Federal District Court Denies Reimbursement of Litigation Funding Expenses in Class Action

November 10, 2021

November 10, 2021

Federal District Court Denies Reimbursement of Litigation Funding Expenses in Class Action

In the Northern District of California, the court denied class counsel’s request for recovery of litigation funding expenses from the corpus of a class settlement. In the case, class counsel had engaged a non-party litigation funder to help collect from the defendant’s insurer on a $267 million judgment. The funder invested $10 million and retained a separate law firm to assist in the recovery. After the insurer settled the claims for over $75 million, class counsel sought approval under Federal Rule of Civil Procedure 23(e) for distribution of the settlement proceeds to the class and for recovery of counsel’s fees and litigation costs from those proceeds.

Among the expenses sought were a $300,000 payment to a broker that arranged for the litigation funding and a $15 million payment to the funder—for a $5 million return on its $10 million investment. Class counsel attributed the “extraordinary” $75 million result to the litigation funding agreement and the assistance of separate counsel.  

The court denied the request, finding that because class counsel independently opted for the litigation funding arrangement over more traditional financing, without court scrutiny or pre-approval, the associated expenses were just the “cost of doing business” and not recoverable from the class settlement proceeds under Rule 23 or any other authority. Even considering the expenses as fees to the separate counsel credited with the result, that extra counsel was not appointed by the court to represent the class. Considering the circumstances, the court stated that allowing the expenses would “undermine the transparency required by class settlements.”  

Given the large class recovery, however, the court increased class counsel’s fee award from 33 to 37 percent of the settlement proceeds, an increase that the court said partly addressed the expenses that were denied.

The decision does not delve into whether litigation funding expense reimbursements would be allowed in class actions where counsel seeks advance judicial approval of the arrangement. But the court anticipated that many questions would be involved in such a review—including the extent of required disclosure of the financing terms to the court and the defendant, the standard applicable to the court’s scrutiny of the plan, and the extent and timing of any disclosure to the class.

It will be interesting to see how litigators and courts will approach reimbursing litigation financing costs from awards and settlements going forward. It seems likely that communication with the client and disclosures to the court and other parties about funding arrangements will be part of the puzzle. In the meantime, if you’re interested in finding straightforward solutions to help you fund your cases, learn how LevelEsq can help at levelesq.com.

Source material: Despite Its Allure, Litigation Funding Is Just ‘The Cost of Doing Business’ for Class Counsel; Order Granting in Part Proposed Plan of Distribution of Settlement

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