Litigation Funding Contributes to Downfall of Tom Girardi and Erika Jayne – Why it Matters for The Insurance Defense Industry

Author: Cayce E. Lynch

Guest Editor: Kiran Gupta

Related Articles: California, Insurance, Litigation Funding

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April 1, 2022 10:01am

 

The case against powerhouse plaintiff’s lawyer Tom Girardi and his now former wife Erika Jayne, a singer and star of reality show “The Real Housewives of Beverly Hills,” is filled with all the details of a juicy crime novel and as many twists and turns as a Six Flags roller coaster.

In a lawsuit filed in Chicago federal court in 2020, law firm Edelson PC accused Girardi and Jayne of egregious misconduct, including the embezzlement of millions of dollars of settlement funds that should have been disbursed to families of victims of the Lion Air Flight 610 crash whom Girardi’s law firm, Girardi Keese, represented.  According to Edelson, Girardi instead funneled those settlement funds through Girardi Keese to pay for his and Jayne’s extravagant lifestyle.

Edelson further accused Girardi of engaging in a Ponzi scheme in which he used clients’ settlement money to cover personal expenses and pay debts.  The debts included amounts owed to litigation finance companies for financing Girardi’s firm secured to cover expenses related to the lawsuits.

 

Litigation Funding Can Lead to a Tangled Financial Web

It is important for defense attorneys and their clients to remain aware of the perils of litigation funding.  Under certain circumstances, litigation funding can tip the scales of justice, resulting in both social inflation and Nuclear Verdicts(R).

Girardi’s success as a well-known and accomplished trial lawyer attracted big lenders in the litigation funding industry.  Unfortunately, his business transactions to secure loans with these companies contributed to the mounting debts he owed and ultimately the end of his legal career.  As the lawsuit filed by Edelson PC stated, Girardi resorted to embezzling the proceeds to avert a downward spiral of mounting debt and dwindling funds.[i]

Edelson PC said it became aware Girardi Keese had not made full payments to clients who had settled their cases with Boeing and instead, Girardi allegedly entered into agreements to redirect money received by Girardi Keese to the law firm’s creditors, including the litigation funders.[ii]  The lawsuit named some of the firm’s creditors as defendants, alleging these creditors “knowingly demanded and received embezzled funds belonging to the Lion Air clients.[iii]

 

Why The Insurance Defense Industry Should Be Concerned About The Growth of Litigation Financing

Litigation funding firms bear the expenses incurred by plaintiffs when litigating a case in return for a percentage of the damages recovered or a multiple of the costs funded.  The litigation funding industry is growing rapidly.  According to litigation finance advisory firm Westfleet Advisors, litigation finance assets under management grew 18% in 2020, and funders executed $2.47 billion in U.S. transactions.[iv]  The number of litigation funders active in the U.S. market grew from 41 in 2019 to 46 in 2020, and those 46 funders had combined assets under management of $11.3 billion, up $1.7 billion from 2019.[v]

The use of a litigation funding agreement can create conflicts of interest that jeopardize an attorney’s duties to a client and, as exemplified by the Girardi case, create ethical violations.  The agreement may control the selection of counsel, preventing a client from discharging an attorney and seeking substitution of counsel; may affect plaintiff’s counsel’s professional judgment regarding what constitutes a reasonable case outcome; may affect plaintiff’s willingness to resolve the case early or through settlement negotiations because plaintiff is seeking a high jury award simply to cover repayment obligations; and may empower litigation finance companies to exert improper influence over plaintiff’s counsel’s case strategy.

Generally, courts have been inclined to deny defense counsel requests for disclosure of litigation funding agreements.  One report found 83% of courts deny defense’s requests through discovery.  In cases where the courts do allow the discovery of litigation funding agreements, only a limited amount of information must be disclosed.[vi]

 

Recommendations for The Defense Industry Related to Litigation Funding

The discoverability of litigation funding agreements is receiving widespread attention, and state and federal rules are being proposed to require disclosure.  Due to concerns raised by defense counsel who argued it is important for basic information at a minimum to be disclosed, New Jersey and California now require the disclosure of litigation funding agreements in federal district courts for class actions.[vii]  If a plaintiff refuses to disclose the existence of litigation funding or the court refuses to require disclosure, defense counsel can search publicly available information, such as Uniform Commercial Code (UCC) filings.

In August 2020, the American Bar Association (“ABA”) adopted guidelines for attorneys to take into consideration before entering into a litigation funding agreement.[viii]  Although the guidelines do not specify if, when, or what information needs to be disclosed, the guidelines do educate attorneys on how to navigate the area of litigation funding.  Specifically, the guidelines recommend the following:

  • the arrangement should be in writing;
  • the writing should clearly indicate: the non-recourse nature of the funder’s investment, how the funder will be compensated, who is responsible for paying the funder, the source of payment, and when the funder must be paid;
  • the arrangement should be structured in a manner that allows the client, or client’s attorney, to retain control of the litigation, as opposed to the lender; and
  • attorneys should be cautious when submitting case-related reports or predictions.[ix]

The guidelines provided by the ABA help outline for defense counsel the issues that can arise from a plaintiff’s use of litigation funding agreements.  When defending a case, defense counsel should determine if opposing counsel followed the above guidelines and whether opposing counsel complied with litigation funding laws applicable to the jurisdiction.  Litigation funding may also create potential ethical issues for plaintiffs’ attorneys, as it may interfere with their duties of loyalty, to provide conflict-free representation, and/or to exercise independent judgment.

Defense counsel can also support legislation that limits the ability of litigation funding companies to interfere with case resolution.  Several laws have been proposed to this effect in efforts to promote disclosure of the presence and financial interest of funders, prohibit kickbacks to medical providers and attorneys, and limit the fees charged by funders.[x]

 

Conclusion

Although the presence of litigation funding should not affect the underlying merits of a case, plaintiffs cannot help but be influenced by the obligations and demands put upon them by the funding company.  Litigation funding agreements inevitably affect case strategy and the likelihood of resolution.  Defense should consider the ABA guidelines for red flags related to litigation funding, seek full disclosure about funding agreements, and lobby for legislative changes to prevent funding companies from exerting influence.

 

 

 


[i] Reuters Staff, Tom Girardi and reality star wife sued for alleged theft of Lion Air settlement funds, Reuters, December 2, 2020, https://www.reuters.com/article/us-otc-girardi-idUKKBN28C3F7.

[ii] Id.

[iii] Id.

[iv] Westfleet Advisors, https://www.westfleetadvisors.com/publications/download-2020-litigation-finance-report/, https://www.westfleetadvisors.com/publications/download-2020-litigation-finance-report/, (last visited February 18, 2022).

[v] Westfleet Advisors, Supra note iv.

[vi] Angela Childers, Uptick In Third-Party Litigation Financing Concerning Insurers, Law360, (Feb 9, 2022, 9:45 PM EST), https://www.law360.com/insurance-authority/articles/1461818/uptick-in-third-party-litigation-financing-concerning-insurers.

[vii] In re: Amendment of Local Civil Rules, (D. N.J. June 21, 2021), https://www.njd.uscourts.gov/sites/njd/files/Order7.1.1%28signed%29.pdf; N.D. Cal., Standing Order for all Judges of the Northern District of California, § 19 (Jan. 17, 2017).

[viii] Resolution, American Bar Association, https://www.americanbar.org/content/dam/aba/directories/policy/annual-2020/111a-annual-2020.pdf, (last visited February 18, 2022).

[ix] Id.

[x] The New York State Senate, https://www.congress.gov/bill/117th-congress/house-bill/2025/actions?r=74&s=1 (last visited February 18, 2022); The New York State Senate, https://www.nysenate.gov/legislation/bills/2019/s4555 (last visited February 18, 2022).

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