Colbeck Capital Management Discusses Litigation Finance

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.
    1. 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.
    1. 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.
      1. 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.

Jason Colodne of Colbeck Capital 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.