Using Litigation Financing, Companies Can Reduce Risk in Uncertain Times
Perhaps the greatest challenge business leaders have faced during 2020 has been the climate of overarching uncertainty. The COVID-19 pandemic, unprecedented political circumstances, turbulent markets and general economic distress have increased risk and made it far more difficult for C-suites and boards of directors to develop and execute on critical corporate strategies.
As they search for ways to navigate turmoil, companies may be overlooking a potential asset that could generate new revenue without driving up expenses—their litigation. Working with a litigation funder, companies can leverage meritorious claims to generate income and certainty in legal budgeting.
Here are just three of the methods businesses can use to deploy litigation funding to reduce risk and build revenue during uncertain times.
1. CONVERTING CLAIMS INTO ASSETS
Companies sometimes shy away from elective litigation, even when cases are highly meritorious and could provide real revenue to the company through a large recovery or settlement.
Litigation can take years to generate a recovery, and outcomes are uncertain. Corporate legal budgets are tight, with most litigation dollars dedicated to defense-side claims. Also, accounting rules traditionally treat litigation unfavorably, recording all of the costs immediately, and limiting the positive financial impact of recoveries by recording them as special events that cannot be calculated as part of the company’s regular revenues and profits. Thus, shareholders, executives and board members may see a case as a potential drag on a company’s performance rather than an opportunity to generate revenue.
Litigation funding helps solve these problems by giving companies a way to finance claims without risking capital or weighing down P&L statements. Funding is non-recourse, which means the funder will recoup a return on its investment only in the event of a successful resolution. The return that the funder receives comes from money generated by the case, not from the company’s coffers.
From an accounting perspective, litigation that was once a drag on profits can become an asset for the company—even before the resolution of a case. Because the funder is providing capital and its return is contingent on the success of a matter, companies are, in most circumstances, freed from recording litigation expenses on their balance sheets.
Capital they might have used to pursue a case is unleashed for other legal department matters or to advance important corporate priorities. The litigation or arbitration expenses are assumed, at least in part, by the funder. If the claim is successful, income can be recorded without having incurred any net downside costs or risk along the way.
Moreover, in jurisdictions where adverse cost orders are a risk, a funding partner like Omni Bridgeway will cover that risk exposure for its funded party. Likewise, where a claimant may be required to post security for costs in order to advance its claim, this is something that a funder can address. This illustrates how funding may serve as a complete risk transfer strategy.
2. A PORTFOLIO OF CLAIMS
Companies often have more than one potentially valuable claim. Using litigation financing to pursue a portfolio of contingency cases allows a company to access a more substantial investment from a funder. That capital can in-turn be used to fund not only the claims in the portfolio, but can also defray other costs facing the company, including general legal budgets.
A portfolio generally consists of multiple plaintiffs-side cases financed on a full or partial contingency basis. Placing multiple cases into a portfolio and using the portfolio as collateral for financing makes the investment less risky and, thus, more attractive for funders.
Cases are selected for a portfolio following careful due diligence. Funders use their expertise to determine if the investment is likely to yield a successful recovery and return on its investment. Diligence is conducted at the funder’s expense—and can provide benefits to the company beyond investment capital. As the funder examines cases, it can provide an unbiased view of the company’s litigation matters and legal strategies and help the company determine the potential value and viability of its claims.
As with single case funding, portfolio funding arrangements allow litigants to hire their preferred counsel rather than being preoccupied with sourcing the lowest quote for legal work. Working with a trusted legal advisor is never more valuable to a company than during uncertain times. A funding relationship enables a business to focus on the lawyer’s advice and strategy and not on the bills.
3. ENFORCING JUDGMENTS
Another opportunity for companies to find new revenue during challenging times is to monetize existing awards or judgments which they have been unable to recover.
On occasion, companies successfully adjudicate cases but are unable to collect from the opposing party. Indeed, many law departments know their company has a potentially valuable judgment or award sitting in a drawer. However, successfully enforcing a judgment or award can be exceptionally complex, requiring a basket of skills—asset tracing, seizure, repatriation—that most companies do not possess in-house. Large awards or judgments may involve multinational companies, high-net worth individuals, as well as sovereign states and state-owned companies. Enforcing judgments against such debtors requires discretion and experience.
Partnering with a litigation funder, a company can pursue single judgments/awards or a portfolio of judgments/awards. Funding for enforcement efforts is also non-recourse, with the funder receiving a return from the proceeds recovered as a result of an enforcement effort. If enforcement efforts prove unsuccessful, the funder is owed nothing. In addition, funders sometimes purchase judgments for enforcement, with the company taking a percentage of its potential recovery in exchange for immediate income from the funder.
Usually, an enforcement effort must meet a few basic criteria to receive funding. Judgments and arbitration awards should be monetary in nature, and debtors must have an ability to pay – even if they are unwilling to do so.
Deploying any one of these methods—funding cases, creating litigation portfolios, or enforcing existing awards and judgments—can be an effective tool for companies looking to find new revenue streams. They serve to help transform litigation departments into to meaningful contributors to the corporate bottom line—even during the most uncertain business cycles.
To learn more about Omni Bridgeway’s litigation funding and enforcement capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.
*Omni Bridgeway is not a tax or accounting firm. Every entity’s accounting is different, and different types of financing structures may also suggest different accounting treatments. When entering into any disputes funding transaction, please be sure to consult your tax and accounting professionals for advice regarding how accepting a particular type of dispute funding will affect your situation.