions expressly permit some assignments that
would, in prior times, have been thought of as champerty. Others
have revised their laws to eliminate this common law prohibi-
tion. Finally, in other jurisdictions, courts have been reluctant to
apply statutes prohibiting champerty, although such statutes re-
main in effect.41
[3] State Statutes
As the ABA White Paper observes, there is a wide variation
among the state statutes concerning champerty. The paper notes
that 29 jurisdictions now permit champerty, provided that the
following conditions are satisfied:
[the] supplier is not:
(1) clearly promoting frivolous litigation
(2) engaging in malice champerty: Malice champerty is sup-
port of meritorious litigation motivated by an improper
motive. (See, e.g. prima facie tort in NY);
(3) intermeddling with the conduct of the litigation (e.g. de-
40. Hananel, Andrew, and Staubitz, David, The Ethics of Law Loans in the
Post-Rancman Era, 17 Georgetown Journal of Legal Ethics 795, at 811
(summer, 2004).
41. ABA White Paper, supra note 3 at 1112.
240
termining trial strategy or controlling settlement).42
New York, for example, has two applicable statutes. General-
ly, claims may be assigned pursuant to General Obligations Law
13-101:
Any claim or demand can be transferred, except in one of the
following cases:
1. Where it is to recover damages for a personal injury;
2. Where it is founded upon a grant, which is made void by a
statute of the state; or upon a claim to or interest in real
property, a grant of which, by the transferrer [sic], would
be void by such a statute;
3. Where a transfer thereof is expressly forbidden by: (a) a
statute of the state, or (b) a statute of the United States, or
(c) would contravene public policy.
However, such assignment, depending upon its purpose,
may constitute champerty:
1. No person or co-partnership, engaged directly or indirectly
in the business of collection and adjustment of claims, and no
corporation or association, directly or indirectly, itself or by or
through its officers, agents or employees, shall solicit, buy or
take an assignment of, or be in any manner interested in buy-
ing or taking an assignment of a bond, promissory note, bill of
exchange, book debt, or other thing in action, or any claim or
demand, with the intent and for the purpose of bringing an ac-
tion or proceeding thereon; provided however, that bills re-
ceivable, notes receivable, bills of exchange, judgments or other
things in action may be solicited, bought, or assignment thereof
taken, from any executor, administrator, assignee for the bene-
fit of creditors, trustee or receiver in bankruptcy, or any other
person or persons in charge of the administration, settlement
or compromise of any estate, through court actions, proceed-
ings or otherwise. Any corporation or association violating the
provisions of this section shall be liable to a fine of not more
than five thousand dollars; any person or co-partnership, vi-
olating the provisions of this section, and any officer, trustee,
director, agent or employee of any person, co-partnership, cor-
poration or association violating this section who, directly or
indirectly, engages or assists in such violation, is guilty of a
misdemeanor.43
42. ABA White Paper, supra note 3, at 11.
43. NY Judiciary Law 489. This statute was not mentioned in the Citibar
241
There is an exception, however, for advances in the amount
of $500,000 or more:
2. Except as set forth in subdivision three of this section, the
provisions of subdivision one of this section shall not apply to
any assignment, purchase or transfer hereafter made of one or
more bonds, promissory notes, bills of exchange, book debts, or
other things in action, or any claims or demands, if such as-
signment, purchase or transfer included bonds, promissory
notes, bills of exchange and/or book debts, issued by or enfor-
ceable against the same obligor (whether or not also issued by
or enforceable against any other obligors), having an aggregate
purchase price of at least five hundred thousand dollars, in
which event the exemption provided by this subdivision shall
apply as well to all other items, including other things in action,
claims and demands, included in such assignment, purchase or
transfer (but only if such other items are issued by or enforcea-
ble against the same obligor, or relate to or arise in connection
with such bonds, promissory notes, bills of exchange and/or
book debts or the issuance thereof).44
In the context of commercial litigation, many (if not the
overwhelming number of) advances exceed this amount.
As the white paper concludes:
Given the somewhat ancient status of the decisions in the re-
maining jurisdictions that prohibit champerty, there may be
more states in which champerty is tolerated or where, if it were
the issue raised again in a modern context, a contemporary
courts would have little reason to preserve the doctrine of
maintenance, either as a matter of common law or public poli-
cy.45
Formal Opinion 2011-2, which stated simply that:
Champerty is a form of maintenance in which a nonparty furthers
anothers interest in a lawsuit in exchange for a portion of the recov-
ery. The law of champerty varies by jurisdiction.[9] While we are
aware of no decision finding non-recourse funding arrangements
champertous under New York law, lawyers should be mindful that
courts in other jurisdictions have invalidated certain financing ar-
rangements under applicable champerty laws.
44. Id.
45. ABA White Paper, supra note 3, at 11.
242
[4] The Case Law
[a] The Rancman Decision
The case of Rancman v. Litigation Funding46 is one of the
best-known decisions involving a claim of champerty in the con-
text of nonrecourse litigation funding. The case arose out of an
automobile collision involving the named plaintiff. Rancman
filed suit against her automobile insurer but, unwilling to await
resolution of the case, contacted the defendant, Interim Settle-
ment Funding Corp., seeking an advance. In return for a nonre-
course advance of $6,000, Rancman was obligated to return
$16,000 if the case was resolved within twelve months, $22,200
if resolution did not occur within eighteen months, and $27,600
if the case was resolved within two years. Somewhat later, she
received an additional $1,000 secured by the next $2,800 of
proceeds. She had no obligation if the litigation was unsuccess-
ful.
Within twelve months, Rancman settled her case against her
insurer for $100,000. But, instead of returning the $16,000 to
the financier, she claimed that, as the contract constituted cham-
perty, it was void, and she was only obligated to return the
$6,000, with interest.
The court held that it was not necessary to determine wheth-
er the advances were loans or investments in order to resolve the
champerty issue. In holding the agreement void, it analyzed the
economic implications of the transaction, concluding that the
transaction provided a disincentive to settlement.
The $6,000 advance, for example, gave FSF the right to the
first $16,800 of the settlement after fees, expenses, and supe-
rior liens, if the State Farm case settled within 12 months. If
there had not been any superior liens on Rancmans settlement
and her attorney had charged a 30 percent contingency fee,
Rancman would not have received any funds from a settlement
of $24,000 or less. This calculation gives Rancman an absolute
disincentive to settle for $24,000 or less because she would
keep the $6,000 advance regardless of whether she settles with
State Farm and would not receive any additional money from a
$24,000 settlement.
46. Rancman v. Interim Settlement Funding Corporation, 99 Ohio St. 3d 121
(S. Ct. Ohio 2003).
243
Under the same facts, the $1,000 Interim advance would
provide a settlement disincentive of an additional $4,000.
Thus, with no liens and a 30 percent attorney fee, the $7,000
advanced to Rancman effectively bars her from considering a
settlement offer of up to $28,000.
These advances also affect settlement offers greater than
$28,000. Suppose Rancman decides that she will settle for
nothing less than $80,000 minus attorney fees. Because of the
obligation to repay the advances, she would refuse to settle un-
til State Farm offers $98,000. If the settlement advance
agreements are enforced, Rancman must receive an $18,000
premium on a settlement offer to have the same incentive to
settle that she would have had if she had not entered into the
agreements with FSF and Interim. This can prolong litigation
and reduce settlement incentivesan evil that prohibitions
against maintenance seek to eliminate.47
This case may be criticized on many grounds.48 Assuming
that the funding was required for living expenses, it is safe to as-
sume that she might not have been able to wait for the $100,000
settlement that she ultimately received, and would have been
forced to settle her case earlier, perhaps for significantly less.
Subsequent to the Rancman decision, the Ohio Legislature
enacted Section 1349.55 of the Ohio Revised Code authorizing
lawsuit loans to consumers. Under the statute, a non-recourse
civil litigation advance
means a transaction in which a company makes a cash pay-
ment to a consumer who has a pending civil claim or action in
exchange for the right to receive an amount out of the proceeds
of any realized settlement, judgment, award, or verdict the con-
sumer may receive in the civil lawsuit.
Such transactions are now permitted, if accompanied by
mandated consumer disclosures.
[b] Odell v. Legal Bucks, LLC
In a North Carolina case involving virtually identical facts,
47. Id., at 220221.
48. See, e.g., Richmond, Douglas R., Other Peoples Money: The Ethics of
Litigation Funding, 56 Mercer Law Review 649, at 658659.
244
Odell v. Legal Bucks, LLC,49 a plaintiff who had a personal in-
jury claim, sought and received financing in a nonrecourse trans-
action. She then attempted to avoid her payment obligation by
claiming, inter alia, that the transaction constituted champerty.
The court, although aware of the Rancman decision, held
that the transaction was not champerty, stating that more is re-
quired than the mere fact that an advance was made by a stran-
ger to the litigation. The court was influenced by the fact that the
deposition testimony indicated that the funder had made no ef-
fort to control the settlement discussions.
[DEFENSE COUNSEL]: ... [W]hat did [Defendant James Tart]
say when you told him that you were thinking about getting
another lawyer?
[PLAINTIFF]: If Im not mistaken, he just said [to] keep in
touch with him. I might be wrong.
[DEFENSE COUNSEL]: Did you ever talk to [Defendant James
Tart] about the settlement offers that [the defendant in the un-
derlying lawsuit] made[?]
[PLAINTIFF]: Not that I know of, not to my knowledge.
[DEFENSE COUNSEL]: Did anything that [Defendant James
Tart] said to you influence your decisions with respect to those
[settlement] offers that were made by [the defendant in the
underlying lawsuit]?
[PLAINTIFF]: Not that Ino.50
The court concluded that, at least in North Carolina, actual
intermeddling in the lawsuit is required to deprive the finan-
cier of its bargain.
The cases cited by Plaintiff, however, do not purport to re-
quire as a prerequisite for champerty and maintenance that a
litigation lender act with a purpose of stirring up strife and
continuing litigation. North Carolina law thus appears to re-
quire a higher level of intermeddling for a lenders actions to be
considered champertous. The evidence in this case does not
demonstrate that Defendants interfered in Plaintiffs personal
injury claim to the extent required to support a claim of cham-
49. Odell v. Legal Bucks, LLC, 192 NC App. 298 (Ct. App. NC 2008).
50. Id. at 310.
245
perty and maintenance.51
[c] The Echeverria Case
In the case of Echeverria v. Lindner,52 the court considered
and rejected the holding in the Rancman case. The court found
that the investors in Echeverria had not acted with the intention
of fomenting litigation, but rather with the intention of making
money from their investment.
Although the agreement does suggest the possibility of Law-
Cash engaging the services of an attorney to collect the sum
due, it follows that this action would not be the primary pur-
pose of the agreement since Mr. Echeverria agreed to volunta-
rily pay this sum back to LawCash after receiving a judgment
and paying his attorney fees. Therefore the primary purpose
and intent of funding Mr. Echeverria the $25,000 and charging
3.85% interest was not to take action on their claim to the
judgment, but to make a profit from their loan/investment. In
other words, a chose in action has been defined as a right to re-
cover money in a legal proceeding.53
Drawing upon differences between the law in Ohio, under
which Rancman was decided, and the law in New York, the court
held:
While the facts and the agreements made by Interim and Law-
Cash are very similar, it is not the facts that account for the dif-
ferences of opinion, but rather it is the different law of the dif-
ferent states which allow us to differ in our conclusions. As
mentioned above the Ohio decision is based on Ohio precedent
that the assignment of rights in a lawsuit can be void as Cham-
perty ( Brown, 66 Ohio St. 316). Under New York law these as-
signments are allowed as long as the primary purpose and in-
tent of the assignment was for some reason other then bringing
suit on that assignment. Knoble, 432 N.Y.S.2d at 68. Therefore
under Ohio law, taking an assignment of a judgment for profit
by itself is enough to constitute Champerty, while under New
York law the primary purpose and intent of taking the assign-
51. Id. at 310311.
52. Echeverria v. The Estate of Marvin L. Lindner, 7 Misc. 3d 1019(A), 2005
WL 1083704 (NY Sup. 2005).
53. Id. at 5.
246
ment would be to profit, and not to bring suit, which would
prevent this action from being Champerty. Resting on the lan-
guage of Judiciary Law 489, and the purpose and intent re-
quirement, the Court is comfortable finding that the instant
agreement is not Champerty.54
[d] The Funder as Assignee of the Claim
In the cases discussed above, the funder did not take an as-
signment of the chose in action, and, therefore, was not in a posi-
tion to bring suit in its own name. However, in the New York
case of Trust for Certificate Holders of Merrill Lynch v Love
Funding,55 the court held that an assignment of a debt instru-
ment for the purpose of enforcing it against the obligors would
not violate the New York Judiciary Law.
The term champerty referred in the Middle Ages to any
situation where someone bought an interest in a claim under
litigation, agreeing to bear the expenses but also to share the
benefits if the suit succeeded. In New York, however, the
prohibition of champerty has always been limited in scope and
largely directed toward preventing attorneys from filing suit
merely as a vehicle for obtaining costs (id.).Our earliest cas-
es and those of the Court of Chancery clearly demonstrate this
narrow scope.New York cases agree that if a party acquires a
debt instrument for the purpose of enforcing it, that is not
champerty simply because the party intends to do so by litiga-
tion.56
27.07 Fee Splitting
The ethical prohibition on fee splitting enunciated in ABA
Model Rule 5.4(a), among others, is sometimes cited as an ob-
stacle to financing an attorneys contingency fee agreement. The
ABA White Paper gives this objection short shrift, citing with
54. Id. at 6.
55. Trust for Certificate Holders of Merrill Lynch v. Love Funding, 13 NY 3d
190 (Ct. App. NY 2009).
56. See also Richbell Information Services, Inc. v. Jupiter Partners L.P. (280
AD 2d 208, S. Ct. App. Div. 2001); and High Voltage Beverages, LLC v.
The Coca-Cola Company, 2010 WL 5924318 (WDNC 2010).
247
approval only Core Funding Group v. McDonald,57 holding that
it is not inappropriate for a lender to take a security interest in
an attorneys accounts receivable, to the extent permitted by
commercial law.58
It is difficult to imagine that the fee-splitting rule would pose
a serious obstacle to the enforcement of a security interest held
by a funder, in light of the fact that banks routinely advance
funds to law firms on the strength of their accounts receivable
(i.e., the aggregate fees anticipated from a portfolio of lawsuits).
Apart from the fact that it is a single lawsuit that is being funded,
rather than a portfolio of lawsuits, each type of financier has a
security interest in the fees to be paid by the client.
57. Core Funding Group v. McDonald, 2006 WL 832833 (Ohio Ct. App.
2006).
58. ABA White Paper, supra note 3, at 29.
248
i
Notes on Faculty
James M. Haddad is an attorney practicing in the fields of commercial, insurance and
construction law. His office is headquartered at 1700 Broadway, 41st Floor, in Manhattan. He
obtained his law degree from Fordham University School of Law in 1993 and is admitted to
practice in New York and Pennsylvania. Brown University awarded him his undergraduate
degree in biology in 1986. Jim also holds a CPCU designation from the American Institute For
Chartered Property Casualty Underwriters and has held management positions in the insurance
industry. Jim has been published as a frequent contributor to legal and trade publications and
journals and often speaks on legal issues of interest in the commercial, construction and
insurance fields. Jim is a member of the City Bar's standing Committee on Commercial Law and
Unified State Laws.
Harvey R. Hirschfeld is the President and Director of Plaintiff Funding Holding Inc. (DBA
LawCash) since its inception in 2000. He is also Special Advisor and Director of Esquire
Bank, a federally chartered banking institution with offices in Manhattan, Brooklyn and Garden
City NY since 2006. Mr. Hirschfeld serves as Chairman of the American Legal Finance
Association, an industry trade association with 35 member companies nationwide for the pre
settlement funding industry from 2004 to the Present. Mr. Hirschfeld had served as Senior Vice
President, Chief Operating Officer and a Director of HealthShield Capital Corporation from June
1996 to August 2002. HealthShield Capital Corporation provided financing, billing, collection
and collateral management services to the healthcare industry on a nationwide basis. Mr.
Hirschfeld has over 35 years experience in consumer and commercial lending as well as financial
administration. From 1989 to 1996 Mr. Hirschfeld was Senior Vice President, Chief Operating
Officer and Director of Franklin Credit Management Corporation, a publically traded company
specializing in real estate mortgage and portfolio acquisitions. He was previously associated
with Ingersoll-Rand Financial Corporation for over 7 years, holding various executive positions
including Director of Special Finance.
Professor Anthony Sebok is an expert on mass torts, litigation finance, comparative tort law,
and legal philosophy. Before coming to Cardozo in 2007, he was the Centennial Professor of
Law and the Associate Dean for Research at Brooklyn Law School, where he taught for 15 years.
He was a Fellow in the Program in Law and Public Affairs at Princeton University from 2005-
06, and in 1999, he was a Fellow at the American Academy in Berlin. Following law school, he
clerked for Chief Judge Edward N. Cahn of the US District Court for the Eastern District of
Pennsylvania. Professor Sebok has authored numerous articles about litigation finance and mass
restitution litigation involving tobacco, handguns, and slavery reparations. He is the author of
Legal Positivism in American Jurisprudence, articles and essays on jurisprudence, and is the
coeditor of The Philosophy of Law: A Collection of Essays. His casebook, Tort Law:
Responsibilities and Redress, which he coauthored with John Goldberg and Benjamin Zipursky,
is used at several leading law schools. Professor Sebok is frequently quoted in the national media
on timely legal issues, such as the September 11 Victim Compensation Fund. He is currently
writing a book with Mauro Bussani of the University of Trieste on comparative tort law, which
will be published by Oxford University Press.
ii
Selvyn Seidel founded and chairs Fulbrook Capital Management LLC, an institutional advisor in
commercial claims. Fulbrook identifies, evaluates, manages, and arranges capital for commercial
claimants to apply towards prosecuting meritorious claims. Fulbrook specializes in complex
national and international claims, whether brought in the United States, or in another country. It
has a special and in some important ways unique capacity and goal to assist in enhancing the
value of the claim closer to its true value, while also reducing costs needed to prosecute the
claim, and bringing more certainty to the process and costs involved. Fulbrook concentrates on
commercial claims in certain practice areas, usually in the U.S. or U.K, while also concentrating
on (although not exclusively) short term claims (which take one year or less from funding to
conclusion). In a recent Report by two think tanks discussing among other things Funders,
Fulbrook was identified along with four other entities, as despite being founded only recently
among the prominent third-party funders in the industry, and worth knowing. Prior to
Fulbrook, Mr. Seidel co-founded and chaired Burford Group Ltd., the investment manager for
Burford Capital, LLC. Burford Capital went public on the UK Aim market of the London
Exchange in October of 2009. It is now the largest institutional litigation funder in the world.
Before entering the funding industry, Mr. Seidel practiced as a litigation attorney, and has over
40 years of experience in complex litigations and arbitrations. He represented business entities in
diverse complex projects in the United States and abroad. Until December 31, 2006, he was a
senior partner at Latham & Watkins, a leading international law firm. At Latham Mr. Seidel was
a co-founder of Lathams New York office in 1985, and was at different times, the Chairman of
its International Practice, the founder and Chairman of its International Litigation and Arbitration
practice, and the Chairman of its New York Litigation Department. Mr. Seidel was for ten years
an Adjunct professor at New York University School of Law, teaching courses in and related to
litigation and arbitration. He is Chairman of the Advisory Board of the Center for International
Commercial and Investment Arbitration Law of Columbia University Law School. He is
currently an Alumnus Lecturer at Linacre College, Oxford University. He is also Chairman of
the Advisory Board of Oxford Law Alumni of America. He lectures on the industry and
participates in conferences and presentations at various leading law schools in the U.S. and UK
(including Harvard Law School, Columbia Law School, and Oxford), and at leading Institutes
(such as the RAND Institute of Civil Justice). He has authored many articles and papers relating
to Third-Party Funding of Commercial Claims. Mr. Seidel is widely referred to and cited in the
media. He is often identified as a leading voice and visionary in the funding industry. In the
Report referred to above, he was described as probably the frontrunner in the industry . . . Mr.
Seidel is a graduate of the University of Chicago (1964, B.A., Economics), the University of
California (Berkeley) Law School (1967, J.D., California Law Review) and the University of
Oxford (1968, Dip. Law, Linacre College).
Sandra Stern of Nordquist & Stern, PLLC, New York City, has been in private practice since
1994, concentrating in commercial finance, including secured transactions and letters of credit,
loan participations, and electronic commerce issues. Ms. Stern counsels commercial banks and
nonbank lenders, as well as corporate borrowers. She has had extensive experience in litigation
finance. Prior to entering private practice, she was Senior Vice President and General Counsel,
Banco Santander, and previously, Deputy General Counsel, Republic National Bank of New
York. She is a Fellow of the American College of Commercial Finance Lawyers. Ms. Stern
represents New York State on the Uniform Law Commission. Ms. Stern was a member of the
Drafting Committees that revised Articles 9 (Secured Transactions), 5 (Letters of Credit) and 7
iii
(Documents of Title), and is currently a member of the Uniform Commercial Code Committee,
which considers ongoing UCC issues. She was inducted as a Life Member of the Commission in
2012. She is the author of numerous articles on commercial law, as well as Structuring and
Drafting Commercial Loan Agreements (Sheshunoff Information Services) and Structuring Loan
Participations (reissue planned for 2013). She has frequently participated in programs on secured
transactions and letters of credit at the New York City Bar Association and Practicing Law
Institute. Ms. Stern is currently a member of the Commercial Law and Uniform State Laws
Committee of The New York City Bar Association. She is a former Chair of the Business Law
Section of the New York State Bar Association. She has also acted as an expert witness on issues
involving security interests and letters of credit. She has been admitted to the bars of New York,
Massachusetts, and Minnesota. Ms. Stern is a graduate of Goucher College and Harvard Law
School.
Aviva O. Will is a Managing Director with Burford Capital LLC. Ms. Will is a seasoned
litigator who was most recently a senior litigation manager and Assistant General Counsel at
Time Warner Inc. In that role, Ms. Will managed a litigation portfolio of significant antitrust, IP
and complex commercial litigation, including matters concerning the pricing of online music, the
bundling of cable networks, DVR technology, and cross-border pricing of DVDs. She was also
the companys chief antitrust and regulatory counsel advising senior management on antitrust
risk and overseeing all matters before the Department of Justice, the Federal Trade Commission
and the Federal Communications Commission, as well as dozens of government antitrust
investigations and merger clearances in jurisdictions throughout the world. She also served as the
Assistant Secretary for the company, managing corporate compliance and governance for the
company and Board of Directors. Prior to joining Time Warner, Ms. Will had been a senior
litigator at Cravath, Swaine & Moore in New York where she represented a wide variety of
media, technology, and investment banking clients. She has managed a broad range of litigation
matters valued in the billions of dollars during her career and has a particular specialty in
antitrust and complex business litigation. Ms. Will graduated from Columbia College with a
degree in economics and philosophy and cum laude from Fordham University School of Law
where she was the Writing & Research Editor of the Fordham Law Review and a member of the
Order of the Coif. She was a law clerk to the Honorable Stewart G. Pollock on the New Jersey
Supreme Court.