Mass Tort Lawyers Trapped in Cycle of Debt as Cases Drag On

Mass tort lawyers and their investors have a problem: Some huge cases are taking longer than expected to pay out as they hunt for the next big one.

Two of the largest multi-district personal injury cases show little sign of resolving soon after running for years. Johnson & Johnson’s multiple attempts at bankruptcy have delayed an $8 billion settlement for claims alleging its talc products cause cancer. A split among courts handling litigation against Bayer over the pesticide Roundup means the US Supreme Court may step in.

High-interest loans that law firms behind those cases use to fund their work are coming due, forcing firms to refinance. An influx of lawyers seeking a piece of the action and a dearth of big budget mass torts on the horizon has sparked concerns that the space is overleveraged.

“All these loans have maturity dates in them,” said Michael Kelley, a partner at Parker Poe who advises on funding deals. “So those are coming and going and the question always becomes what happens?”

Mass tort lawyers typically work on contingency, getting paid with a percentage of any settlement for the people they represent. They turn to outside funders to help shoulder the costs. The $15.2 billion litigation finance industry turned its attention to these cases in recent years after initially focusing on commercial disputes. They offer loans—rather than investments in exchange for returns on successful cases—with firms using their case dockets as collateral.

The deals allow funders to deploy large amounts of capital to firms with built-in diversified portfolios of hundreds or thousands of cases. Many of the large payouts they anticipated have yet to come.

Now, funders and law firms are scrambling to identify the next big tort.

There’s a “degree of stress and distress in the space,” Brandon Baer, founder of Contingency Capital, said at a litigation finance conference in September. Some funders are getting pressured for returns from limited partners, while borrowers are saying they don’t have enough liquidity, according to Baer.

“We are going to be entering into a fallow period,” Baer said. “You have a lot of built up inventory over significant periods of times. There might be seven major mass torts at the moment. Once those are played out, there will be potentially three to five years of quiet time while the firms are idling and reloading.”

‘Refinancing Wave’

Loans to law firms often come with double-digit interest rates that can exceed 20%. The deals typically mature after three to four years. If cases aren’t resolved by that time, borrowers are forced to restructure the loans—with pricey concessions to lenders—or refinance with a new lender.

The talc and Roundup cases are nearing the decade mark with no end in sight.

“Nobody makes a bad loan. Bad loans happen over time,” said Andrew Sagliocca, the CEO and president of Esquire Bank, which specializes in lending to plaintiffs’ firms. “Duration is creating kind of a refinance wave.”

Esquire often lends to law firms for up to $30 million, but also does deals with funders and others. Its focus has shifted in the past eight years away from mass torts because of the duration issues. The bank instead has turned toward law firms handling single-event cases, like automobile accidents, which are shorter and lower risk.

Kelley of Parker Poe says around 85% of his practice involves funding deals and the portion of refinancing arrangements has grown fairly significantly. He helps law firms facing looming maturity dates design those arrangements.

Lenders typically require law firm borrowers seeking more capital to increase guarantees, cut costs in the operations or even slash firm owners’ pay.

“That’s pretty scary for a lot of the attorneys,” he said. Lenders “want to see the principals putting some more skin in the game.”

Brian Roth, CEO of mass tort funder Rocade Capital, says the market is in a digestion phase after capital surged in quickly. “A lot of investors in the space are waiting to see when the cash will come back from the cases rather than other investors,” he said.

‘Dangerous Proposition’

Some seasoned mass tort lawyers blame an influx of new players, who they say are borrowing a lot of capital and fueling the heavily leveraged environment.

The market has “blown up exponentially” with new firms said Jim Onder, founder of plaintiffs’ firm OnderLaw. He expects consolidation to eventually follow.

“There are a lot of people entering the space trying to figure it out,” said Onder. “I don’t think it’s a good idea for them to be engaging in funding because it’s a dangerous proposition. They need to understand the risk.”

OnderLaw previously had a loan with Fortress Investment Group, a major player in litigation funding. The firm has a lien with Texas-based Armadillo Litigation Funding, according to public filings.

Inexperienced lawyers are taking on more cases than they can handle, according to Mike Papantonio, senior partner at Florida-based personal injury firm Levin Papantonio. Some newcomers aren’t properly evaluating the transactional costs and duration, he said, and he’s concerned they’re more beholden to investors than their clients.

“Refinancing is gonna cost somebody and the pitiful thing is it costs the client,” said Papantonio. “The client is now a victim three times: victim from the injury, victim for the first financing, victim from the third financing.”

Papantonio and Onder are already eyeing their next big target: lawsuits over contraceptive injection Depo-Provera. Those suits allege pharma giant Pfizer Inc. failed to warn patients about brain tumor risks. The cost that lawyers pay for Depo-Provera case referrals has already jumped from $350 to $1,500 apiece, according to Onder.

Many lawyers that don’t know how to identify good litigation opportunities are too eager to deploy money, Onder said.

“If the next thing that someone says is good is a really horrible litigation, they’re going to throw their money at it stupidly and blindly,” he said. “And unfortunately, some of the lenders do the same thing.”