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How to Hate Litigation Funding—Until You End Up Loving It

May 27, 2021, 9:31 AM

Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at a case that illustrates the complicated debate around disclosing the existence of litigation finance in individual lawsuits. Sign up to receive this column in your Inbox on Thursday mornings.

I wrote earlier this week about a battle brewing over litigation finance in New Jersey, where a rule is being considered that would force litigants to tell opponents when they’ve received an investment in their lawsuit.

Litigation funders can’t stand the idea, which would apply to the New Jersey federal court. They say forced disclosure will lead to more litigation. Defendants will dig for information about the nature of the funding agreement. “Fishing expeditions!” they shout.

On the other hand, proponents of more transparency in litigation funding say the disclosure will root out conflicts of interest or situations where the money behind a lawsuit comes with the power to make decisions for the litigant. “Where’s the ethical safeguards?” they demand.

Even with fake commentary included, I don’t find the argument over disclosure all that exciting. Both positions seem pretty intuitive. Defendants will go to the mat to find out whatever they can. Sometimes they won’t find anything. Sometimes they will.

But when does asking questions cross the line to become a “fishing expedition,” as the International Litigation Finance Association phrased it recently. When the questions don’t turn up anything juicy? When you’re on the side that doesn’t like the questions?

A case now in Delaware’s bankruptcy court with a long history of litigation funding brings the debate to life. It also shows how positions on litigation finance can change depending on how it’s being used or who is using it—which is sure to complicate any rulemaking effort around mandatory disclosure.

The case dates to 2011, when Angela Ruckh, a nurse in Florida, brought a lawsuit under the False Claims Act alleging a nursing facilities operator was defrauding Medicare and Medicaid. Ruckh’s case resulted in a jury award in 2017 of more than $340 million, eventually whittled down to about $255 million.

Ruckh had sold 4% of any future award to a litigation finance company, a fact lawyers at Skadden, Arps, Slate, Meagher & Flom representing the nursing facility seized on during an appeal. They argued that since Ruckh was suing on behalf of the U.S. government, she didn’t have the right to sell a portion of the award to a third party.

The Eleventh Circuit rejected the argument, saying the 4% was only a small portion of her award and she maintained control of the case. (The decision has been widely analyzed as part of a broader debate around the role of outside money in whistleblower cases.)

The award pushed the nursing facility operator into bankruptcy. In this new context, it appears to view litigation finance more favorably: It is now looking to market litigation assets to the highest bidder.

Before that marketing effort takes place, there has been an effort by creditors to learn more about the relationship between the bankrupt company and a proposed buyer of the litigation assets. The creditor’s committee, which includes the whistleblower Ruckh, has sought to conduct a Rule 2004 examination into the sale.

This would be the “fishing expedition” part of the case.

The creditors viewed the initial sale suspiciously because it appeared to sell litigation claims to the very defendants they could be brought against in the future. And those defendants could be the parent company of the bankrupt subsidiary.

“The Court should not tolerate a sale of complex claims against related non-Debtors that involve evolving corporate structures and restructurings, capitalizations, transactions and governance, to those very same parties that are likely to be the subject and target of such claims,” lawyers for the creditors committee wrote in a motion objecting to the sale.

Funders often characterize efforts to uncover information related to the sale of litigation assets as a waste of judicial resources. And it’s true that many judges privately review litigation finance information and deem it irrelevant to the broader litigation. But there are still cases where the details matter. And that information usually doesn’t come freely.

Last week, the bankrupt nursing facilities operator appeared to change course.

It asked the bankruptcy judge to hire law firm McDonald Hopkins to help broker an auction of the litigation assets. McDonald Hopkins will earn $50,000 a month for its first four months of work, and $25,000 a month thereafter. If its work leads to a sale price higher than the earlier proposed deal—around $3 million—McDonald Hopkins will earn a 2.5% commission on the sale price.

Marc Carmel, a member at McDonald Hopkins, declined to comment, as did lawyers for the creditor committee. Lawyers for the bankrupt company did not respond to messages seeking comment.

The case is far from over. There’s still the outstanding Rule 2004 request, which argues there’s been a lack of transparency by the debtors. And the auction could take months.

But so far, the case shows it’s hard for abstract arguments about litigation finance disclosure to capture the complexity of real-life litigation. And that is sure to complicate the ongoing attempts to craft rules around the issue.

VIDEO: A look at the growing field of litigation finance and what it means for the future of the business of law.

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That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.

To contact the reporter on this story: Roy Strom in Chicago at rstrom@bloomberglaw.com

To contact the editors responsible for this story: Rebekah Mintzer at rmintzer@bloomberglaw.com; Chris Opfer at copfer@bloomberglaw.com

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