Litigation Financing Arrangements for Businesses
The commercial litigation financing market is teeming with solutions for the financial challenges that accompany complex litigation. Numerous financing structures exist, ranging from contingent-repayment financing for single cases to corporate debt secured by portfolios of cases. Knowing what is available and how to access it saves time and resources. Westfleet Advisors can quickly assess the needs of your situation, ensuring your company charts the proper course. We also manage the process of obtaining financing so that your company finds the right funding partner offering the best financing terms, leaving executives free to focus on running the business.
How Commercial Litigation Financing Works
How Are Litigation Financing Agreements Structured?
Litigation finance transactions are structured in a variety of ways, but because the repayment is almost always contingent upon a successful litigation outcome, commercial litigation funding is not typically structured as debt. The financing arrangements involve a litigation funder providing capital in exchange for a right to receive a contingent payment from any proceeds that arise from a successful litigation outcome. Westfleet Advisors assists your business in understanding the options and structuring a litigation financing arrangement that is optimal for your needs.
Common features of litigation funding agreements include:
- Funder’s payment contingent upon the successful outcome of the legal claim
- Funder has no control or influence in case strategy or settlement
- Financing limit approved initially, often available in tranches tied to legal milestones
- Financing proceeds escrowed and made available for draw down as expenses are incurred
- Funder entitled to a multiple of capital invested and/or a percentage of the monetary outcome
- No recourse to other assets beyond the legal claim(s)
- Obligations to report progress and key developments in legal claim(s)
Business Uses for Commercial Litigation Finance
Litigation financing proceeds are typically used for the legal fees and expenses of extraordinary litigation budgets, although proceeds are sometimes used for working capital needs unrelated to the underlying legal claim. Westfleet can advise your company on the applications for litigation funding regardless of the complexity of your needs.
Companies commonly use litigation funding to:
- Assert high-value legal claims while keeping expenditures off balance sheets
- Defend claims without incurring legal expenses until the claim has been successfully resolved
- Sell or partially monetize an uncollected judgment
- Leverage a legal claim or portfolio of claims to raise capital for other purposes
- Use valuable claims as collateral for corporate debt
When litigation funding is used toward legal fees and expenses, it usually involves extraordinary expenditures that are not part of a company’s routine legal budget. Litigation finance provides a mechanism for your company to prevent these expenditures from creating pressures on already strained legal department budgets and from impairing profitability.
What Makes a Good Candidate for Litigation Financing?
Whenever the economic value of a successful litigation outcome is high and the company has sensitivity to the litigation budget, exploring a litigation finance transaction may be worthwhile. Your company’s decision to allocate capital toward an assertion matter is often elective, in contrast to decisions to incur expenses to defend a claim. This distinction often involves a different analysis as to whether to make an extraordinary budget allowance for an assertion matter.
Other criteria for litigation financing candidates include:
- Strong, meritorious litigation or arbitration claims
- All types of commercial cases (no personal injury, etc.)
- All procedural stages from pre-filing to post-judgment
- Claim already vetted by legal counsel who has been (or is willing to be) retained
- Litigation counsel willing to share risk (budget and outcome)
- Demonstrable economic damages in excess of $10 million
- Clear ability of defendant to pay claim
- Financing request less than 10% of case value
- Financing request exceeds $500,000 (no maximum)
With its knowledge of commercial litigation financing, Westfleet Advisors aids your company in understanding all your options before devoting time and resources to exploring the market for a transaction. If litigation funding does make sense, Westfleet Advisors’ professionals are experts in procuring litigation financing efficiently and at the most favorable terms.
How Businesses Obtain Litigation Financing
The process of exploring and consummating a commercial litigation financing transaction is complex and can be time-consuming. Companies should expect key executives and outside litigation counsel to invest significant time in this process. Careful preparation, a solid understanding of the market, and alignment with a knowledgeable partner like Westfleet Advisors will increase your chances of a successful transaction and expedite the entire process.
What Is the Commercial Litigation Funding Process?
Any company seeking a litigation finance arrangement can expect to encounter the following basic process.
How to Approach the Litigation Finance Market
Numerous litigation finance companies and funds regularly provide commercial litigation funding. Each of these litigation funders has their own approach and financing criteria. The market is also fluid, and funder appetites can vary significantly depending on whether that funder recently raised new capital that needs to be deployed or is nearing full deployment of existing capital. Westfleet Advisors continuously maintains current knowledge of all of these market nuances, providing your business with a powerful advantage.
Approaching multiple litigation funders that may be suitable for a particular transaction will increase the chances of a successful transaction and ensure the company receives the most favorable terms. However, unless your company executives or litigation counsel are experienced with litigation financing, the process of identifying and approaching multiple funders can be daunting. Partnering with an experienced guide like Westfleet Advisors can improve the efficiency of this approach.
Other Important Considerations
Commercial litigation funding transactions are highly consequential and involve sensitive matters for companies. Few people outside of the litigation funding industry are experts in the subject. Even sophisticated commercial litigators are usually lacking in deep substantive knowledge and/or recent experience with the market. Westfleet’s team of experts in this field provides a great deal of peace of mind.
Understanding Legal & Ethical Issues
Litigation financing arrangements involve certain legal and ethical issues in which expertise is rare, and caution must be exercised to ensure compliance with relevant laws. As long as proper protocols are followed and reasonable safeguards are in place, these transactions are permissible in virtually every U.S. state.
A properly structured litigation finance transaction can be highly beneficial to a company, but a seemingly innocuous oversight in the negotiation or structuring process can be very costly. Responsible litigation funders will strive to ensure proper incentive alignment between the parties, but there is no substitute for expertise that is loyal strictly to your side of the transaction. Westfleet’s careful attention to financing terms and agreements combined with industry experience ensure your business avoids unfortunate pitfalls. For more information on this topic, please download our Guide to Litigation Financing and review our list of frequently asked questions.
Please contact us or call (615) 312-8255 for more detailed information regarding your particular situation.