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Litigation
finance is a term widely used when describing funding provided by a bank, hedge
fund, or other financial institution which does not have any direct link to the
underlying litigation proceeding, to pay for a portion or the whole of legal
expenses and case management costs. In return, the capital providers receive a
certain share of the recovered damages, if awarded. The concept first emerged
in Australia in the mid-1990s and has since spread across the world. New York-based financial institution Colbeck Capital Management states that with a
broad definition comes a wide array of applications.

Provided
below, by Colbeck Capital Management, is a summary of the various types of litigation
finance. 

Pre-Settlements

• Advancing funds to personal injury litigation
  plaintiffs, who use the funds to pay medical expenses or for other purposes.
  • Each individual advance may be relatively
    small, so pre-settlement companies often originate a large number of loans
    (hundreds or thousands).
  • Each advance will earn an accrual based on
    amount of time outstanding.
  • The risk of each individual funding is binary.
    The plaintiff is obligated to repay an advance only if there are proceeds from
    a judgment or settlement.
  • Funder does not have the right to control the
    litigation. The plaintiff’s lawyer is obligated to do what is best for his or
    her client, which is the plaintiff.

Post-Settlements

1. As the name implies, post-settlement financings are made after a settlement has been finalized and the funded party is awaiting distribution of proceeds.
   1. The advances can
      be made to a plaintiff or to a law firm that is entitled to a contingency fee
      to be paid from the settlement proceeds.
   2. One example of a post-settlement
      funding business is in the class action sector, such as financing the NFL
      concussion settlement where the settlement is final and is currently in the
      implementation stage.
   3. Another example
      is the Deepwater Horizon BP settlement. The two settlements are good examples
      of how they can vary.
      1. The BP settlement
         requires a more complicated assessment of recovery entitlement.
      2. The NFL
         settlement is based on a grid.

Medical Liens (also known as Letter of
Protection Fundings)

• The advances are made to medical
  professionals.
  • Such medical professionals provided medical
    care to the plaintiffs and are entitled to be paid from recoveries under the
    related litigation.
  • “Letter of Protection” refers to the letter
    signed by the plaintiff’s attorney acknowledging the entitlement to payment.

Loans to Law Firms

• Can be secured by fees from one case or
  multiple cases.
  • Can be a pre-settlement or a post-settlement.
  • Has often been done in the class action or
    other personal injury context but can also be in commercial torts or other
    types of cases.
  • Law firms may seek funding to advertise for,
    or prove up cases, in a specific area with a pool of other cases providing
    collateral value to the Lender. 

Investment in Cases

• Arguably the purest form of litigation
  funding.
  • Advancing money to a plaintiff to prosecute
    the litigation.
  • One well-publicized example was Hulk Hogan’s
    case against Gawker from 2012 through 2016.
  • This type of arrangement can be used in
    different types of cases (e.g., pharmaceutical, medical devices, patent
    infringement, matrimonial, etc.).
  • There is a waterfall for distributing proceeds
    among the plaintiff, the attorneys and the funder.
  • Lending and regulatory considerations must be
    reviewed in these situations. 

Bankruptcy Litigation Funding

• Advancing money to debtors-in-possession,
  creditors’ committees, liquidation/litigation trusts, Chapter 7/11 trustees or
  liquidation trusts.
  • Types of litigation matters to be funded may
    include fraud/fraudulent transfer/preference actions, other avoidance or
    clawback actions and/or monetization of pre-bankruptcy or post-bankruptcy
    judgments.
  • Funding may be required during pendency of
    bankruptcy case (e.g., commencement of an adversary proceeding or continued
    prosecution of prebankruptcy litigation), post-confirmation or after
    consummation of a Chapter 11 plan.
  • Bankruptcy Code requires court approval for
    debtor or trustee to obtain credit outside ordinary course of business and
    approval of litigation financing is not guaranteed.

Single Event Cases

Single
event cases refer to individual lawsuits. Single event cases can cover a wide
range of litigation efforts including personal injury, product liability,
commercial litigation, medical claims, motor vehicle accidents, probate
processes, trespassing claims, etc. Generally, these types of cases are split
into 2 categories Pre-Lit or Single Event cases. Single event cases are
typically settled out of court within a few weeks.  

Mass
Torts

Mass
torts is defined as many people injured by the same product; often the cases
are congregated in class actions or multidistrict litigation (“MDL”). Class
action lawsuits are created when several people are harmed by a common cause
(e.g., a medical device or prescription drug). A group can file a complaint in
court and act as the lead plaintiffs. The entire group affected can benefit
from the outcome of the case, but little is required from those other than the
lead plaintiff.

MDL

MDL
refers to a special procedure in which federal civil (i.e., non-criminal) cases
from around the country are transferred to one court. MDLs are organized when
the United States Judicial Panel on Multidistrict Litigation assert that a
large number – usually at least one hundred – of plaintiffs in different
federal courts are suing a common defendant on substantially similar grounds.
The goals of MDL are efficiency and economy when facing large-scale, complex
cases. 

Victims harmed by a particular product or device will often seek experienced counsel to represent their case. Lawyers representing victims with similar claims, or with experience navigating the mass tort litigation space, are naturally more attractive for a prospective plaintiff. Moreover, lawyers with a widespread representation in a particular docket may eventually find themselves on a Plaintiffs’ Steering Committee or similar position that might give that law firm direct influence over developments in a settlement. 

While
many individuals harmed by a product actively seek counsel to represent their
lawsuits, mass tort litigation has given rise to a robust marketplace of law
firms reaching out to victims. Marketing efforts include social media
advertising, television ads, billboards, and print advertisements. The rise of
mass tort litigation has propagated hundreds of ancillary advertising
firms. 

Law
Firm Marketing

A
law firm may generate cases organically by way of a client reaching out
directly with his or her claim. However, a law firm may also tap a marketing firm
to identify prospective clients harmed by a certain product. The terms of
engagement will specify the criteria of victims the law firm is seeking to
represent, a total marketing budget, and a compensation schedule to the
marketing firms. The arrangement can be paid through an upfront fee and/or, if
the marketer is itself a law firm, a split of future settlement proceeds as
co-counsel. 

Upon
coming across a relevant advertisement, a prospective plaintiff might reach out
via the contact info provided in the ad. The victim is put in touch with the
marketing firm – often through a designated intake center – where it is
determined (i) whether that individual meets the criteria and (ii) is not
already represented by other counsel. Assuming both prongs are satisfied, the
individual is referred on directly to the law firm that engaged the respective marketing
efforts. The intake process can occur either through the marketing firm or
through the referral firm.

From
there, the law firm verifies the findings of the marketing firm and begins to
process medical records to substantiate the client’s claims of harm. The law
firm will formally engage with the client and agree to a split of any future
legal fees. In most later-stage mass tort litigation efforts, the engagements
contemplate zero fees upfront and a 40% split of any future payments. That 40%
split of any future compensation is then split between the marketing firm and
aggregating firm per the pre-negotiated metrics. 

Given the sheer size and enormous
costs associated with most MDLs and large-scale litigation efforts cases are
usually settled, resulting a non-zero payout to plaintiffs. Very few cases –
sometimes less than a dozen – see a court room. Occasionally, cases will be
aggregated into a class action or MDL, a judge will hear a number of bellwether
cases, and, upon establishing a trend across those bellwethers, the defendant
and plaintiffs (often through a Plaintiff Steering Committee) will agree to
settle. 

About Colbeck Capital Management

Colbeck
Capital Management was
founded in 2009 by Jason Colodne and Jason Beckman, who still operate as
Managing Partners.  Colbeck has offices
in New York and Los Angeles.   Colbeck provides
strategic loans to companies going through periods of transition when
traditional sources of capital are not readily available. The principals have
over 75 years of experience managing credit investing businesses and have
underwrote over $22B of total loan volume.

Jason
Colodne co-founded
Colbeck Capital Management as a Managing Partner in 2009. Mr. Colodne oversees
all aspects of investment execution and portfolio management is the senior
transaction partner at Colbeck and oversees all aspects of investment execution
and portfolio management.

About Jason Colodne

Mr.
Colodne’s investment experience spans
over two decades. Mr. Colodne was the Head of Proprietary Distressed
Investing and the Hybrid Lending Group in the Fixed Income Currencies and
Commodities Division at Goldman Sachs. Mr. Colodne joined Goldman Sachs after
gaining distressed investment and investment banking experience at UBS and Bear
Stearns. Following Goldman Sachs, Mr. Colodne was a Managing Director and the
Head of the Strategic Finance Division at Morgan Stanley. 

Mr.
Colodne has held board seats on multiple portfolio companies and participated
in numerous restructuring steering committees. Mr. Colodne is a member of the
Young Professionals Organization – Metro New York (YPO), is a Board member of
the Centurion Foundation, and a longtime supporter of the Children’s Tumor
Foundation. Mr. Colodne is a graduate of the University of Pennsylvania.

About Jason Beckman

Jason
Beckman co-founded Colbeck in 2009 and is a Managing Partner.
The foundational years of his career were spent at Goldman Sachs as the Head of
Distressed Product Loan Sourcing, Fixed Income Currencies and Commodities Division at Goldman Sachs.
Prior
to Colbeck, Mr. Beckman worked at Deutsche Bank in their Distressed Group.

Mr.
Beckman attended Union College and The London School of Economics.

His
philanthropic endeavors include support for the arts as a benefactor of The
Metropolitan Museum of Art and Art Production Fund and global humanitarian
issues through the International Rescue Committee founded by Albert Einstein.