Litigation Finance, Litigators

The Best And Worst States For Litigation Finance (Part I)

Professor Michael McDonald examines why the differences between funding exist between states.

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Though litigation finance is growing rapidly across the U.S., that growth is uneven in many regions of the country. The reality is that in some states, litigation financing is next to impossible to obtain, while in others, it can be less costly for financing recipients than might be expected. In this two-part article, I’ll look at differences in litigation finance between states. Part one here focuses on why the differences between funding exist between states, while part two itemizes the best and worst states to invest in for the space.

The discrepancy in attractiveness of litigation finance between states generally stems from judicial decisions that have been handed down in that state, as well as state-level legislative differences.

Many people new to the industry do not realize that there are important differences in litigation finance across states. Managing those differences can be challenging. The reality is that managing a portfolio of claims is tough by itself, but once you throw in differences between states for a given claim, it is next to impossible to manage these claims on one’s own.

One major improvement that is helping to professionalize the industry is portfolio management software for funders. Mighty offers probably the most well-known case management software in the field. Mighty co-founder Dylan Beynon says that differences between states are an important consideration that can be a struggle for litigation finance professionals to deal with on their own.

In particular, there are important underwriting differences on a state-by-state basis. In other words, a deal that works in one state might be illegal in another. In a recent case I worked on, for example, a commercial claim in Indiana proved virtually unfundable because of adverse issues with the treatment of litigation funding in the state. Funders need up-to-date information on what underwriters need to know to evaluate cases in different states, such as statue of limitations, liability limits, comparative negligence, PIP, thresholds, etc. — something that Mighty is quick to point out that it provides.


Courtesy of Mighty Software

In addition to legislative restrictions around litigation and litigation finance, just complying with state-by-state regulation is tough for litigation funders. Regulation on a state level around litigation funding continues to increase; for example, regulations in Kentucky and California make litigation funding challenging in those states.

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Beynon of Mighty cites those challenges from state=level regulation as the reason for his firms RegTech feature: “Because individual states have passed regulations and continue to do so, Mighty has the automated contract templates and specific reporting requirements needed to comply with each individual state.”

While different litigation funders are more or less willing to invest in different states, Roni Elias of litigation finance firm TownCenter Partners cites Alabama, Colorado, Kentucky, and Pennsylvania as being particularly tough to fund cases in.

Against this backdrop, how can a litigant increase its chances of getting funding if it is located in a hostile state? There are solutions, but none of them are ideal.

Elias of TownCenter Partners says that for his firm, litigants residing in hostile states have to “agree to both choice-of-law and choice-of-forum clauses that would put the agreement under the jurisdiction of a state that is friendly to litigation financing.”

In addition, if a litigant has the option of making an agreement as an individual or through a commercial entity, it would be better to make the agreement through the entity.  In many states, the limitations on lending to individuals don’t apply to commercial enterprises.

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Another important consideration for litigants looking for funding is the timing of the agreement.  There are states in which courts have held that the common-law principle of champerty applies only to the “stirring up” of litigation.  In such jurisdictions, it makes a difference if the litigation funding is sought before or after the litigant has hired an attorney and made a firm commitment to litigating a case.

In these situations, Elias says, it is probably not necessary to file a complaint before seeking funding, but it is necessary to “establish that the litigant’s decision to pursue a claim was independent of the availability of funding.”

In some states, courts also examine the extent to which the litigation funder has the capacity to control fundamental decisions about litigation strategy and settlement.  If the litigation financing agreement is clear about preserving the litigant’s own autonomy in these situations, it will go a long way to minimizing the risk that a court will find the agreement invalid.

Overall then, litigation financing is not impossible to get in states that are hostile to the concept, but certain restrictions do make it harder to get through the process smoothly. Next week, we’ll look at the specific states that offer easier and harder access to litigation funding.

Michael McDonald is an assistant professor of finance at Fairfield University in Connecticut. He holds a PhD in finance. Michael consults extensively through Morning Investments Consulting and writes for Litigation Finance Journal. Michael has served as an expert witness in legal disputes, and is an arbitrator with the Financial Industry National Regulatory Authority (FINRA). Michael can be reached at M.McDonald@MorningInvestmentsCT.com.

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