Reports have indicated that litigation funding investment plays a significant role in the administration of justice. Legal funding helps meritorious claimants to pursue their cases without worrying about the financial liabilities during the pendency of the suit. It allows them to wait for a better settlement offer or trial award.
But, what are the risks for investors?
For the sake of this article, we will use Tom Girardi’s fraud against a litigation funding company and how investors can protect themselves.
Who is Tom Girardi?
Erika Jayne Girardi is a famous celebrity who made her debut in December 2015 on the famous TV series “The Real Housewives of Beverly Hills.” The show got a hit, and she became a household name after the show. Prior to her debut in the show, she was a cocktail waitress at a restaurant where she met Tom Girardi, and they got married. Tom Girardi is a famous personal injury attorney named Tom Girardi, who is famous for winning the case against Pacific Gas and Electric.
The celebrity couple is reported to be living a lavish lifestyle. Reports have indicated that Erika spent $40,000 per month on her looks, whereas Tom had a daily standing reservation for an exclusive table at Morton’s Steakhouse in Los Angeles.
The couple also owned expensive property and two private jets.
However, the table turned for them in 2019, when a litigation funding company sued Tom Girardi, his wife, and the law firm for defaulting in paying back the litigation loan agreed between the parties in the contract and for defrauding them.
Litigation Funding Is Gaining Populality
Litigation financing has gained popularity in recent times. In its simplest form, litigation funding is a non-recourse financial arrangement between law firms, clients, and settlement funding companies. In this funding agreement, the law firm or client approach funding companies and request financing before or after a lawsuit settlement is finalized.
If the application is approved, settlement funding companies provide payment to the law firm or plaintiff; in return, the client or law firm agrees to pay a particular percentage of the compensation awarded to the client after monetary compensation is received.
In other words, a litigation funding investor only gets paid after the borrowers receive the award from their case.
In order to obtain litigation funding, law firms have two options. They can offer a portfolio of their cases to a company whose returns are secured against all the cases or access a loan for a single case. Which is what Tom Girardi did.
How Girardi Scammed The Funding Compamy
In a funding agreement arrangement, Tom Girardi approached a litigation finance company named Stillwell Madison and took our 5.1 million dollars on the basis of cases his law firm Girardi and Keese were fighting against Shell Oil, Riverside Cement, GlaxoSmithKline, Eli Lilly, and other cement and drug companies.
However, he failed to keep his agreement and, in 2018, allegedly defaulted on the loan payment to Stillwell Madison. The two parties negotiated, and Girardi promised to pay $500,000 per month and repay the loan within a year.
Girardi also defaulted on a separate loan from another investment firm, Law Finance Capital. Stillwell Madison was not aware of the arrangement between Girardi and the law finance group arrangement.
With further investigation, it was found that Girardi’s firm had been pledging the same portfolios for multiple loans without informing litigation funding companies of such a scam.
On another note, in October 2018, a 737 Max airplane crashed, and 189 people on board died. Families of the deceased persons hired the services of Girardi’s law firm to represent them in a case against Boeing, the airplane maker. The case was settled in early 2020, and Boeing transferred proceeds to Girardi and Keese, but the firm did not transfer the proceeds to the deceased families, which resulted in further litigation against the law firm.
Safety Measures For Investors
Commercial litigation finance experts believe that the use of a case or portfolio of cases to obtain multiple loans from different lenders is detrimental to the administration of justice and litigation funding arrangements.
In order to prevent such malpractices, litigation funding investors should explicitly write in their contract that they have a first priority lien or security on the cases.
Dai Wai Chin Geman, director of commercial litigation strategies and corporate counsel at litigation finance firm Parabellum Capital, considers the first lien on the collateral a paramount consideration for legal funding. This can prevent funding companies from avoiding disputes; people are fighting for the same assets.
Daniel Digiaimo, CEO at Baker Street Funding said on Law360 “his company rarely allows a lawyer to use “blanket” collateral”.
Another litigation Finance Expert argues that another way to secure capital is to insist in your documentation that any money received has to be sent to an escrow account. The money cannot be taken out of such an account without joint signatures or can be taken out just by the investment firm.
Litigation funding companies can minimize risk and avoid Girardi and Keese’s scenario by taking the above-mentioned safety measures.