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NY ruling correctly deems legal finance docs irrelevant

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Andrew Cohen

Andrew Cohen


Former Litigator, Debevoise & Plimpton

A recent decision from the Supreme Court of the State of New York, New York County, Appellate Division, First Department, is noteworthy as the latest instance of a court ruling that the details of legal finance agreements are generally not relevant or discoverable.

Further, the decision is notable as the first ruling that directly addresses the discoverability of legal finance materials to come from the New York Appellate Division.

The ruling in Worldview Entertainment Holdings Inc. v. Woodrow affirms the denial of a motion to compel production of, inter alia, litigation funding documents, as the defendant failed to explain "how discovery about litigation financing and witness payments would support or undermine any particular claim or defense."

The decision 

The dispute relates to the film production company Worldview's claims that former CEO Christopher Woodrow defrauded the company in various ways. Woodrow sought production of funding documents from Worldview, alleging that Maria Cestone, co-owner of one of Worldview's investors—and also a deponent and potential trial witness—had financed the litigation out of animus toward Woodrow.

Specifically, the four requests covered:

  • All documents concerning any arrangement regarding the financing of litigation on behalf of Worldview and/or the Worldview entities from 2014 through the present;

  • All documents concerning any agreement or arrangement, formal or informal, by which any person had either (1) been assigned, transferred, pledged, or given rights or interests in any claims of Worldview in this action or the proceeds thereof; and/or (2) been given any right to control in any manner the prosecution of litigation by Worldview and/or the Worldview Entities;

  • All documents concerning any payments by any other person of legal fees or litigation costs on behalf of Worldview and/or the Worldview Entities from 2014 through the present; and

  • All documents concerning any loans, capital contributions or investments by Cestone from 2014 through the present.

The trial court denied the motion to compel in two sentences:

[The motion] to compel is denied as to Woodrow's request for discovery based on an alter ego theory as being either too late or too speculative at this juncture. The remainder of the motion is either mooted by discovery produced on 2/4/2021 or resolved by agreement of the parties on the record.

At issue was the question of whether the trial court erred in denying Woodrow's motion to compel production of litigation funding documents. Woodrow argued that the circumstances of the funding arrangement were relevant to Cestone's potential bias, motive and credibility as a witness.

He also argued that Cestone's funding would be relevant to an as-yet-unadvanced argument that Cestone was an alter ego of Worldview. And he argued that litigation funding might be champertous insofar as Cestone was funding litigation to harass Woodrow, or that the defense of unclean hands might apply.

The appellate panel of five justices — Rolando Acosta, Sallie Manzanet-Daniels, Angela Mazzarelli, Anil Singh and Lizbeth González — affirmed the trial court's order in one relevant sentence: "[D]efendant has not explained how discovery about litigation financing and witness payments would support or undermine any particular claim or defense."

The court thereby declined to upset the trial court's refusal to probe into Worldview's financial arrangements since there was no relevance to the inquiry.

Legal finance disclosure does not merit distinct treatment 

This decision reflects a growing trend of courts recognizing that legal finance does not merit a special set of rules and should not be the subject of additional disclosure.[1] Proponents of such disclosure often fail to make the case that litigation finance is different from other types of financing and should therefore be treated differently.

There is no call for litigants to disclose, for example, a line of credit obtained for the purpose of financing litigation, but that is just as much "litigation funding" as the type of funding legal finance firms provide—and probably happens significantly more often.

As litigation finance has become a part of the legal mainstream, forced disclosure of litigation finance arrangements remains both unjustified and unnecessary. In litigation, the standard for discovery is straightforward: What will the disclosure add that is relevant to the matter at hand?

The details of how a party is financing litigation are generally not relevant to the subject matter of the case; that is, the merits of any claim or defense at issue.

One struggles to imagine how, for example, the fact that a party has contracted with a third-party finance provider bears any relevance to the prior contractual breach, tortious conduct or statutory violation that gave rise to the litigation. Rather, when disclosure is raised in relation to litigation finance, it is all too often merely a delay tactic.

There are circumstances where limited disclosure of litigation finance is appropriate, such as in proceedings like class actions and multidistrict litigation, where the court takes on a greater role in protecting the interests of absent claimants. In those cases, courts are justified in inquiring into the qualifications of counsel to serve in leadership positions, including relevant details of financing arrangements.

But even in those instances, judges have tailored the necessary disclosure of funding narrowly to adequately protect the interests of the litigants.

For example, in the National Prescription Opiate Litigation in the U.S. District Court for the Northern District of Ohio, U.S. District Judge Dan Polster in 2018 called for the disclosure of litigation finance to be made ex parte and in camera to him, but not to the defendants.

Judge Polster made clear that the purpose of the disclosure was simply to affirm to him that attorneys seeking leadership positions had no conflicts of interest and that funders, if any, exercised no control over the matter. He also said up front that no discovery would be permitted into the litigation finance arrangements, which he recognized constitute protected attorney work product.

Judges have increasingly found that documents created in connection with legal finance are protected from disclosure by the work product doctrine.

For example, also in 2018, in Lambeth Magnetic Structures LLC v. Seagate Technology (US) Holdings Inc., the U.S. District Court for the Western District of Pennsylvania extended the work product protection to communication with potential legal finance providers in the period leading up to litigation.

The court found that communication with legal finance providers was for the purpose of preparing for litigation and because the communication took place during a period where the party reasonably foresaw litigation, the work product protection applied.

All litigation is financed—either by the litigants themselves, or through some form of external funding, which means that some third party has a direct or indirect interest in the outcome of the litigation.

Examples include banks with outstanding general recourse debt to a company whose financial position is dependent on a litigation judgment or settlement and law firms that have taken cases on a contingency basis and have a financial stake in the outcome. These kinds of confidential financial arrangements are considered par for the course and are not subject to disclosure.

Mandating different rules for the disclosure of legal finance is therefore manifestly unfair and unhelpful, and results in a less just, more costly and burdensome judicial system. Anyone who has experience working in high-stakes commercial litigation knows that demands for disclosure of irrelevant information are a common mechanism of delay.

While the decision in Worldview Entertainment v. Woodrow is based on a scant record, one can imagine a court having concluded, on this fact pattern, that the circumstances of funding were at least tangentially relevant to alter ego or credibility determinations.

That the trial court declined to do so, and that the Appellate Division allowed that order to stand, suggests New York courts will be less permissive in granting discovery into legal finance absent a strong showing of relevance.

Given the alternative, the court has made the right decision. Commercial legal finance should be afforded the same treatment as any other commercial litigation where a third party has an interest in the outcome. 

This article first appeared in Law360 and can be viewed here.