March 16, 2022
Congratulations – your litigation has reached a point of judgement or settlement. Now what?
Most litigations end in settlement. Even a judgement rendered at trial may be subject to post-trial motions, appeals, or settlement offers. As funders, we are in a position to advise, but not control, clients’ discussions and decisions around pre-trial settlements or negotiations around court-adjudicated judgements. In all cases, the client and lawyer have the final say. However, funders can and should provide value by offering clarity around recovery scenarios and outlining alternatives so clients can make the most advantageous decisions.
Go back to the beginning
A complete understanding of the funding contract and litigation model is key when assessing a settlement offer. All parties should have full transparency around how the funder’s return and counsel’s contingency are being calculated, and what the implications of a particular recovery scenario will be for the claimant, counsel, and funder.
The key inputs for a resolution model are normally the funding deployed (i.e., the amount the funder actually spent), the resolution size, and how long the litigation has taken. But, depending on your funding and contingency agreements, you may also need to consider how much was committed, transaction fees, or bonuses. And, of course, your resolution model needs to include the waterfall, which can have a big impact in lower return scenarios.
A portfolio resolution model has some special features. Law firms or claimants who have brought multiple cases to a funder share in the benefit from cross-collateralizing their portfolio, most obviously by obtaining lower funding returns upfront. But the dynamic also plays out during resolution. The first resolution in a portfolio, unless it is of an anchor case, can sometimes look a little painful. The funder might seem to be capturing most of the result if you look only at what happens in that case. This is because in a cross-collateralized portfolio, the first result often pays off funding capital that was deployed across all of the portfolio cases. Funders can help you understand how a good resolution model pays settlement benefits forward from case one to case two and beyond. It may be that case one’s resolution is paying off the funder’s entire return such that the result in case two now accrues entirely to the law firm or client. You need to understand these dynamics when considering your resolution options.
Most important, clients should have clarity on the components of their resolution model and the specifics of their contracts in order to truly understand their returns at different settlement levels and best evaluate their options. Make sure you, your counsel, and your funder are on the same page, and never be shy about asking for a model. In a well-constructed funding, any reasonable resolution scenario should include the claimant receiving the lion’s share.
Consider your options
Funders can supply useful settlement and financial advice during this final phase of litigation. While claimants typically have a duty to keep their funder informed about settlement discussions, the claimant remains in control so the primary way in which the funder can add real value is by offering alternatives to ensure the claimant does not feel pressure to settle at an unfair price or accept unfavorable discounts to a judgement.
Post-judgment, a client has to face the uncertainty of post-trial motions, appeals, and collections issues. Accepting a discounted judgement amount may be attractive to resolve these concerns. However, the most valuable route forward may not be settlement, and a funder can counsel the client on the process for determining whether a financial engineering solution can enhance its returns. The most common financial solutions include selling the judgment or a combination of insurance and monetization. Insurance can be secured for a portion of the total judgment, in some cases 100%, with up-front premium payments generally ranging from 8%-12%. The process of securing insurance can overlap somewhat with the process of monetizing a judgment: while banks and other lenders typically will not lend against unpaid judgements, they are willing to lend against the insurance policy issued for the judgment. The lender will typically charge between 7-10% interest and may be willing to lend 70-80% of the insured amount.
Here’s a simplified example:
A $100M verdict is 100% insured at a premium of $10M. Monetization of $60M is available. The premium is paid, and $50M is put through the return waterfall. If the verdict is upheld on appeal, the monetization plus interest is repaid at ~$70M, leaving $30M more to go through the waterfall. If the appeal is lost and a retrial occurs, conceivably there would be no additional funds to put through the waterfall and the insurance policy would repay the monetization with interest. In this example, an insurance solution is better than $50M now, whether by settlement or through selling the judgment. It is worse than $80M now. Where between those numbers the client lands would depend upon their risk tolerance.
If there are surprises in the resolution model, something went wrong on the front end. When entering into funding and contingency relationships, you should be modelling and thinking about the final result in a variety of scenarios. A funder can help simplify this process by being transparent upfront: making complicated models simpler to understand, and walking clients through potential scenarios before, during, and after litigation. By considering the endgame at the start of a funding relationship, clients can envision how the case might end, and feel confident they can reach a resolution that meets their goals and manages their risk.