The Decisionmaking Process of Funders, Attorneys, and Claimholders
Citation: 103 Geo L.J. 197 (2014)
In the past twenty years, there has been significant growth in the alternative- litigation-finance industry, whereby an outside third-party contributes capital with the expectation of a positive return upon successful completion of a lawsuit. In the early days of litigation finance, claims were primarily limited to the personal injury arena. But in recent years, outside funders have shown an interest in more complex, commercial litigation. For instance, Counsel Financial—a firm backed by Citigroup—funded much of the litigation surrounding the 9/11 World Trade Center disbursements. And because of international pressures and competition, litigation financing has become a much more global industry. The Chevron–Ecuadorian environmental liability litigation that produced an $18 billion judgment abroad was financed at least partially by outside funders. Plaintiffs are not the only group to take advantage of litigation finance either. Most recently, sovereign nations and corporate defendants have taken advantage of this type of funding, adding a new dimension to the analysis.
What makes alternative-litigation-financing arrangements attractive to all of these greatly varied parties? Much of the literature written about the litigation finance industry has focused on the propriety of the arrangements in light of the judicial, regulatory, and ethical barriers that currently exist, with an eye towards policy changes that would make funding more accessible to potential claim- holders and clients. But why do each of the three parties to the transaction (the funder, the attorney, and the claimholder) agree to these arrangements in the first place? In particular, why do these parties, especially the claimholder, choose an alternative-litigation-financing agreement as opposed to a more traditional contingent-fee arrangement? Why do funders sometimes loan directly to attorneys and other times to claimholders themselves? This Note will analyze the factors in the decision to seek alternative litigation financing. These include both the artificial barriers that have been erected by the current legal and regulatory regime, such as the prohibitions on champerty and maintenance, and the economic considerations of the parties, including cost of capital, liquidity and risk preferences amongst others.
The Note will proceed as follows. Part I provides a brief overview and compares the traditional contingent-fee arrangements entered into between an attorney and client with alternative litigation financing provided by a third-party funder. This includes both loans made by a funder directly to a client and loans made from a funder to an attorney. Part II will discuss the economically artificial barriers to entering into these agreements, including prohibitions on champerty and maintenance, ethics rules, usury, and other regulations. Part III will introduce a model explaining the various components of the funder and attorney’s decisionmaking process. The variables modeled will determine what interest rates the funder and attorney will have to charge in order to make the agreement economically feasible. Parts IV through VI will analyze the funder’s, attorney’s, and client’s decisionmaking processes, respectively, detailing what benefits and comparative advantages the parties can realize from the arrangement. The Note will conclude with a discussion of potential implications of the model and closing remarks.