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Setting the record straight on legal finance

March 31, 2020
Philip Braverman

This letter originally appeared in Tax Notes and can be found here.

To the Editor:

As a longtime reader of Tax Notes and given my great respect for it and for Lee A. Sheppard and her influence in the tax community, I feel compelled to address a few key (and potentially misleading) points in her recent article (Sheppard, “Is Litigation Funding a Trade or Business? Tax Notes Federal, Mar. 23, 2020, p. 1876). We at Burford Capital — a legal finance company that is, we believe, the leading provider in the industry and that was specifically and repeatedly cited by Sheppard — have a responsibility to provide context to the readers of Tax Notes for two reasons. First, they may be called upon by their companies and their clients to provide guidance on the efficient treatment of legal assets, and it is important that they have an accurate understanding of the role that legal finance can play in shifting the cost of pursuing claims and defense matters as well as in advancing working capital for pending claims. Second, it is increasingly likely that more companies will seek and use legal finance in the months and years ahead given the recent and dramatic downturn in the economy, which both increases the likelihood that companies will be involved in expensive disputes with significant dollars attached and decreases the capital that companies have available to pay for those disputes — heightening the importance to tax professionals of accurate information about legal finance.

We have four specific concerns with the article that merit clarification.

First, legal finance is a broad industry that is practiced in many different ways and with many types of clients, and it is misleading to reduce it to a monolithic practice, as the article implies. While we can only comment on Burford’s business, what we do — provide financing to large law firms and large corporations — is different from an entirely separate industry — consumer litigation funding, in which funding companies provide individual lawsuit loans to people with personal injury or other individual claims, as well as mass torts. The distinction is clear and crucial: Commercial legal finance as practiced by Burford and consumer litigation funding are as distinct as investment banking is from payday lending. The former comprises multimillion-dollar nonrecourse investments with law firms and corporations represented by world-class counsel, and the latter comprises cash provisions to individuals in economic distress who may not be experienced in or savvy about negotiating legal transactions.

Second, Burford does not control litigation or settlement of disputes, as the article suggests. We commit capital into carefully negotiated high-stakes transactions with law firms and corporations represented by top counsel. Our role is passive. When we commit capital to a pending piece of litigation, we do not control the legal assets in which we invest, and indeed our agreements state that we neither control nor seek to control strategy, settlement, or other litigation-related decision-making, nor may we direct a counterparty to settle at all.

Third, legal finance transactions are not loans and they are not sales of claims. Burford’s core business is built on its expertise in valuing legal assets and our capacity to provide capital to our clients who have those assets. As passive investors, we neither purchase claims nor take on the cause of action, nor do we assume the role of the claimant. A loan implies a debt obligation, and by definition Burford’s nonrecourse arrangement means that there is no obligation by clients for repayment of capital in the event of an unsuccessful claim. Most often, we provide upfront capital in exchange for a portion of a successful outcome — although our arrangements may take many forms, including paying the fees and expenses to pursue a claim, providing a monetization or cash advance for a pending claim or award, or financing a pool of matters — which can include both claims and defense matters.

Fourth, legal finance is an accepted and increasingly common practice that is supported by courts and legislatures. Sheppard’s article suggests that aspects of its practice remain unsettled — and this is plainly not supported by the facts in the two instances she cites, champerty and privilege. Originating in ancient Greece and assimilated into medieval English law, champerty does not exist in modern legal practice in the jurisdictions in which Burford operates, with very few exceptions — and even in those jurisdictions, these ancient issues do not interfere with legal finance as practiced by Burford. Privilege as it pertains to legal finance is not, as Sheppard suggests, a “knotty issue.” Materials created for and provided to a financier in connection with financed litigation, with adequate confidentiality protections in place, are clearly protected under the work product doctrine in the United States and are considered privileged materials in other jurisdictions. Similarly, deal documents embodying a finance transaction are protected because they were created due to the litigation, and the terms of such agreements reflect the information provided in work product protected documents, such as lawyers’ mental impressions, theories and strategies about the underlying litigation.

Burford takes pride in our 10-year record of leadership in the legal finance industry, and we welcome the opportunity to work with members of the tax community as they serve their clients and their companies.

- Philip Braverman, Managing Director, Tax & HR