The business of third-party funding of litigation is said to be rapidly growing. Typically, the entity putting up the money (a funder) signs a contract with a plaintiff to pay the costs of a lawsuit in return for a percentage of any recovery. While once thought to be impermissibly champerty, this practice is now widely recognized as permitted so long as the plaintiff retains control of the litigation. But in a recent twist on the business of funding, a Delaware court has denied a funder any fees. The decision raises a caution that funders should note.
In Judy v. Preferred Communication Systems, Del. Ch. C.A. 4662-VCL (Sept. 19), the court denied a fee application by Preferred Spectrum Investments (PSI) notwithstanding that PSI’s funding of litigation had arguably set in motion a series of events that led to a $60 million recovery by its litigation target, Preferred Communication Systems Inc. (the company). While the facts of the Judy case are very unusual, the principles it stands for have potentially far-reaching consequences.
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