Key Takeaways
Litigation funders’ loan terms can create situations where an attorney’s personal, financial interest in a litigation outcome is contrary to—or at least not coextensive with—the client’s, creating untenable tensions. Clients should be wary of and require disclosure of any third-party litigation funding arrangements to which their claims may be subject.
As we have covered in previous issues of Re:Torts, the multi-billion-dollar third-party litigation funding industry obscures the true parties in interest from opposing parties and may create unanticipated barriers to the resolution of claims. The U.S. Judicial Conference Advisory Committee created a subcommittee to consider an amendment to the Federal Rules that would require disclosure of third-party funding agreements. But third-party litigation funders may also be problematic for the “funded” firms that sign onto these agreements and are saddled with mounting liabilities as a result. Because of the nature of these lending agreements, lawyers may find themselves at odds with the interests of their clients.
Recently, Truett Bryan Akin IV, co-founder of the Houston firm AkinMears LLP, filed for personal Chapter 11 protection, citing over $202 million in litigation funding liabilities. Indeed, the only creditors listed in Mr. Akin’s petition as having potential unsecured claims were third-party litigation funders, including Virage SPV 1 LLC, Rocade Capital, and Burford Capital, among others.
Since its inception in 2013, Virage has provided litigation funding to at least four different plaintiff firms that later declared bankruptcy. In March 2023, Virage sued Philadelphia litigation boutique Sacks Weston, alleging that Sacks Weston owed Virage approximately $14 million—nearly triple the amount the firm had borrowed, thanks to a default interest rate of 27.5 percent. Virage SPV 1 LLC v. Sacks Weston LLC, et al., No. 202319385 (Tex. 2023). Sacks Weston has since declared bankruptcy.
Mr. Akin’s and Sacks Weston’s bankruptcy filings are illustrative of not only the significant financial risks that third-party litigation funding poses to the borrowers, but the potential conflicts that can arise between the funded firm and its clients. Litigation lenders can charge high interest rates that are not subject to usury laws because these financing transactions are often not structured as traditional “loans” that give creditors an absolute right to collect from borrowers. Instead, the right of repayment of the principal is contingent upon the firm’s recovery in the underlying litigation. See Fast Trak Inv. Co., LLC v. Sax, 962 F.3d 465, 468 (9th Cir. 2020). Regardless of the outcome, however, the firm still owes the interest that has been accruing at a crippling rate. Because of the nature of these agreements, litigation lenders often require the firm’s shareholders to personally guarantee the loan, placing these lawyers at personal financial risk—as evidenced by Mr. Akin’s recent bankruptcy petition. Given the protracted nature of mass tort litigation, the high interest rates associated with these loans, and the personal liability these individual lawyers face, there is the very real potential for conflict between the funded lawyer and his or her clients. For instance, lawyers may be incentivized to encourage their client to accept an earlier, lower offer of settlement in order to resolve the cases quickly, avoid accruing additional interest, and extinguish personal outstanding debts.
Contributors
*The Re:Torts team would like to thank Sonia Badyal for her contribution to this article.
