Attorney Waste

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In his comment to the Accelerated Investment concept, Mr. Reilly objected to the idea that the funder should be forced to prematurely purchase Litigation Proceed Rights with capital committed to future closings. His core reason was fairness-based: the funder is unlikely to be to blame for the cost overrun, so why should the funder have to solve the shortfall by re-investing early? As an example of who might be more likely to blame for the funding shortfall, Mr. Reilly pointed out the Litigation Counsel may have simply made bad decisions. We agreed that was a fair point, and that we would think about how to address that slice of his concern. Here’s our answer, with the new sentences in all caps:

Acceleration Event: The balance of the Litigation Account falls below [$ ] and the Litigation Counsel in good faith reasonably believes the amount remaining in the Litigation Account is insufficient to finance the conduct of the Claim through to the Milestone Event marking the next Closing. [DESPITE SUCH CERTIFICATION, AN ACCELERATION EVENT HAS NOT OCCURRED IF THE PLAINTIFF AND [FUNDER/FUNDERS HOLDING A MAJORITY OF ISSUED LITIGATION PROCEED RIGHTS] AGREE THE FUNDING SHORTFALL IS DUE TO ATTORNEY WASTE, AS DEFINED IN THE RETAINER AGREEMENT. IN SUCH CASE, THE RELATED PROVISIONS IN THE RETAINER AGREEMENT SHALL APPLY.]

Supplemental Investment Event: A Supplemental Investment Event occurs when the balance of the Litigation Account has fallen below [$ ], all Committed Capital investments have been made, and the Litigation Counsel in good faith reasonably believes the amount remaining in the Litigation Account is insufficient to finance the conduct of the Claim through to the next Milestone Event or the Conclusion of the Claim, whichever comes soonest. [DESPITE SUCH CERTIFICATION, A SUPPLEMENTAL INVESTMENT EVENT HAS NOT OCCURRED IF THE PLAINTIFF AND [FUNDER/FUNDERS HOLDING A MAJORITY OF ISSUED LITIGATION PROCEED RIGHTS] AGREE THE FUNDING SHORTFALL IS DUE TO ATTORNEY WASTE, AS DEFINED IN THE RETAINER AGREEMENT. IN SUCH CASE, THE RELATED PROVISIONS IN THE RETAINER AGREEMENT SHALL APPLY.]

As drafted, the new language leaves “Attorney Waste” undefined and does not explain what happens to make up the funding shortfall. One possibility, is the litigation counsel absorbs its overruns; another, is it accepts partial or even full payment in Litigation Proceed Rights. We think the substance of those provisions belong in the retainer agreement between the litigation counsel and the plaintiff. The key part for the plaintiff-funder contract we’re modeling is ensuring the funder isn’t forced to cover for a spendthrift litigator who might be incentivized to be wasteful knowing it could force additional investment.

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