Economics

U-Pick Plantiffs

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u pick

An uptick in investment in other people's lawsuits:

Some wealthy investors are starting to dabble in lawsuit investment, bankrolling some or all of the heavy upfront costs in return for a share of the damages in the event of a win.

The London-managed hedge fund MKM Longboat last month revealed plans to invest $100million (£50.5million) to finance European lawsuits. Today a new company, Juridica, floats on AIM, having raised £80million to make litigation bets.

Why the sudden interest?:

Law firms in the US remain one of the few no-go areas for outside equity capital investment. They also appear a safe bet to prosper in the chilliest of economic conditions. No wonder capital is starting to seek out imaginative ways to try to piggyback on their good fortune.

More on champerty.

Via Tyler Cowen

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  1. In a way, this is a good thing; one of the hallmarks of litigation in the U.S. is that the guy with the “deep pockets” can win by effectively outlasting his or her opponent rather than on the merits of the case.

    So let’s say, for example, that you bet you company on a partnership with Microsoft, and they break the contract in a manner that effectively destroys your company. You can sell the “lawsuit rights” to someone who will pursue your case for you and reap the rewards. Having received a portion of the expected damages you are much less likely to face bankruptcy.

    This also encourages settlement offers to more closely reflect the actual damages incurred – again a good thing.

  2. It’s a good way in the same mentality that it’s a good thing to have red light cameras. They’re ALL ’bout safety, dontcha know.

    When you make law about making money, it’s time to start the revolution (yes, it’s past time, I know that)

  3. Katherine,

    Thanks for the interesting item. But do you (or does anyone out there) understand this anecdote from the Champerty article you linked? WTF is Zelda? I am confused.

    “In the mid 1980’s, Julian Kraft, Harold Newburg and the companies they owned filed what they considered to be a very strong federal antitrust complaint in federal court in Florida. Their only problem was money: their law firm (a very good firm) told Kraft and Newburg that it would require more money to continue the suit or it would withdraw.

    Kraft then approached a man named Gross and offered him the following deal: Gross would obtain a bank loan of $100,000 and lend the proceeds to the plaintiffs. In exchange, if Kraft and Newburg won the lawsuit, they would not only repay the $100,000 loan, but also give Gross 20% of the first $1,000,000 recovered as damages in the suit, 6% of the next $4,000,000 recovered, and 3% of any recovery in excess of $5,000,000. Gross said no.

    Zelda then sued Kraft in state court for $355,450, which she believed was her share of the winnings from her brother’s lawsuit. Of that sum, only $15,000 was for the loan she had arranged, and even Julian agreed that he owed her that. The rest was money Zelda claimed she was owed under the 20%/6%/3% deal.”

  4. Because, you know, lawsuits are always about justice, and not at all about extortion of deep-pocketed defendants.

    The biggest supporters of nanny=state politicians are trial lawyers, because of their mentality that if something bad happens to you, it must be someone else’s fault.

    /snark

  5. /snark

    should have gone after the first paragraph above, not the second.

    * Preview, dammit! *

  6. Tommmy Grand,
    Kraft v. Mason:

    District Court of Appeal of Florida,
    Fourth District.
    Julian B. KRAFT; Falcon Food Service Company, Inc., Harold R. Newburg, Sea-Good Seafood, Inc., a Florida corporation, Seagood Trading Corporation, a Florida Corporation, and Blaine H. Winship as partner of Winship & Byrne, Appellants/Cross-Appellees,
    v.
    Zelda Pincourt MASON, Appellee/Cross-Appellant.
    No. 94-2544.
    Feb. 28, 1996.

    Reconsideration and Clarification Denied April 19, 1996.

    Sister who lent brother money to continue antitrust litigation, in consideration of share of proceeds if case settled or was decided in brother’s favor, sought share of proceeds after suit was settled. The Circuit Court, Palm Beach County, Richard I. Wennet, J., entered final judgment on behalf of sister while rejecting sister’s claim to share of full settlement amount before deducting attorney fees. Cross-appeals were taken. The District Court of Appeal, Henning, Patti Englander, Associate Judge, held that: (1) loan agreement was not champertous; (2) loan was not usurious; (3) action for sister’s share of recovery was within statute of limitations; and (4) sister was entitled to recover share of proceeds calculated prior to deduction of attorney fees.

    Affirmed in part, reversed in part and remanded.

    HENNING, PATTI ENGLANDER, Associate Judge.
    STATEMENT OF THE FACTS
    Julian Kraft, Harold Newburg and their companies were plaintiffs in a federal antitrust suit in the mid-1980s. They were represented by a law firm, which, after a time, told them that the firm would be required to settle the case or withdraw from representation unless fees and costs were paid. Without the financial wherewithal themselves, the plaintiffs sought financing from others.

    First, Kraft approached a gentleman named Gross with a contract drafted by Kraft himself. The contract provided for an interest in the antitrust suit if Gross would obtain a bank loan and, in turn, lend the proceeds to the plaintiffs. Specifically, the terms were for 20% of the first $1,000,000 recovered, 6% of the next $4,000,000 recovered and 3% of any recovery in excess of $5,000,000 in exchange for a loan of $100,000. The plaintiffs were obligated to pay Gross the first $100,000 of any recovery, and Gross was obligated to utilize that $100,000 in reducing the loan principal. Additionally, the loan was guaranteed and the borrowers would pay interest payments. Gross declined to provide the financing.

    Still needing the funds, Kraft sought help from his sister Zelda Mason. She reviewed the loan agreement (identical to the one Kraft had drafted for Gross) and after considering the matter for a few weeks agreed to lend her brother the money. She made no changes in the loan document. She believed that the $100,000 loan would be repaid and that she would receive interest payments on the loan. She was also obligated by the loan agreement to use the first $100,000 received by her to reduce the loan principal. She testified that her brother said any additional money received under the loan agreement was like “icing on the cake” for her. Mason did not consider it a necessary incentive for making the loan. She had no expectations as to any further recovery. Important for issues presented to this court, we note that the contract contained no fixed repayment dates.

    Once Mason lent the money, the antitrust lawsuit continued. The law firm modified its agreement with Kraft and Newburg to a straight contingent fee agreement. Because of this, Mason actually bore the cost of the litigation with her $100,000 loan.

    In 1987, there was a partial settlement of the antitrust litigation for $200,000. Mason received $85,000 to reduce her loan obligations with the bank; with agreement of all, $15,000 was paid to her prior attorney; and all agreed the remaining $15,000 principal would be paid from any later settlement.

    In June of 1987, Kraft stopped making the contractually mandated interest payments. By October, Mason demanded in writing full payment of the principal and unpaid interest. Testimony reveals that Kraft had repudiated the contract because of an unrelated family dispute Kraft had with his sister. Mason did not file a lawsuit at that time.

    Eventually in December 1992, the antitrust suit settled for $5,015,000. Although the attorneys notified Mason in writing that she was entitled to $355,450, no money was actually disbursed at the direction of Kraft. He still believed he was entitled to a setoff for that family matter. Mason demanded her settlement proceeds and instituted this suit when she was not paid. The suit was defended on the basis that the original contract was champertous and usurious and that the suit had been filed outside the statute of limitations.

    This amount was calculated by Kraft’s attorney pursuant to paragraph 6 of the loan agreement by taking 20% of the first $1 million ($200,000), 6% of the next $4 million ($240,000) and 3% of the remaining $15,000 ($450) less the $85,000 previously paid to Mason. Interestingly, this original calculation is the calculation demanded by Mason at trial and before this court on appeal, but rejected by the defendants and trial court below.

    After a nonjury trial, the trial court entered final judgment on behalf of Mason rejecting all defenses. However, the trial judge rejected Mason’s position that she was entitled to have her recovery based on the full settlement amount before deducting attorneys’ fees. This is the appeal and cross-appeal to this court of those rulings.

  7. Awesome. Thanks.

  8. Libertarians love civil suits instead of regulation as a way to punish and deter bad behavior.

    Right up until somebody files a lawsuit.

  9. Things could get really interesting if an employee of Acme Inc. buys a bunch of shares in a law firm, and the same firm later receives an envelope with no return address and some insider documents.

    I have my idea for a movie script. And since I’m not in the union, I’m willing to scab.

  10. Everyone hates trial lawyers until they need them.

  11. Don’t hate the lawyers, hate the law.

  12. It’s worse than that, MCW.

    Whenever there is a thread about environmental damage, consumer safety regulations, unsafe workplaces and the like, the comments are full of people praising lawsuits as the solution to all our problems.

    And yet, these same people – libertarians! – whine like fanbelts whenever people actually avail themselves of that system, which is hypocritical enough, but then they have the nerve to decry the system because – my goodness! – it involves someone with a profit motive.

  13. joe — tell you what, if you agree that we should terminate with extreme prejudice all the nanny-state laws and regulations, I’ll agree to not bitch about the lawyers who sue people over frivolous stuff, because they won’t then be able to turn around and use their ill-gotten gains to further expand nanny-statism.

    Do you concede that many of the nanny-state laws are enforced via lawsuits, which libertarians might legitimately complain about?

  14. joe,
    I’ll ignore your BS today and say that I am with Tarran that this will allow smaller groups of victims to think about suing deep pocketed firms. I think that lawsuits, in particular those suits settled reasonably in line with personal responsibility* are more likely to be a deterrent to poor behavior than legal sanctions are so this simply opens up the market to other plaintiffs.

    *Eg.
    No shit the coffee was hot, you shouldn’t have spilled it on your self
    vs.
    You had reason to trust that your kid’s toys weren’t painted with toxic paint.

    The former should have been thrown out of court, the latter should be a no-brainer (unless no one was actually harmed, in which case there is no case). Even in the former, this action harmed the restaurant in question economically (court costs + bad publicity) and they probably would have changed their cup design even if the lawsuit had been tossed.

  15. Its really sexist to say nanny state, you’re just playing into peoples gender anxieties. Why not daddy state?

  16. MCW — Better yet, let’s call it the more accurate title, “collectivists-who-can’t-stand-that-some-people-are-more-productive-than-others-and-thus-enjoy-more-luxuries-statism”

    Kind of long, but I’d be happy to accept the awkwardness if all you collectivists agreed to correctly labeled what you’re trying to “achieve” (irony alert!).

  17. Things could get really interesting if an employee of Acme Inc. buys a bunch of shares in a law firm, and the same firm later receives an envelope with no return address and some insider documents.

    I have my idea for a movie script. And since I’m not in the union, I’m willing to scab.

    Traditionally, T., in at least most states, law firms can’t sell equity to non-lawyers. If I understand the rules correctly, this is the biggest reason why US law firms are not branches of the big accounting firms.

    The idea is that if the shareholder is required to be a lawyer because she is less likely to do this kind of thing because of her: (i) mandated ethics training; and (ii) doesn’t want to lose her law license. As a real world examle, Bill Clinton lost his law license for perjuring himself. Of course, when the stakes are big enough, no amount of rules can contain human greed.

    Here is a real life case, sort of similar to your script idea:

    http://www.sourcewatch.org/index.php?title=Merrell_Williams%2C_Jr.

  18. prolefeed,

    I agree that there are laws a libertarian would disagree with that are enforced via lawsuit, and that there are such things as frivolous lawsuits, but that doesn’t justify the anti-lawsuit rhetoric and the “tort reform” cause it is used to support, because neither the rhetoric nor the proposals actually distinguish between legitimate and illegitimate suits, nor between legitimate and illegitimate laws.

    I don’t see a good-faith effort being made to separate the goats from the sheep. I see efforts to keep down the ruminant population, regardless. And since most such efforts involve blanket efforts to make it harder for plaintiffs, the burden is going to fall most heavily on those without their own deep pockets.

    Reagan, when he was pushing for loophole-closings in the 1986 tax reform bill, made a point about targeting “weak claims, not weak claimants.” That is, parties who had a poor case to make for tax breaks, not simply those who lacked the resources to make their case effectively. Not so much along those lines in most of the lawsuit-bashing I see.

  19. Prolefeed, corporate CEOs are some of the least productive people on the planet.

    I guess Paris Hilton is real productive too. And George Bush. Oh wait, they inherited it all.

    The amount of wealth a person has is not a measure of their “productivity”. Teachers and nurses are way more “productive” than Tiger Woods but don’t have nearly as much wealth.

  20. And I’d like to give a shout-out to Yoda for helping me compose that last sentence.

    Not so much along those lines in most of the lawsuit-bashing I see.

  21. Joe, you can adjust that fanbelt…..

    MCW, You’re a blatant sexist and it shows when you make the unthinking assumption that the term Nanny is unilaterally feminine.

    Dude, this is the 21st Century.

    For the record, I think you’re an Urkobold plant designed to stir the pot.

  22. Lawsuit bashing is a great avocation.

  23. Just a technical note – you’re hotlinking to a large (250Kb) picture. You might want to resize and relocate as a service both to the domain you’re hotlinking too and any readers on slower connections…

  24. joe | December 26, 2007, 2:40pm | #
    And I’d like to give a shout-out to Yoda for helping me compose that last sentence.

    Received your shout-out I have. Much learning of the use of Preview have you left. Study and be strong you will.

  25. The propane company I use got sued a couple of years ago because they had a long-standing monthly charge of $1.00 that was labeled “environmental compliance fee”.

    The argument was that the customers were being hoodwinked because the company implied that this $1.00 per month fee was a government imposed charge or fee or tax or something.

    At settlement each customer got something like a $10.00 credit on the next propane bill. The attorneys got a half million or so.

  26. The grammar is strong in this one.

  27. joe — I agree that some lawsuits are necessary to prevent (or at least compensate the victims of) such things as uncompensated pollution, fraud, theft, extortion, rape, murder, etc.

    Where we disagree is in which laws ought to be enforced via lawsuits. I feel the only laws should be ones prohibiting the initiation of force. You, obviously, have a much more expansive view of the necessary scope of laws.

    I agree that some people, having been subjected to lawsuits based on laws that (I and they at least feel) should be abolished, have overcompensated and acquired a burning hatred of all lawsuits, regardless of merit.

  28. Katherine, Shame. Hotlinking is uncool.

    Coolest hotlink retribution I ever saw was when the White Supremacist site (the one that gave money to RP) hotlinked to a gun picture on a different site. When the site found out, they changed the picture to a black guy with a shotgun and the caption was “The Law Didn’t Stop The KKK, Men Like This Did”. It was priceless.

  29. …..regardless of merit…..

    In terms of the law, isn’t that an oxymoron? 🙂

  30. MCW — some people have more money than they have earned via productive labor — John Edwards, for example. 😉

    I think you have a false impression of how well our economy would function if all CEOs were fired by the government and replaced with random people, illiterate in economics, dragged off the street. That some CEOs are paid more than their earnings would justify I won’t argue with, while arguing with your implicit argument that the government should intervene.

    Yeah, and some folks like GWB and Paris Hilton received gifts (aka inheritances) that they have squandered. Again, disagree with your implied assertion that the government should confiscate a large part of those gifts. The money squandered will largely wind up in the hands of people who will be more responsible with it. Giving it to politicians will also results in vast sums being squandered. Best to let the market sort things out, and pity folks like Paris Hilton rather than try to rob them.

  31. It has always been my intent that when I win the super lotto – I would invest $10 million of the proceeds in a start up law firm whose business model would be to specialize in suing other law firms. I base the consumer need on the following:

    – everyone hates lawyers
    – if you’ve just lost your case – see us and we’ll evaluate your representation to see if it was deficient and then sue based on that perceived deficiency.
    – even if you’ve just won your case – see us and we’ll determine if the settlement in your favor was up to industry standards – if not, again we’ll sue away.
    – the TV commercials would be a blast.

    I actually have approached some doctor clients regarding this idea (since most of the bitching seems to come from that quarter) as of yet none have signed on to the model. Bunch of pussies. ;~)

  32. Coolest hotlink retribution I ever saw was when the White Supremacist site (the one that gave money to RP) hotlinked to a gun picture on a different site. When the site found out, they changed the picture to a black guy with a shotgun and the caption was “The Law Didn’t Stop The KKK, Men Like This Did”. It was priceless.

    I’d bet money that was Oleg Volk.

  33. Ein Volk, ein Reich….

    Ahh, forget it.

  34. No shit the coffee was hot, you shouldn’t have spilled it on your self

    Seriously? You’ve never accidentally spilled a drink? Ever?

    Anyway, the coffee lawsuit is always seen as the classic frivolous lawsuit, except I once read a great explanation of why it wasn’t frivolous. The explanation was that there is a set standard for the maximum temperature for beverages (not a law, just a standard)- so that people can’t badly scald themselves when they spill them. Besides, anything hot enogh to scald your skin is way too hot to drink. McDonalds ignored that standard (by something like 20 degrees). Apparently this had previously been pointed out to McDonalds, but they still ignored it. Hence, they were negligent in the case.

  35. The explanation was that there is a set standard for the maximum temperature for beverages (not a law, just a standard)

    Standands schmanderds. The IBEW ( I Block Every Sidewalk ) union just came down on a job I have been working on with the requirement that the operation of any device using a voltage over 24 be supervised by a certified IBEW electrician. The owner wondered aloud if he could operate his toaster.

  36. I think this is a fantastic development. As everyone knows, when there’s a huge disparity between the parties to a civil lawsuit, the larger one simply crushes the smaller one with fees. With a system of outside financing based solely on investors’ perceptions of the odds of winning, the balance would clearly be tipped back toward the center, and might even be tipped the other way when it’s pretty clear to a neutral observer that the smaller party is in the right.

    I like this a lot better than, say, “public” financing of civil litigation (where public financing really means tax financing which realy means robbery).

  37. As everyone knows, when there’s a huge disparity between the parties to a civil lawsuit, the larger one simply crushes the smaller one with fees.

    What a load of horseshit. The vast majority of civil plaintiffs don’t pay any legal fees at all – their lawyers are paid on a contingent basis, with a percentage of the recovery. The plaintiff has zero financial exposure, and the firm takes a calculated economic risk on its investment in the case.

    Further, your big plaintiff’s firms are extremely wealthy, and more than capable of financing litigation against the wealthiest companies. Google up the career of one Mr. Lerach if you doubt this is true.

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