Ralph Sutton, CEO Validity Finance, and Elizabeth (Lisa) Vandesteeg, Partner, Sugar Felsenthal Grais & Helsinger Ralph Sutton and Elizabeth Vandesteeg.

Growth in the controversial litigation finance industry is leading to an increase in lawsuits connected with it, according to court records and news accounts.

The lawsuits involve both commercial litigation finance companies and consumer-oriented litigation finance companies in the United States. Lawyers knowledgeable about the industry said they believe the increase is a function of its relatively recent creation and rapid growth.

“The more predictability that exists in the legal environment, the less litigation we will see,” said Peter Buckley, a partner at Fox Rothschild in Philadelphia who has represented legal funders in lawsuits. “When something is new, it is not uncommon to see litigation because people have different expectations or a different understanding of what playing field they are on.”

While litigation funding is more often associated with plaintiffs in mass torts, increasingly large commercial outfits such as Burford Capital Ltd., based in the U.K., are funding the defendants in high-stakes litigation. Hedge funds and private equity firms are venturing into the fast-growing multibillion-dollar industry.

“Commercial litigation versus consumer tort funding are two very different things. It is definitely important to draw the distinction,” said Jay Greenberg, co-founder and CEO of LexShares in Boston, a commercial funder that uses a crowdsourcing model.

No single source of data appears to be publicly available that tracks lawsuits for or against third-party litigation investors. A review of cases and news reports, however, suggests that lawsuits involving big litigation finance companies are filed more often by the funders against law firms over nonrepayment of advances.

Lawsuits against the consumer finance firms, also called consumer legal or settlement funding, by contrast, often involve claims by individuals or regulators that funding recipients were victims of unfair or deceptive practices and that the agreements violated state champerty or usury laws.     

Suits against both commercial and consumer litigation finance companies are likely to grow, with explosive industry expansion. Allison Chock, chief investment officer-U.S. at Bentham IMF, the U.S. unit of the oldest commercial litigation funder, estimated the industry as having grown up to $10 billion globally, possibly $5 billion in the United States, based on commitments (pledged assets).

“That must be true in any business if it was growing tenfold, you would expect there would be more litigation in the industry, and it is a difficult industry in which to succeed,” said Chock, who formerly was a principal at McKool Smith in Los Angeles.

One reason more suits against big funders haven’t arisen is the amount of legal scrutiny that leads up to agreements, said Ralph Sutton, founder and CEO of Validity Finance, who was at Bentham from 2011 to 2017 and helped establish its U.S. operations. “When parties to a large transaction are represented by good lawyers in commercial litigation finance, they are less likely to have disputes later because they have been advised and counseled by their lawyers on the details of these transactions.”

A recent exception occurred when Burford Capital Ltd. was named in April as a defendant in an $85 million damages claim filed in Dubai by Russian billionaire Farkhad Akhmedov for allegedly funding his wife’s, Tatiana Akhmedova’s, divorce proceedings against him, as reported in The New York Times and elsewhere. The company would not comment on the matter.

Lawsuits involving the smaller commercial litigation finance companies often involve allegations against law firms that they did not repay funds advanced to them according to the terms of the agreement.

  • In April, Harris County State District Judge Caroline Baker ruled in Houston that New York and Texas-based Berg & Androphy and name partner Joel Androphy must repay $2.8 million in principal plus interest and attorney fees of more than $1.2 million after a five-month bench trial in a dispute over the terms of a 2014 promissory note with Houston-based litigation finance firm Virage Capital Management LP, a hedge fund founded in 2013. The ruling has been appealed by the law firm. Berg & Androphy appeal counsel, David Beck at Beck Redden in Houston, said: “The appeal will give Texas courts the opportunity to address standards for authorization of electronic signatures, as well as specific issues about the loan itself, most importantly, how the loan, advertised as non-recourse (the only reason to obtain litigation funding), became a recourse loan.” Millard Johnson, a shareholder at Johnson DeLuca Kurisky & Gould for Virage Capital, said: “Both of those issues were litigated thoroughly, and the court determined that the loan was recourse and was an enforceable transaction as entered into on the electronic platform.”
  • A  $15 million lawsuit was filed in January in California Superior Court in Los Angeles by Law Finance Group Inc. of Mill Valley, California, against class-action plaintiffs lawyer Thomas Girardi of Pasadena and his firm, Girardi Keese. The suit, which is now in arbitration, alleges that Girardi failed to repay a loan advanced against class action settlements including the National Football Leagues players’ concussion litigation and Avandia drug cases. A question remains as to whether the finance company can go after Girardi’s assets if it wins in arbitration. In a declaration, Girardi called the lawsuit “fraudulent, slanderous and an abuse of the legal process,” according to a report in Law.com affiliate The Recorder. In a response filed April 22, Law Finance Group said Girardi does not have the funds to pay back the loan and is “actively soliciting more than $30 million in additional loans,” the report said. Both parties refused comment at the time.
  • In another matter connected with the NFL settlement, on April 26, a three-judge panel of the U.S. Court of Appeals for the Third Circuit in Philadelphia ruled that a district court judge overreached when she entirely nullified the lending agreements in litigation connected to the NFL concussion settlement. U.S. District Judge Anita Brody of the Eastern District of Pennsylvania, who is overseeing the settlement, in 2017 barred third-party investors from making assignment agreements with retired players. Three lending companies, Atlas Legal Funding, RD Legal Funding LLC and Thrivest Specialty Funding LLC, had appealed the district court’s decision, arguing that Brody lacked jurisdiction.
  • And in 2014, a New Jersey litigation financing firm and hedge fund, RD Legal Funding Partners of Cresskill, New Jersey, filed a lawsuit against Los Angeles mass tort lawyers Mel Powell and Jeffrey Bogert in New Jersey state court alleging the class action lawyers owed the company roughly $26.6 million plus fees and interest for financing lawsuits against pharmaceutical manufacturers, including the makers of osteoporosis prevention drugs Actonel and Fosamax.

Consumer Litigation Funding Disputes

In contrast to suits involving the commercial litigation funders, lawsuits involving consumer finance companies are more common. In those cases, individuals who received cash advances against settlements have alleged that the agreements were illegal under state laws barring champerty or usury. Sometimes state regulators also have filed actions on behalf of  consumers. The companies usually argue that the agreements are asset purchases, not loans. 

“It is not that surprising that there is more litigation coming out of the consumer side. It is a much less sophisticated user, typically,” Chock said.

Michael Roth, a litigation partner at Boies Schiller Flexner in Los Angeles, who has represented investors in several lawsuits, said that “litigation finance agreements are generally structured as the purchase of proceeds from settlements or judgments and the trend is for courts to recognize that they are not subject to usury laws. Even though courts are finding these transactions are legitimate financing arrangements, it has not deterred individuals and regulators from challenging well-settled law.”

Illinois-based Oasis Legal Finance LLC, for instance, is being sued in federal court in Georgia by six plaintiffs seeking class action status. They are asking a judge to declare the nonrecourse advances they received in personal injury suits to be usurious loans under state law, saying they were charged interest rates of more than 100%. Attorneys at Barnes & Thornburg representing Oasis asked an Eleventh Circuit panel to dismiss the suit in March, and a decision is pending. A call and emails to Oasis’ attorney was not returned. A similar suit against Oasis has been filed in federal court for the Eastern District of Missouri. In a lawsuit against a different funder, Ruth v. Cherokee Funding LLC, the Georgia Supreme Court decided in October 2018 that state payday lending laws didn’t apply to the legal financing agreements.

States where individuals have successfully sued litigation funders on charges of illegal lending are mainly those where champerty laws are still on the books, such as Kentucky, lawyers who have studied the issue say. For instance, Christopher Boling sued Prospect Funding Holdings LLC in the Western District of Kentucky in 2014, seeking a declaratory judgment that the agreements he entered into for funding a personal injury suit were illegal. The court granted summary judgment in March 2017, saying the funding agreements were void for violating Kentucky’s champerty statute, and that the interest rates were usurious.  

About a half-dozen states that still recognize champerty as a defense including Minnesota have seen similar decisions, according to an article published in 2017. But funders have gotten smarter recently about tailoring agreements to the states so as not to run afoul of standards on champerty and maintenance, said Elizabeth Vandesteeg, a partner at Sugar Felsenthal Grais & Helsinger in Chicago, a co-author of the article.

There have been some decisions that have provided guidance, and they have structured their agreements in such a fashion that courts would likely uphold them and built-in provisions like arbitration agreements that help to keep them out of the courts,” Vandesteeg said. “I think we will see more regulation on a state-by-state basis, and that may have more substantial and lasting impact than one-off lawsuits on litigation finance.”