Safety Measures For Litigation Funding Investors

Important disclosure: This article is for educational purposes only. It is not investment advice, legal advice, or tax advice. Litigation finance can be high-risk and illiquid, and you can lose some or all of your invested capital. If you are considering investing in litigation finance, speak with your own attorney and financial/tax advisors. Nothing on this page is an offer to sell securities or a solicitation to buy securities.

Litigation funding (also called litigation finance) can play a real role in the civil justice system. It can help plaintiffs and law firms handle legal costs and cash-flow gaps while a case moves through the courts.

But if you’re investing in litigation finance—directly or through a fund—one thing is always true:

Your upside is tied to legal outcomes and clean collections. That means your risk isn’t just “Will the case win?” It’s also “Will the money actually get paid—and routed correctly—when it does?”

To make this practical, let’s use one of the most widely discussed cautionary examples in modern litigation finance: Tom Girardi and the collapse of Girardi Keese.

Litigation finance basics

Litigation finance is third-party capital deployed into legal matters in exchange for a financial return that depends on the case’s outcome.

There are a few common structures:

• Plaintiff funding / pre-settlement funding: A plaintiff receives money while the case is pending.
  Non-recourse means repayment typically comes only from the settlement or award—and if there’s no recovery, there’s usually no repayment obligation.
• Law firm funding: A law firm receives capital (often for operating expenses or case costs). Repayment may be tied to fee income, case proceeds, or a portfolio. Terms vary widely.
• Commercial litigation finance: Business disputes, arbitration, patent matters, class actions, and other complex cases, usually involving larger investments and longer timelines.

If you’re an investor, the key point is simple:

Non-recourse protects the claimant, not you. You can still lose capital if the case loses, stalls, gets appealed for years, settles for less than expected, or proceeds are misdirected or encumbered.

Case study: The Girardi collapse (what investors should learn)

Tom Girardi was once a famous plaintiffs’ lawyer associated with major litigation (including the PG&E case portrayed in Erin Brockovich). Over time, creditors and courts alleged that financing arrangements and settlement funds were mishandled.

In public reporting and official proceedings, a few themes appear again and again:

• Multiple financing arrangements at the same time
• Disputes over collateral and priority
• Settlement proceeds routed to accounts that did not promptly pay the intended recipients
• Years of litigation and enforcement activity after “successful” case outcomes

In the Lion Air Flight 610 matter (the 2018 Boeing 737 MAX crash that killed 189 people), settlement funds were wired to the firm’s client trust account and were supposed to be distributed to clients. Public filings and disciplinary summaries describe delays, partial payments, and allegations of misappropriation—followed by court proceedings and discipline actions involving firm leadership.

Separately, the attorney Girardi was later convicted in federal court for stealing settlement funds from clients and sentenced to prison.

Why this matters for investors: Even when a case “wins,” your return depends on clean priority, clean routing, and clean controls over proceeds.

Safety measures every litigation funding investor should insist on

There is no such thing as “zero-risk” for those investing in litigation finance. But you can reduce avoidable risk with disciplined structure and documentation.

1) Underwrite the case and the counterparties

Yes, you evaluate legal merits. But you also evaluate the people and systems handling money.

Ask about:

• Who controls settlementdisbursement?
• What trust-account controls exist (signatories, reconciliation, audit trail)?
• Has the law firm had disciplinary issues, sanctions, or repeated malpractice claims?
• What is the firm’s financial health (cash flow, debt load, partner departures)?

A strong case can still be a bad investment if collections are messy.

2) Get priority in writing (and verify it)

This is the heart of “double-pledge” risk.

Your documentation should address:

• What exactly is the collateral? (specific cases vs. portfolio vs. fee receivable rights)
• Representations and warranties that the collateral has not been pledged elsewhere
• A negative pledge covenant (no additional liens/assignments without consent)
• Notice obligations if another lender appears or a default occurs
• Intercreditor terms if multiple funders are knowingly involved

If priority matters, don’t assume. Confirm it.
That may include UCC searches/filings and counsel review, depending on the structure and jurisdiction.

3) Use an escrow / lockbox approach for proceeds

One of the cleanest risk controls is controlling the flow of money once it arrives.

Common safeguards include:

• Requiring settlement proceeds to be wired into an escrow or designated trust account
• Requiring dual authorization (joint signatures) for disbursements
• Using a written direction letter and attorney acknowledgment confirming the payment waterfall

This doesn’t eliminate risk—but it can prevent “we won, but we never got paid” scenarios.

4) Build a payment waterfall that is realistic and enforceable

A proper waterfall answers:

• Who gets paid first (and why)?
• What liens must be paid before anyone else (medical liens, government liens, prior assignments)?
• What happens if proceeds are less than expected?

Make sure the waterfall reflects real-world settlement distribution—not wishful math.

5) Require ongoing reporting (not “call us if something changes”)

Lawsuit funding risk increases when investors go dark.

Require periodic reporting on:

• Material case developments (motions, summary judgment, mediation, trial dates)
• Material risk changes (new defendants, insurance coverage disputes, sanctions)
• Settlement discussions (without interfering with legal strategy)
• Estimated time-to-resolution updates

You’re not trying to control litigation. You’re trying to avoid blind risk.

6) Diversify—because single-case risk is brutal

Even elite underwriters miss outcomes. Litigation is uncertain by nature.

If you’re allocating capital, consider:

• Diversifying across case types, venues, and stage of litigation
• Limiting exposure to any single case or single firm
• Avoiding “one big bet” structures unless you can truly absorb a total loss

7) Respect ethics rules and control boundaries

A compliance-safe structure avoids investor control over litigation decisions.

As a general principle:

• The funder/investor should not direct legal strategy
• The attorney’s duty remains to the client
• Privilege and confidentiality must be protected

If your structure pressures case control, you’re adding legal and reputational risk on top of financial risk.

Quick investor checklist

Before you commit capital, you should be able to answer “yes” to these:

• Do I understand the structure (plaintiff funding vs law firm funding vs commercial finance)?
• Do I know who controls proceeds and how they’ll be routed?
• Do I have written priority protections and a clear collateral definition?
• Have I verified there aren’t undisclosed liens/assignments (as appropriate)?
• Is there an escrow/lockbox or equivalent control?
• Do I receive ongoing reporting with defined triggers?
• Is my exposure diversified enough to survive losses?

Bottom line

Litigation finance can be a legitimate alternative asset class. But it’s not “set it and forget it.”

If you want to protect your capital, you need more than a strong case narrative. You need:

priority + proceeds control + monitoring + diversification.

If you’re seeking funding…

If you’re a plaintiff or attorney looking for litigation funding, focus on reputable, transparent terms. In many consumer legal funding arrangements, the funding is structured as non-recourse, meaning repayment is typically owed only from a settlement or award—no monthly payments, and no repayment obligation if there is no recovery (terms vary by product and jurisdiction).