Of Conflicts and Corporations: Analyzing Corporate Forms for Future Litigation Finance Firms

By Knight, Jared F. | Journal of Corporation Law, Summer 2016 | Go to article overview

Of Conflicts and Corporations: Analyzing Corporate Forms for Future Litigation Finance Firms


Knight, Jared F., Journal of Corporation Law


I. INTRODUCTION II. CURRENT PROBLEMS WITH PLAINTIFF LITIGATION AND THE THIRD-PARTY FUNDING SOLUTION    A. Champerty, Maintenance, and the Rise of the Contingent Fee Model    B. Current Trends in Litigation Finance III. POTENTIAL CORPORATE STRUCTURES FOR LITIGATION FINANCE COMPANIES    A. Factors Under Consideration       1. Claimants' Interests       2. Funder's Interests       3. Shareholders' Interests.    B. Limited Liability Company       1. Advantages       2. Disadvantages    C. Traditional Corporation       1. Advantages       2. Disadvantages       3. Public vs. Private Corporations    D. Public Benefit Corporation       1. Advantages       2. Disadvantages IV. CHOOSING THE RIGHT CORPORATE FORM V. CONCLUSION 

I. INTRODUCTION

Third-party litigation finance is part of legal scholarship's cutting edge. Proposals for enabling legislation have both ardent supporters and critics, but the idea has already gained traction in Australia and the United Kingdom. (1) It is worth noting that these countries differ from the United States in some respects. (2) However, the push for legalizing this practice appears to be gaining ground rapidly. In fact, several firms are already operating litigation finance operations in the United States. (3)

Current litigation finance firms operate as limited Guernsey corporations. (4) But these firms operate with the purpose of avoiding conflict with existing U.S. and U.K. law. This operating model may be inefficient. (5) In an ideal world--indeed, the one envisioned by litigation finance proponents--laws would allow plaintiffs to freely contract with these firms to finance their claims. (6) However, scholars have yet to consider what form these now-legal firms might adopt. This Note fills that void.

Part II analyzes litigation finance's history in the United States. I recount third-party financing' s greatest obstacle--the ancient doctrine of champerty--and the modern workarounds to that rule. I also review the most recent scholarship relating to third-party financing to provide the context for understanding the evolving world in which these firms operate. Part III then analyzes several corporate structures litigation finance companies might choose. While current financing companies operate around existing laws, the options analyzed in this Part assume the underlying laws prohibiting third-party finance are removed. In considering these options, I weigh several sometimes-competing interests, including the ability to raise capital and potential conflicts between capital providers, financiers, and claimants. I conclude that a benefit corporation provides the ideal balance of conflict mitigation and access to capital.

II. CURRENT PROBLEMS WITH PLAINTIFF LITIGATION AND THE THIRD-PARTY FUNDING SOLUTION

Third-party financing is the latest in a series of developments that could change the landscape of civil litigation. In this Part, I trace litigation finance's development in the United States, including reference to its ancient roots in the English common law. From its early roots in the doctrine of champerty to the rise of the contingent fee model and insurance defense and prosecution, litigation looks very different today than it did at the country's founding. Next, I review modern developments in litigation finance, both in American legal scholarship and in foreign jurisdictions. If, and when, third-party finance takes hold in American litigation, the same forces that reshaped English and Australian laws will likely guide its development.

A. Champerty, Maintenance, and the Rise of the Contingent Fee Model

In the United States, plaintiffs and defendants pay their own legal costs in litigation. (7) This "American Rule" developed as a response to complaints of soaring legal costs, which became "altogether disproportionate to the magnitude" of their underlying claims. (8) This contrasts with the "English Rule," in which the losing litigant pays the winner's legal fees. …

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