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Do We Need It? Is It Worth the Risks?
Third-party litigation financers have been thriving in the litigation arena for quite some time. As evidence of this fact, you need only type the phrase "commercial litigation funding" into any search engine, and you will be rewarded with page after page of links to "leaders" in the litigation finance field, anxious to tout their experience and access to vast financial resources. In contrast, a search of "bankruptcy litigation funding" generates a paucity of responses.
What does the virtual absence of third-party litigation funders in bankruptcy cases mean? Have we been so focused on Stern and other pure insolvency issues that we have missed out on a new source of funds to inject into the process? Or, as professionals who must find creative funding solutions on a daily basis, are we actually the unrecognized leaders in the field?
Brief Background of Third-Party Litigation Financing
Although modern litigation financing can be traced to the late 1990s,1 third-party litigation financing has existed (albeit in a more rudimentary form) since the Middle Ages.2 Feudal lords and wealthy landowners, seeking to gain increased dominance, money and power,
[financed] other individuals' legal claims, usually against [their] political or personal enemies, in exchange for a share of the results. These "champertors" enlisted paid retainers - known as "maintainers" - who could prosecute the suits ruthlessly on the champertors' behalf.3
This practice "was the means by which great men increased their power at the expense of the courts of justice."4 To eliminate these actions, which were viewed as encouraging fraudulent suits, the common law doctrines of champerty5 and maintenance6 were created to ban third-party funding. These doctrines, and abhorrence to the practice, have survived to this day in some states.7
With the passage of time, views on litigation and third-party funding changed. The current litigation finance trend began in the consumer area, in small personal-injury cases. Providing what many considered an important option for someone who had viable claims but lacked the financial recourses to sustain themselves through prolonged litigation, third-party financiers did what the plaintiffs' bar was ethically prohibited8 from doing: they advanced the plaintiff funds to use for "basic life needs"9 during the pendency of the plaintiff's suit. Monies were...