Legal Finance for Asset Recovery

September 5, 2019

Imagine you’ve been involved in a long, bruising litigation battle against a defendant that has fought at every stage.  Finally, you win a substantial final judgment.  This is the moment when the defendant admits defeat and immediately wires you the full amount owed, right?

Hardly.  Litigating to a final judgment is often only the first phase of a complex commercial dispute.  Enforcing that judgment comes next.  If your company is facing a defendant that either cannot or will not pay, enforcement can take as long and cost as much as the litigation itself.  That is particularly true if the defendant is a foreign corporation or has assets spread across multiple jurisdictions.

Moreover, complex or multi-jurisdictional asset recovery requires a unique skill set.  The lawyers and experts who won the underlying litigation usually lack the expertise to create and execute a strategy for enforcing the judgment.

Many companies emerging from litigation feel caught between a rock and a hard place.  On the one hand, they may have few resources and lack the resolve to engage in a long and expensive asset recovery process.  On the other hand, they have invested significant time and money to win the case, and accepting less than the full judgment is an unattractive option.

Litigation finance can be an important tool to ensure a corporate plaintiff can enforce a judgment, and funders with experience in complex asset recovery that can add value to a company as it navigates a potentially challenging process.

It’s Never Too Early to Think About Enforcement

At the beginning of a case, plaintiffs understandably focus on the merits of the claim, potential damages, and the likelihood of prevailing in court.  While these issues are obviously important, one of the biggest mistakes corporate plaintiffs make at the outset of complex litigation is failing to consider the enforcement strategy.  Ignoring it can lead to the nightmare scenario of litigating to the bitter end, only to learn that the defendant’s assets are out of reach.

When considering a high-value claim, it often makes sense to conduct diligence on the type and location of a defendant’s assets and on the defendant’s litigation history to evaluate whether the defendant has assets to satisfy a judgment, and whether it has a history of failing to satisfy judgments.  This early diligence certainly incurs costs, potentially including fees to investigators, forensic accountants, and lawyers who specialize in asset recovery.  Some plaintiffs may balk at spending money to research enforcement before they even file a claim.  But this early diligence is well worth the investment.

Early diligence on assets can inform critical decisions at the beginning of the case.  It will facilitate the plaintiff’s budgeting process to know in advance that enforcement might require significant additional litigation to, for example, pierce the corporate veil or repatriate assets from a corrupt country.  Alternatively, it may deter the plaintiff from proceeding with the lawsuit in the first place.  If the plaintiff does proceed, the location of assets may influence forum selection, requests for the defendant to post a bond, seeking to freeze the defendant’s assets or other measures to prevent the defendant from hiding or disposing of assets.

Avoiding Expensive Mistakes

As the litigation progresses, having a sense of the enforcement strategy will help the plaintiff avoid mistakes that could complicate or preclude recovery later.  Time is of the essence in asset recovery, so a plaintiff should position itself to move quickly and efficiently once it has a judgment in hand.  At a minimum, this means having as much information as possible about the defendant’s corporate structure and assets to ensure that any enforcement order not only specifies the terms, but also the correctly names the entities and property subject to it.

Generally, the enforceability of any court order depends on the plaintiff’s compliance with both the law and internal procedures of the jurisdiction where either the defendant or the asset is located.  It is paramount for a plaintiff to identify local counsel and relevant experts in advance, and to ensure it has followed all the rules for providing notice, serving documents, taking possession of property, etc.  Waiting until the litigation is complete or close to completion to create a recovery strategy, will give the defendant time to take measures that will complicate or even block a plaintiff’s recovery.

Plaintiffs will also want to ensure that a court judgment in their favor is properly crafted to identify all of the proper parties, including any and all alter egos of the named defendant. This will avoid a nightmare scenario of winning a long-fought legal battle, only to realize that the paper judgment you hold is meaningless against the parties that hold the assets owed to you.

Reacting to the Unexpected

The foregoing is largely premised on dealing with a defendant that acts in bad faith or whose assets are organized or located in a way that makes them difficult to reach—and such defendants are often easy to recognize from the outset.  However, sometimes things happen during the litigation that are beyond the defendant’s control, but which can still jeopardize a plaintiff’s ability to recover the money the defendant owes.   For example, if a defendant becomes the victim of a major fraud, is forced into bankruptcy, or has its assets frozen or confiscated, a plaintiff must adjust its approach to account for these unexpected developments.

In such a situation, the right experts can help assess the situation and craft a strategy that maximizes the plaintiff’s chances of recovering while mitigating the risks and expenses of the enforcement process.

How Litigation Finance Can Help

Litigation finance is available to support the planning and execution of an enforcement strategy at almost any stage.  The process begins with diligence, during which a funder will assess the underlying claim and—in consultation with its own experts—examine the potential paths to recovery.  At Validity we share our assessment with the plaintiff regardless of whether we ultimately fund the case, which can give the plaintiff a valuable third-party opinion about the strengths and pitfalls of the case and various recovery strategies.

When a funder invests, clients can use funding to pay the fees and costs of asset recovery efforts, regardless of whether those assets involve in-court litigation.  This can provide much-needed relief for a company that has already spent a significant sum litigating the underlying claim.

Alternatively, a plaintiff that has been litigating for years may wish to monetize a claim or judgment either to use the money now for business purposes or simply to ensure that it receives some return on its investment in litigating the claim.  In such cases, a funder may be willing to advance a portion of what it expects the client to eventually recover.

In this scenario, the original plaintiff remains the party in interest, and retains the responsibility of pursuing the collection effort, albeit with financial support from the funder.  Typically the plaintiff’s cost of capital is calculated either as a multiple of the funder’s investment or as a capped percentage of the eventual recovery.  As with other types of litigation finance, funding for asset recovery is non-recourse, which means the funder’s return comes only from litigation proceeds and asset recoveries.       

For example, imagine a company has won a judgment of $80 million, which the defendant claims it cannot satisfy.  After conducting diligence, a litigation funder determines that the defendant has concealed assets that would allow it to comfortably pay the full amount.  The litigation funder advances $20 million to the plaintiff, which the plaintiff uses partially to pay outside counsel and partially as working capital for the business.  If the plaintiff’s enforcement strategy is effective and it ultimately collects the judgment, the funder will be entitled to a pre-negotiated return.  If the company loses the appeal, the funder loses its investment.

The Bottom Line

Enforcing a judgment can be a wearying, expensive and complicated endeavor, but companies do not have to go it alone.  A sophisticated litigation funder brings both capital and expertise to help navigate the process and ensure a plaintiff recovers what it is rightfully owed.