Are there Good Candidates for Litigation Finance?

Litigation is expensive. Access to courts requires time, money, and resources. And whether you are an individual or a small or large company, litigation costs are booked as expenses on the income statement. This makes protecting your company and keeping the budget in the green extremely tricky. So, to keep costs off the balance sheet, litigation financing is the way forward.

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But how do funders decide whether a claimant or company will be a good candidate for financing and whether recovery is likely? This article looks at what makes a good lawsuit candidate, how the fees get paid, and the features of litigation funding transactions.

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How do funders determine good candidates for litigation finance?

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Litigation funding makes sense where there are complex commercial claims. In other words, where the litigation costs are high, and the claim doesn't depend on details that only the defendants know. This includes breaches of contract, shareholder securities actions, class actions, patent and other intellectual property disputes, international arbitrations, bankruptcies, etc. In the same way that a law firm evaluates whether to take on a client as contingent representation, a funder will determine whether a client is a good contender for litigation funding.?

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A reputable funder will begin evaluating a candidate by using the 10:1 ratio. For example, if the claim value sits at ten and the financial commitment ratio is at 1, the funder will know whether funding is a viable option. If this is the case, they can start doing further research into the claimant and the case.?

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What entities usually need litigation funding?

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Entities seeking funding often include:

??? Individuals or partnerships, small entities (including LLCs), insolvency practitioners, and startups: These institutions need funding because litigation is expensive and private equity funds are reticent about supplying funds for ventures that don't grow the company, and litigation certainly falls into this category.?

??? Large class actions: The law firms looking to represent the class action claim will struggle at scale.?

??? Mid to large-cap operating companies: These mature companies regularly seek litigation funding because executing claims is not part of their legal budget. Moving forward with a claim without litigation funding will often drain operating capital, especially since the outcome is often uncertain or the recovery is untimely.?

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How does an entity secure litigation funding?

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The first step is an executed NDA with the client. Once this is signed, the litigation funder will review whether the claimant is creditworthy, the claim has merits, and the recovery is realistic. The funder will also research the claim's legal team and study the budget. If, after all the investigations, the litigation funder views the lawsuit as stable and potentially valuable – with recovery highly likely – they will put together terms for the funding. Once there is a mutual agreement, the process of financing can take place.?

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How do the fees get paid?

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Most often, the client will send the litigation funder notices of the legal fees and disbursements incurred, and the funder will pay these outright. Funders will normally pay legal invoices sent to clients and forwarded on a 30-day billing cycle. That means funders will pay the firm just as clients usually would.

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What is a case's standard rate of return?

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This is not an easy question to answer because the risk is what dictates the return. Experience and meticulous research usually ensure a funder sees success with their investment, but even the most thorough and skilled litigation funder may not recover some of their investments. However, litigation funders do have specific attributes that help guide their decisions. For example, they may conform with a law firm's contingency arrangements, depending on how much of the litigation expenses they need to cover. They may also bear lower returns for earlier resolutions before their cash is exposed or step down their returns as the cash award gets bigger. Regarding the recovery rate, funders need a 100% cash sweep until their invested capital is recovered. Once this happens, the remaining profits are split with the claimant, with the funder's return often stepping down over time.?

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Standard features of litigation funding transactions?

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Each litigation funding contract is unique. However, these contracts often have similar features.

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??? The recipient of the finance: The law firm receives the lawsuit monies, not the claimant. The funder merely provides the financial resources for the claimant to pursue the claim, and the funder does not interfere in the case strategy or settlement decisions.

??? The investment is non-recourse: The claimant will not have to pay the funder back.

??? The structure of the funder's return: This is usually done in two ways. Once the case has a successful recovery, the funder will take a percentage rate of return, or a multiple of what was invested.

??? The priority return: The funder will often pursue a priority return of their capital. Once the funder gets this priority return of their deployed capital from the successful proceedings, the remainder of the proceeds is shared between the legal counsel, claimant, and the funder.?

??? The accounting benefits: Litigation funding is non-recourse, meaning the money received for the litigation proceedings isn't marked as debt but can be seen as revenue. And since this capital is used to pay litigation fees and costs, the company isn't paying these costs through their budget, lessening their financial burden.?

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If you want to stay up-to-date with what is going on with non-recourse litigation funding, Wild Dog serves as a trusted advisor to attorneys and their clients who are exploring litigation financing. So follow our Linkedin Page for the latest updates on?https://www.dhirubhai.net/company/wild-dog-mu ?or visit our website?https://wilddog.mu ?for more.