Litigation funding has quickly become a hot topic in the legal and financial industries over the past few years. Litigation funding companies provide money to plaintiffs in lawsuits in exchange for repayment with a pre-determined rate of return when the case settles. There are a few major players in the industry now including Baker Street Funding, Oasis Financial, Parabellum Capital and Law Cash. These companies are backed by both individual and institutional investors that are looking for negatively correlated alternative investments that offer the potential for double digit returns.
To understand how litigation funding works, one must first understand how attorneys are paid on personal injury cases. Unlike criminal or corporate attorneys who typically charge an up front or hourly fee, personal injury attorneys charge something called a contingency fee. This means that their fee is only paid contingent to the case successfully settling. This helps the plaintiff who typically cannot afford the cost of litigating a large insurance company and helps the attorney by aligning his or her interests with their client and making them push for the most favorable recovery amount possible.
Litigation funding evolved from the contingency fee model. These funders can step in as a neutral third party and either provide capital for litigation expenses or for living expenses while the injured plaintiff is out of work and unable to earn a living. These funding companies look at legal claims as assets which can be quantified and even securitized. Litigation funders take various factors into account when evaluating a case including the merits of the case, the jurisdiction it was filed in and the duration to settlement. Need to consult on this contact at Bellwether Capital.
While litigation funding is still a small niche business, Baker Street Funding, which was founded in 2018, is quickly becoming a dominant player in the field. Their CEO, Daniel Digiaimo who previously worked in wealth management at Morgan Stanley and Merrill Lynch, has brought his white glove service model and applied it to the attorneys and plaintiffs that work with his firm. Baker Street Funding is a private company but according to Mr. DiGiaimo, they have more than tripled the amount of origination from the previous year.
Another major player in the space is Oasis Financial, who is one of the originators of the litigation funding business. Recently acquired by Parthenon Capital, they are involved in their own litigation currently with previous CEO, Gary Chodes, accusing the law firm Kirkland & Ellis LLP, of “keeping executives in the dark, while current executives of the company conspired to sell the company at a cut rate”.
A New Alternative Investment
One of the reason financial institutions are clamoring to pour capital into the litigation funding industry is because of the risk profile and diversity of the investment. Litigation funding is negatively correlated to the general economy, which means if the stock market takes a downturn, this asset could become more valuable. As fund managers, family offices and large institutions look to diversify their portfolio risk, litigation funding can potentially be part of the answer. Litigation funding portfolios are diverse and each firm invests in different case types with different maturity profiles. The portfolios created by litigation funding firms are crafted with a large amount of due diligence and each case is thoroughly examined by legal experts on both the merits of the case, and the time that they believe it will take to settle.
An Industry Not Without Controversy
While litigation funding is new to some, to others it is an industry that is in dire need of regulation. Some states like Minnesota and Ohio have voided litigation funding contracts, citing a medieval legal doctrine called “champerty”. This doctrine prohibits the sharing of litigation proceeds with a third party. Many US states have rejected these doctrines because they are outdated and do not apply to today’s legal landscape.
There has been a number of recent legal opinions that have championed the industry calling it a necessary and common supplement to todays legal costs. A federal court has also recently upheld the protection of attorney work product to third party funding companies that may be interested in investing into a case.
“Insurance companies can drag cases out for a long time, leaving plaintiffs financially insolvent. Litigation funding acts as an equalizer to help level the playing field for plaintiffs” explained the CEO of Baker Street Funding, Daniel DiGiaimo.
The litigation funding industry may see some regulation in the next few years but it will also continue to expand. As investors look for new sources of alternative investment, money will continue to flow into the space. Attorneys and plaintiffs alike are starting to see the benefit from litigation funding and given that the US legal consists of over $200 billion in plaintiff spending alone, there is an enormous amount of room for growth.