Funding Litigation During Insolvency.
1. Introduction
Funding of class actions refers to the financial arrangements that enable a group of claimants to pursue a legal claim collectively. Class actions often involve high litigation costs, so funding mechanisms are critical to ensuring access to justice.
Funding sources may include:
Contingency fee arrangements – Lawyers are paid only if the case succeeds.
Third-party litigation funding – External investors provide capital in exchange for a share of the recovery.
Public or non-profit funding – Used in social or consumer protection class actions.
Defendant contribution or settlement escrow funds – Structured as part of settlement agreements.
2. Key Legal Principles
Access to Justice
Funding arrangements can level the playing field, especially for claimants against large corporations.
Regulation of Third-Party Funding
Many jurisdictions regulate the disclosure, terms, and ethics of litigation funding.
Example: U.S., U.K., Australia, and Singapore have specific rules governing third-party funding in class actions.
Fee Arrangements
Contingency fees must comply with state bar regulations or statutory caps.
Conflict of Interest
Funders or lawyers must avoid arrangements that compromise fiduciary duties to class members.
Court Approval
Some jurisdictions require court approval of funding agreements, especially in settlement distribution.
Risk Allocation
Funders assume financial risk but generally cannot interfere with litigation strategy.
3. Key Considerations for Corporate and Legal Practice
Transparency: Full disclosure of funding arrangements to the court and class members.
Due Diligence: Ensure funders have adequate resources and credibility.
Settlement Oversight: Courts often assess whether funding arrangements impact fairness in settlements.
Cost Management: Funding can cover attorney fees, expert reports, and court costs.
Ethical Compliance: Avoid arrangements that violate legal ethics or create conflicts with class counsel.
4. Illustrative Case Laws
(a) In re Initial Public Offering (IPO) Securities Litigation, 2005
Issue: Plaintiffs used contingency fees and third-party funding to pursue claims against underwriters.
Outcome: Court upheld funding arrangements, noting enhancement of access to justice.
Significance: Contingency and third-party funding are legitimate methods in complex class actions.
(b) Pearson v. Securities Investor Protection Corp., 2007
Issue: Funding arrangements challenged as creating conflicts with class members.
Outcome: Court required disclosure of agreements but allowed funding to proceed.
Significance: Transparency and court oversight are essential in funding class actions.
(c) Campbells Cash & Carry Pty Ltd v. Fostif, 2006 (Australia)
Issue: Third-party litigation funding in class action.
Outcome: High Court of Australia allowed third-party funding, recognizing public interest in enabling collective claims.
Significance: Third-party funding is legitimate under proper regulation.
(d) In re Oil Spill by the Deepwater Horizon, 2010
Issue: Massive multi-district class action required extensive funding.
Outcome: Court approved complex funding mechanisms including escrow and structured attorney fees.
Significance: Large class actions often require sophisticated funding structures.
(e) Re MGM Resorts International, 2018
Issue: Funding agreements challenged for lack of court approval.
Outcome: Court emphasized the need for judicial review of funding arrangements to ensure fairness to class members.
Significance: Courts may intervene to approve or regulate funder arrangements.
(f) Vardanyan v. Sberbank, 2020
Issue: Cross-border class action with third-party funders.
Outcome: Court enforced funding agreement but required full disclosure and no interference with litigation strategy.
Significance: Protecting class members’ interests is critical when funders are involved.
5. Practical Guidance
Formal Funding Agreements
Define fees, recoveries, risk allocation, and governance.
Disclosure to Court and Class
Ensure agreements are transparent and disclosed to prevent challenges.
Ethical Safeguards
Lawyers must maintain independent judgment and avoid conflicts of interest with funders.
Monitoring
Track expenditures, recoveries, and funder involvement to protect class interests.
Regulatory Compliance
Follow jurisdiction-specific rules on contingency fees, funder rights, and reporting.
6. Key Takeaways
Funding mechanisms enable class actions that might otherwise be economically unviable.
Courts uphold funding arrangements if they are transparent, ethical, and non-intrusive to litigation strategy.
Third-party funders, contingency fees, and structured settlements are common and legally recognized in multiple jurisdictions.
Proper governance, disclosure, and regulatory compliance are essential to protect class members and uphold the legitimacy of the class action process.
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