Episode 1 - Interview with Stevens & Lee Shareholder, Nicholas F. Kajon

Read the transcript below:

The following episode of Beyond Hourly was recorded before the merger of IMF Bentham and Omni Bridgeway.

Jim Batson:
Hello and thank you for tuning into the Beyond Hourly podcast hosted by Bentham IMF (now known as Omni Bridgeway). As one of the world's most experienced commercial litigation funders, Bentham IMF has invested nearly two decades into providing litigation finance and investment capital to plaintiffs and law firms. We offer law firms and their clients a risk sharing partnership and a proven record of success as a leading global litigation funder. Episodes of this podcast can be found on our website, www.benthamimf.com (now at www.omnibridgeway.com) and on iTunes, Stitcher, and SoundCloud.

     I'm your host, Jim Batson and I'm the head of Bentham's New York office where I've been an investment manager and legal counsel since joining the company in 2014. Before joining Bentham, I spent 20 years as a trial lawyer. My role at Bentham involves assessing investment opportunities and serving as a strategic resource for the parties we fund throughout the funding relationship. Our guest today is Nick Kajon, co-chair of Stevens & Lee's bankruptcy and financial restructuring department, co-chair of the firm's litigation finance and alternative funding group, and a member of its litigation group.

     Nick has over 30 years' experience advising clients on financial restructuring, corporate governance, and commercial litigation matters. Nick has negotiated a number of multimillion dollar agreements with litigation funders pertaining to both insolvency and other commercial litigation claims and has appeared on several panels to discuss litigation finance issues. Nick, welcome to the Beyond Hourly podcast. Thank you for joining us today.

Nick Kajon: 
Thanks for having me, Jim. It's my pleasure to be here.

Jim Batson:        
Please tell us a little bit about Stevens & Lee and your practice to get us started here.

Nick Kajon:        
Sure. Stevens & Lee is an AmLaw 200 law firm with about 160 lawyers, primarily in New York, New Jersey, Pennsylvania, and Delaware. There are some other satellite offices in other places, but that's our geographic footprint. I do restructuring work and commercial litigation. I'm the head of the New York office. I work here in the New York City office at 485 Madison Avenue—just a couple blocks to the north of your office. I've been doing this for 30 plus years.

     Of course, in my case, I draw on attorneys from other groups and in particular doing restructuring work as a so-called bankruptcy lawyer. Especially if you're representing a debtor in possession, you don't only restructure the company, you wind up suing people.

     I've also done a fair amount of trustee work. Trustees investigate the insider to find out what they did and then sue them for having done it. That's really the nature of my practice. It's both restructuring and litigation oriented, and it's a natural fit, if you're playing in the bankruptcy arena.

Jim Batson:        
You mentioned certain people and a couple of different contexts in that description. Do you find in the bankruptcy sphere, litigation finance can be useful in different aspects?

Nick Kajon:        
I've said this before, I think maybe when you guys interviewed me a year ago, that bankruptcy and litigation finance really are a match made in heaven. In a bankruptcy case, it is so often the case that there is little or nothing for the unsecured creditors, other than potential litigation claims. Here's the rub—there is no money to pursue the potential litigation claim. You have a speculative asset that might take several years to reduce to cash if ever, but you can't get from point A to point B without a war chest. How does one get the war chest? You go to litigation funders.

     Obviously, you have to first investigate the claims and you'll have to do that on your nickel because you have to explain to the litigation funder why you should actually spend his money pursuing this. The cost of an expensive litigation against a well funded adversary and all that is entailed with it, including discovery, hiring experts, consultants, etc., can be covered by a funder. That, in many instances, would provide a recovery, and maybe a significant recovery for creditors. Where otherwise the litigation claims there would have expired worthless.

Jim Batson:        
Looking over your bio, I was struck that Stevens & Lee has a litigation finance and alternative funding group. Recently, we've begun to notice more firms creating those kinds of groups, maybe called different things, but essentially internal groups focused on litigation financing, what's sometimes called AFAs. Can you share with our listeners a little bit how that group came to be and what the impetus was for creating it?

Nick Kajon:        
Sure. A couple of years ago, the firm agreed to create that group at my behest. I have been involved over the years in a number of contingency fee type arrangements or alternative fee arrangements. I just did that naturally over the course of my career going back decades. Litigation finance wasn't around back then, so you had to piece things together as best you can. Over the last three, four, five years, I've been involved more with litigation finance and I started weaving those two things together, doing contingency fee work, partial contingency fee work, having a funder or not having a funder if you have the war chest. It occurred to me that, gee, if we do this, shouldn't we let people know we do this?

     I had a little paragraph or so on my bio. If you stumbled upon my bio at my firm's website, you'd see that I did this, but it wasn’t a practice group. If you just look at the firm's web page, you'd never know about it. I said, I think we should trumpet this. This is a hot and burgeoning area. I'm doing it already, why don't we create a group to do it on a more formal basis and bring other people together. Then as part of creating a group add the webpage for it, etc.

     The world will know that we do this. The firm analyzed it for about 10 seconds and agreed to do so. It made eminent sense, and no one gave me any push back. I mean, they got it right away that yes, this is a good idea. We should do this.

Jim Batson:        
I mean, obviously I'm biased at a litigation finance company, but I think that's great. You look at law firm webpages and practice groups and sometimes it seems like you're seeing the same thing again and again and nothing stands out. I'm curious having that group and as you say, making clear to the public with its own individual webpage, do you have clients or potential clients ask you about that, point that out to you?

Nick Kajon:        
Yes, I have. Well, first of all, in any kind of representation, most of my practice is referral based for the most part from other attorneys, lawyers I know over the years often who are adversaries in another case. You refer to your client, hey, why don't you hire Nick? I have a conflict. Why don't you check out Nick?

     First thing the client does is they check out your webpage before they call you. I've had clients in those initial calls, "Oh Jim Batson said I should call you. I noticed on your website you do X, Y, and Z. That's great cause that's exactly what I need. Can you tell me more about X, Y, and Z?" I've also had instances where I've basically gotten cold calls or emails. People I don't know who weren't referred, who Googled something like litigation finance or something and stumbled upon either my webpage, my web bio, and saw that I do it, or the web bio for the litigation funding group. Or LinkedIn where it talks about how this is one of the things I do.

     It's been a marketing tool in that respect and that people see you do it. Including people who you don't know from Adam will just stumble upon the fact that, "Hey, I found someone with the qualifications I was looking for. Let me give him a call."

Jim Batson:        
One of the things when we're talking about litigation finance, we point out that law firms have the ability to take your case on a full contingency. They even have the ability to advance expenses as part of the representation. Of course, law firms can't provide funding capital directly to their clients. Do you ever get inquiries from clients who are saying, “Hey, I'm just interested in getting money for myself. Not necessarily for legal fees or expenses, perhaps because I've already got the case on a full contingency?”

Nick Kajon:        
Clients don't really come to me. I mean sometimes, obviously I deal with a lot of lenders and capital providers, so sometimes clients come to me for that. They usually come to me when they have some litigation claims that they want to pursue and/or they want to pursue them on some kind of contingency or partial contingency fee basis where they need funding for expenses, etc.

Jim Batson:        
Got it. Well, one of the things that we were really excited to speak to you about today is your experience negotiating agreements with funders on behalf of clients. Very few lawyers have that as a practice area as well. Have you in fact had matters where you aren't necessarily bringing the litigation for the client, but the client needed funding and wanted to have a separate lawyer representing them and negotiating the funding agreement?

Nick Kajon:        
Yes, we have done that. That is one of the things our litigation funding group will do for people. Another thing that our litigation funding group will do, and you should keep this in mind Jim, is we will work for a funder. I mean not in negotiating the agreement, but if you're looking at say, specialized claims that you want an attorney with experience in that area to analyze, you know outside counsel to analyze it. We've done that for funders. You'll go in and kick the tires and let me know if these bankruptcy claims or securities law claims are as good as they seem to be.

Jim Batson:        
We call that due diligence counsel. A lot of times when we get a matter and we're looking it over, if it's not an area of expertise that we have in-house, so to speak, among our investment managers and legal counsel, we will often engage external counsel as due diligence council.

Nick Kajon:        
We do all that. The favorite thing we want to do is to represent the client in procuring the funding so that we can be the attorneys on the case and we're happy to take economic risk, whether on a full contingency or partial contingency. The funders will usually pay you some percentage of your hourly rate and then you're working for the upside. I'd rather be retained on that basis than probably any other basis. I’d rather have the upside than get paid 100% of my hourly rate.

Jim Batson:        
Yes. I think it's common in the industry from a founder's standpoint. Certainly Bentham's—we prefer arrangements where the lawyers are taking meaningful risk, but also receiving some amount of funding during the course of the litigation so that the motivation isn't just to try and get the case done as quickly as possible as might be the case if it was a full contingency versus maybe putting more hours than you might need if it was a full hourly. We look for that middle ground ourselves and I could see why that would be preferable to you as well.

Nick Kajon:        
One of the reasons I like contingency, while I like the upside obviously, but I also like the fact that I don't have to justify every hour to a client. “Why'd you spend 10 hours analyzing that issue Nick?” “Well, because it's the critical issue in the case, and it justified 10.” The client doesn't care anymore. The funder may, if they're paying you a percentage. Even then the funder will probably understand the need for the work more than the client will. Vis-à-vis the client I don't have the concern of, I see a potential pitfall that could arise if these guys are smart enough to see it. Let me start figuring out how to get around it. Let me have someone who actually knows how to do legal research, unlike me. Do the analysis, do the legal research under Delaware law, or whatever, of this arcane issue that may arise. I don't have to justify that. If it does arise, we're not blown away by it. We've already had a chance to adjust our strategy so that we won't fall into that hole or trap. 

     That always makes me sleep better at night. That if I see something that justifies some work, I don't have to explain to a client who won't understand it, why we should do this and have him think, “oh Nick just wants to run up the bill”. No, Nick is trying to protect you. The funders will get that. They will say, “oh yeah that's an important issue. I'm glad you spent 10 hours analyzing it and then changing strategy so that we did not fall into that trap. Great job.”

Jim Batson:        
Absolutely. I've heard you speak before on panels discussing a very well known matter, at least certainly in the litigation finance sphere, referred to in shorthand as Mag Corp where funding was a big part of that. Can you tell us a bit about that and how it arose and what made it appropriate for funding?

Nick Kajon:        
Sure. In the Mag Corp case, I represented the bankruptcy trustee, a fellow named Lee Buchwald and the case had been going on. He was appointed bankruptcy trustee back in 2003. I represented him in the case. There was one litigation that was brought against the insiders, including Ira Rennert, a billionaire on the Forbes list, and his private holding company Renco Group. That was brought by contingency council. We were local counsel in that matter. This was back in `03, back in the days before litigation finance really took off. They funded the costs.

Jim Batson:        
The client did?

Nick Kajon:        
The law firm did.

Jim Batson:        
The client didn't have the cash. The law firm funded both the fees and the costs.

Nick Kajon:        
Full contingency. Plus, they took the risk on the expenses. The case went on for a very long time, primarily because the defendant obviously tried to do as much as they could to delay the day of reckoning. We had a jury trial in early 2015 when the case was nearly 12 years old and we won. We got a jury verdict that resulted in a judgment for $213 million. That's a great place to be. 

     Of course, Rennert, being a billionaire, took an appeal. It was fully bonded. There was no collection risk, but this was an all-or-nothing situation. All the trustees’ eggs were in one basket. He had $600,000 in the bank and a judgment against a billionaire for $213 million. That's all he had. Creditors and note holders were owed over $160 million. The government asserts claims for environmental liabilities in excess of $100 million. There's nothing to pay them. Just that $600,000, unless we're successful on appeal. Now, we had confidence in our case, we thought we'd be successful in our appeal, but what if the second circuit (it was on appeal to the second circuit) reverses.

     Then we're back to square one. It goes to your judgment and you have $600,000 in the bank is all you have, and then all these lawyers continued doing it. You have a new trial years from now. He wanted to hedge his downside exposure, vis-à-vis the appeal. He came to me and said, "I know you work with litigation funders, do you think we could get a litigation funder interested in Mag Corp.” Like sell a piece of the judgment so to speak.

Jim Batson:        
This was the trustee Lee Buchwald asking?

Nick Kajon:        
It was his idea. Yeah, he knew I worked with funders and he said, “is there a way to parlay your relationship with funders into some kind of a transaction where we could be assured of getting some cash?” I said, well, it's a little unique. It's not what funders ordinarily do. We can ask, there's no harm in asking. I reached out to a number of funders and lo and behold, we were able to procure a transaction that resulted in $26.2 million cash to the bankruptcy estate in exchange for a non-recourse obligation, only if we win, and only out of the proceeds. We would pay $50 million, a 90% return for the funder. Vis-à-vis my client, if I lose, I have nothing. The pig had lipstick at that moment in time. It really did. This case looked horrible. It was a no asset case, not even enough money to pay the expenses, the out of pocket expenses, and suddenly your very speculative asset is now a lot less speculative. 

     If you were ever going to market this, this was the time. We went to market to try to … the trustee wanted a war chest so that if there were a second trial he could hire lawyers of his choice if need be, hire experts of his choice. No matter what happened in the second trial, he had set aside some funds that there’d be some money, an eight-figure stash for creditors so that they’d get something.

Jim Batson:        
Tell me about the process that you went through to seek funding. In other words, did you raise this with the court before you actually went out to market? When you went out to market, how did you go about it? Did you get multiple bids? What sort of process did you follow? I imagine in the bankruptcy sphere it's a little different than it might be for an ordinary litigation funder.

Nick Kajon:        
You're exactly right. It was a multi-step process. First, we didn't go to the bankruptcy court in the first instance. We privately reached out and we ran a private auction process in effect. We privately reached out to a number of funders. We created a virtual data room so they could conduct their due diligence. We had a number of conference calls with them to respond to their questions. Then ultimately picked, what in bankruptcy parlance we call a stalking horse bidder.

     I structured the transaction as a sale rather than a financing. What you do in a sale, and what we did was you file a motion to sell the assets. It could be debtor's business or factory or inventory. In this case, we were selling an interest in the proceeds of the litigation, whether the appeal or subsequent disposition or trial, whatever happened.

     If we win and we get cash, you get cash. That's what we're selling. The right to give us money that you may never get back for this right to someday, maybe if we're successful get back X dollars. We file the motion to do that. There's a first hearing to approve the so called bid procedures because if you're going to be the stalking horse bidder you're going to want certain protections because in bankruptcy it's going to be subject to higher and better bids.

     People get a crack at saying I'll pay more. Then you just did a lot of work for nothing. We gave the funder an expense reimbursement provision and a breakup fee and all that had to be approved by the court at a first hearing. The defendant of course objected, because what defendant suddenly wants his poor broke trustee now to be well funded?

Jim Batson:        
Especially as a new trial.

Nick Kajon:        
I'm a billionaire. You got no money, hold it. Now you're going to have $26 million? I don't like this. He objected. The note holders objected too, saying that if you do this, we'll get less if you win. Yes, that's true. But if we lose, we get more.

Jim Batson:        
That was the trustee's decision as to whether or not he thought that made sense. Nick, how did the Mag Corp judge react to the funding arrangement here?

Nick Kajon:        
We were very pleasantly surprised by her reaction in that she just intuitively got it. We learned afterwards that while she was a partner at Simpson Thatcher, she had done work with litigation funders, but we did not know that at the time we filed the motion or appeared before her. This is a bankruptcy judge, Mary Kay Biscoso here in the Southern District. It was a unique motion. You don't see this every day. In fact, at that time you didn't see it at all.

     We structured it as a sale of an interest in the litigation proceeds and debtors and trustees file motions to sell assets all the time. They sell the business, they sell the equipment, machinery, accounts receivable, inventory, whatever. They don't file motions to sell an interest in a litigation recovery.

     The concern we had was whether the judge was going to say, "What is this? I've never seen this before. I don't understand it. Why are you guys doing this?" She understood immediately why we were doing it and very quickly shot down the objections that were raised by both the defendants, no surprise, and the note holders.

Jim Batson:        
She was able to recognize a litigation as an asset class?

Nick Kajon:        
Right. Yeah. She just immediately understood that this is an asset. She understood it was a speculative asset. The note holders are saying, “well the trustees are going to get less money now.” She's like, “yeah if he wins, that's true, but there's no guarantee he's going to win the appeal. That's a speculative asset.” This is a sure thing. $26.2 million in the bank is a sure thing. When the trustee only has $600,000 I understand why he's doing this and I'm going to defer to his business judgment, which is what courts are supposed to do in that situation, when a bankruptcy trustee moves to sell an asset. We were relieved and happy.

Jim Batson:        
After she approved the process did any other bidders appear?

Nick Kajon:        
Well first she approved the bid procedures, which said that an alternative bidder had until a specified date to make a so-called qualifying bid. It had to be at least X dollars and it had to come with the financial disclosure that you have the wherewithal to close the transaction. 

     We did get a competing bidder who did show up, and that drove the price up. Actually the way we structured the auction was, we told people you can either bid more for the same interest or bid, more or less, for a lower return or some combination thereof. We were going to be flexible. Obviously, we'd look at the ratio. We'd also want to make sure we were getting at least $25 million, which was the client's goal.

     Bid 10 million for a small piece, we wouldn't have given it to you. There was quite a bit of jockeying back and forth. The numbers on both sides were going up and down and we went through, I don't know, maybe six rounds of bidding. With the successful bidder, the pricing improved in our favor. The successful bidder had to pay $26.2 million in exchange for a $50 million return. Those weren't the initial numbers.

     Then we went back to court after the auction to obtain bankruptcy court approval of the new bid, which actually was the initial bidder but on improved terms. Of course, the same people objected and Judge Biscoso shot them down yet again for the same reason. First of all, these guys don't know the case as well as the trustee. He's been living with the case for 13 years. He has access to input from his lawyers, confidential attorney client communications from appellate counsel from my firm, from the trial lawyers, none of which the note holders have. He's exercising his business judgment.

     She also noted that in one of the note holder group that was objecting, there were three or four members of the group. One had just joined the group that morning a little before the 10:00 am hearing. How much do they know about this? Yeah, you joined the group. Great. Have you been living with this case for more than 10 minutes? She shot them down yet again, and they of course appealed. Then they sought a stay pending appeal. We went up to the district court and Judge Denise Ko shot them down. We closed the transaction.

Jim Batson:        
Congratulations.

Nick Kajon:        
It was a lot of fun.

Jim Batson:        
How did the appeal ultimately play out?

Nick Kajon:        
The appeal was heard a few months later. It was a three judge panel and in the second circuit and we all left with smiles on our faces after the oral argument. I treated everyone to a very expensive liquid lunch. There were steaks involved too, but there was a lot of alcohol to celebrate what we expected would be a win because the oral argument went so well and in fact we were vindicated. Less than a month later the second circuit issued a ruling affirming our appeals and we collected the full judgment, and including post judgment interest, that came to $214.7 million, which is a nice collection.

Jim Batson:        
Congratulations.

Nick Kajon:        
Thank you.

Jim Batson:        
Not only did you collect, but you set a precedent because I know now, and correct me if I'm wrong, but my impression is that the bankruptcy courts, really around the nation, are far more understanding when this type of bidding process in seeking funding for a litigation asset in bankruptcy comes up.

Nick Kajon:        
Yes. We're all hesitant if it's something we're unfamiliar with. If you've seen another judge approve it, then you feel, oh, okay, this is okay. I can do this too. I think doing the process the right way is important. This goes for any transaction of bankruptcy. You want to show the judge that you beat the bushes. Not just whether you're selling a debtor's business or selling an interest in litigation. We ran a process that made sense based on the circumstances of this case. Here's what we did.

     In our case we said we can't disclose the funders we reached out to because we have confidentiality agreements with them, but we could disclose how many we reached out to and we did. If the judge is comfortable and you put in evidence, which we did, the judge is comfortable with the record that in fact you ran a process that was reasonable under the circumstances of the case. You got a result that appears reasonable under the circumstances of the case, then it's easy to approve.

Jim Batson:        
Having been through that, when you've seen similar scenarios later or even just generally going forward, are there any things you would do differently now that you've been around the process once before?

Nick Kajon:        
Well, I don't think there's anything I would have done differently in Mag Corp.

Jim Batson:        
I mean generally, any lessons that you learned from that experience that you've taken with you?

Nick Kajon:        
Well, I did learn the lesson of no good deed goes unpunished because the note holders who had taken no role in the case before then, filed objections and you know basically called me, my client names for breaching a fiduciary duty. How could we do that. Of course, the defendant said that too, but when you're suing the guy for a couple hundred million dollars and he calls you names, you wear that as a badge of honor.

Jim Batson:        
Let me turn back to negotiating funding agreements. You've got a lot of experience with that, so I was wondering, are there any particular clauses, generally speaking, that you want to make sure that you see in a litigation funding agreement?

Nick Kajon:        
One of the negotiated issues is going to be the budget, of course. That's probably one of the most important issues in exhibit to the funding agreement, but it might be one of the most important elements. You want to make sure that you have everything in there that you're going to need. You want to make sure that the funder is willing to fund everything you're going to need. If you think you need a $3M budget the funder will only give you $2M, you better find another funder.

     You also want to see how the money's going to be reimbursed. Funders will generally dribble it out quarterly or something and that's fine. I don't want to wait a year for my money, but every quarter that's fine, and it's not just my firm—it’s the other parties, who are going to hire experts, you might need local counsel. We had a case recently where we had to hire experts on Cayman Law. The Cayman lawyers are going to expect to be paid. They’ll wait a couple of months, but they're not going to wait forever. They're not working on contingency.

     You want to see how the payment mechanism works. Funders will usually want a lien on the recovery. That's something that has to be negotiated with the client. You're going to want to see what rights the funder has to pull the plug on you. Funders should have some reasonable outs, but not just willy nilly pull the plug at my first whim. You know you want to go in with the funders as partners. I mean, as the lawyer who's doing this with economic risk, I want to know that we're partners on this deal.

     Now if we both come to a realization that the case isn't as good as we thought it was, okay, we should hang it up, but I'm committed so I want to know that the funder is committed too and it isn't just going to walk away. I think a very important aspect of the relationship, Jim, it's not in the documentation per se, is really getting comfortable with your funder. Making sure you have the right funder for this case. That the funder understands the case, understands the complexities, the issues that are likely to arise, how long it's going to take.

     That the funder has realistic expectations that this is going to be a long, hard slog because these guys are dirty, rotten scoundrels and they're going to use every trick in the book. We understand that and that's okay and we're in for the long haul. It's the right funder. There's a good relationship to the extent the funder has direct interactions with the client. You want to make sure that the clients and the funders get along. Obviously, I want to get along with the funder. You want the funder to be fully committed emotionally to the case too.

     If a problem arises and invariably life throws us curves, if a problem arises down the road and it's not an insurmountable problem, but it's an unexpected problem, you want the funder to look at it with the mindset of, I'm committed to this litigation. This is a small problem. It's okay. You know, we're not going to blow up a good deal for a little problem.

Jim Batson:        
There've been very few litigations that have gone exactly the way everybody expected it to.

Nick Kajon:        
They never do. Well, why do we as lawyers tell clients to settle cases? One never knows whether you're trying it before a judge or a jury, you just don't know. I won cases I should have lost and I have lost cases I should have won. You tell clients that. You say, "I don't know what's going to happen." I mean we could make reasonable projections about timelines and the way things might play out, but the other party may do something unexpected. I don't mean unexpected meaning something very beneficial to them that you stupidly didn't foresee. They could have done two things at this juncture and the thing that made the most sense that you expected them to do, they didn't do. Maybe they're shooting themselves in the foot.

     As a result of that, you now have to change your strategy because when they came to that fork in the road, you were sure they were going to go left but they went right. And you're like, "Oh wow, didn't see that coming," they're probably hurting themselves. Now we have to shift gears. We have to do things differently.

Jim Batson:        
Well your partnership point really resonates with me and I'm not sure other funders look the same way at that, but from Bentham's perspective, we also want to feel comfortable working with the lawyer and working with the client. One of the things we pride ourselves on is the fact that all of our investment managers have extensive, usually well more than 10 years, experience as litigators. Have you dealt with funding companies where the counterpart to you, to whom you're dealing with during the pendency of litigation is not a former litigator? Has that impacted the relationship?

Nick Kajon:        
I don't think so. I think everyone I ever dealt with was a litigator.

Jim Batson:        
How has litigation funding impacted your practice in terms of your ability to take on new clients?

Nick Kajon:        
Well, it's great. It's like having that extra tool in your toolkit. You know if you have a hammer it’s a great tool, but if you need a wrench and all you have is a hammer, you’re stuck, you can't fix the problem. Having the litigation funding available ... I use it as a selling point to clients. I could say one of the things I do is I have relationships with funders and I know them all, I know how they work, and I can pick up the phone and they'll return my call. If you have a good case, if I think it's a good case, I'm pretty damn sure I can get funding for you.

     I can say that and I really mean it because I come with, if I do think it's a good case, I'm pretty sure funders will fund it. It lets me take on matters that maybe I otherwise would not take on. My firm will let me take on matters on contingency. Full contingency, partial, they're fine with it. As long as I'm comfortable with it they'll bless it. They won't let me start writing checks to the consultants and the local counsel and the experts. We're not going to pay a couple million dollars to third parties. My firm won’t take it out of our own coffers. If the client can't or won't pay the money to put up the experts, etc., I can't take on the case. Unless I can get a funder, that solves that problem for me.

Jim Batson:        
In other words, your firm under the right circumstances is willing to not charge for any of its attorney's fees, and in exchange for that get some type of contingent recovery. But what your firm, and I find this to be very common, is not willing to do in a contingency setting is also pay the out of pocket expenses.

Nick Kajon:        
Which can be a couple million dollars.

Jim Batson:        
You'll partner with a funder in some instances where you're putting at risk your hourly fees and the funder’s putting at risk the cost of the out of pocket expenses.

Nick Kajon:        
Right. It's not just solving that problem is important because you would lose the case, you'd lose it to a competitor, who was willing to write the checks. My firm is not willing to write and justifiably so. I'm not criticizing the policy. I understand the policy. It's just, that I would lose the case.

     The other huge benefit to the funding, obviously for me or other lawyers is that, while I'll do something on a full contingency, I prefer a partial contingency to a full contingency. Bringing a little money in as you go is not the worst thing in the world. It makes me happy, it makes the people who are working for me on the case happy, because they get that credit this year. We all like credit this year rather than next year with three years from now. It keeps my firm happy. Like, oh, there's some cash flow here. Good. Nick doesn't have this $3 million receivable; Nick has a one and a half million dollar receivable. Okay. Whatever. We'll cut Nick some slack this year.

     That's another huge benefit to it. It makes it easier for me to take on the next case, because you know I do have to bring in some cash each year. If every case were a straight contingency that wouldn't pay off for three years, I might have a spectacular 2022 but the next couple of years are going to be pretty sparse. You have to have that continuous cash flow and obviously with the funding you ameliorate that problem.

Jim Batson:        
How do you think litigation finance is impacting the legal industry broadly?

Nick Kajon:        
I think it's similar to what I said in that lawyers are now catching on and getting educated to it and can therefore educate their clients. Unfortunately, I have more competition out there, Jim. I wish lawyers were all stupid and didn't want to work with litigation funders.

Jim Batson:        
Well, I'm sure your clients appreciate finding somebody who has experience with it and isn't doing it for the first time.

Nick Kajon:        
It's a great selling point for me. I just regret that other lawyers are catching on. You're educating them too much. Please stop.

Jim Batson:        
What do you see on the horizon that will impact the use of litigation finance by clients?

Nick Kajon:        
Well, one thing I see Jim, and I'm not an economist, but I noted, as probably you could as well, that the yield curve inverted last week, and it's still inverted as of today. That is generally a harbinger of an upcoming recession. Now, it may still be a year away, but we have to, bearing in mind that this recovery has been going on for about a decade, so it's already long in the tooth. It makes sense that at some point, maybe sooner than later, there's going to be a recession or maybe a slowdown.

     That affects companies. It'll mean more bankruptcies. Beyond the modest percentage of companies that filed chapter 11, all companies feel the squeeze in a recession. What do you do when you feel a squeeze, when sales start dropping because consumers or the companies you sell to are cutting back? You cut back too.

     What's one of the easiest expenses for a firm to slash? It’s the litigation budget. Companies—they see that we're heading into tough economic times. They're looking to lay off workers, they cut sales and marketing, they cut their R&D budget. All those are valuable things that directly impact the bottom line, litigation budget they view it as... “why do we need to spend money on litigation? How does that help us? Maybe we'll get a recovery several years from now. So what?” We've got to reduce our litigation budgets.

     A great selling point, if times are tough and a company does not have the money to spend on that extra litigation because they've been told they got to slash their litigation budget by the CEO, the CFO and the general counsel. Well, gee you don't have to spend anything on this valuable litigation claim you have. Zero is the cost to you. The funder will pay 100% of the costs, the attorneys, the out of pocket expenses, everything. That could be very attractive or more attractive when companies are feeling the squeeze.

     If you're a company... if you hire lawyers on contingency and you have a funder involved, obviously you're giving up some of the upside to both of them. If you have a valuable litigation claim and you only have to spend $1 million to prosecute and you think you're going to get $50 million, well maybe that's a no brainer. If you don't have the million dollars because you've had to cut back, then all of a sudden giving up that upside is looking a lot better. I think if and when there's a slowdown or a recession, you could see more companies suddenly realizing that litigation funding is an attractive alternative when they're in the midst of a liquidity squeeze.

Jim Batson:        
For our last question for the audience, are there any actionable takeaways that you would recommend for the listeners here?

Nick Kajon:        
I think one of the most important things for lawyers, if I’m giving advice to other lawyers I probably shouldn't, but I will, is that you know, have that extra tool in your tool kit. You'll get that case that you otherwise would not get because now a client is suddenly going to talk to you because you can offer something that previously you could not offer—and many of the other lawyers that they're talking to cannot offer—and you'll be able to take on the case.

     If a client came to you and said "Gee, Jim you know we have this really great hundred million dollar lawsuit against a deep pocket and it's not time barred. We're not aware of any defenses. Here's a memo explaining it, but a lawyer isn't willing to take it on because we have no money to pay it. Will you take it on?"

     You analyze the case and you realize even if you were to do it on a full contingency, you need to spend a few million dollars on experts. You say I can't do that. Sorry. Won't you pay the 3 million? I think it's a good case to make now. We don't have it or, or no, we can't take the hit on our P&L. We're not willing to do it. Now all of a sudden you can take on this hundred million dollar case that you think has settlement value of $50 or $60 million and that's a nice payout.

Jim Batson:        
Indeed. I think that's a perfect spot for us to wrap up today's podcast. Nick, I want to thank you for appearing on Bentham's Beyond Hourly podcast and for sharing your knowledge.

Nick Kajon:        
Thank you so much for having me. It was a pleasure.

Jim Batson:        
As I mentioned at the outset, episodes of the Beyond Hourly podcast can be found on our website, www.benthamimf.com (now at wwww.omnibridgeway.com) and on iTunes, Stitcher, and SoundCloud. We'll be back soon with another episode focused on advancements in legal services that drive economic value for law firms and the clients they serve.

     Until then, I'd like to thank our audience for listening in and invite you to follow up with me, Jim Batson, at [email protected] for any feedback, ideas, or insights you have on topics we should cover on the podcasts going forward. Thank you, and be well.