Third-party funders that chased Liberian judgment face sanctions by federal judge

Taryn Phaneuf Aug. 23, 2016, 12:38pm


PHILADELPHIA — Called out for violating a U.S. district court order, a group of third-party litigation funders faces sanctions in a case that a defense attorney says illustrates the dark side of a growing industry.

Cigna Worldwide Insurance Co. has fought litigation brought by a Liberian corporation for more than 20 years. Most recently, millions of dollars in third-party funding kept alive an attempt to enforce a $66.5 million judgment against the company, ordered by a Liberian court after a U.S. judge ruled in Cigna’s favor. 

But the pursuit violated a 2001 order preventing the Liberian judgment from being enforced.

In July, U.S. District Judge Paul Diamond held the violators in contempt and criticized their “outrageous behavior,” calling it “an affront to Courts of the United States.”

Third-party litigation funding is a controversial industry with an estimated $3 billion value, Mary H. Terzino, an attorney and consultant who has studied the subject for the last six years, told Legal Newsline. Terzino has consulted with the U.S. Chamber Institute of Legal Reform, which owns Legal Newsline.

But the industry is difficult to assess because a lack of government oversight allows third-party funders to operate largely in the shadows. Few litigation investors share information, but two publicly traded companies — Bentham IMF and Burford Capital — publicize some financial information, Terzino said. 

It took years for defense attorneys working for Cigna to uncover who was involved with the ongoing Liberian litigation.

“It is difficult to determine how typical this situation is,” Terzino said of the Cigna lawsuit. “Most of the time, third-party funders operate under the radar, so unfortunately, most courts and defendants never learn whether funders are involved in their litigation.”

In 1991, The Abi Jaoudi and Azar Trading Corp. (AJA), a Liberian corporation, sued Cigna to force the insurance company to cover damage to AJA’s commercial properties sustained during the Liberian Civil War. 

The matter went to trial in the U.S. District Court for the Eastern District of Pennsylvania, where the judge overruled a jury verdict in AJA’s favor and siding, instead, with Cigna because the war-related damage in question was excluded by the insurance policy.

Instead of accepting the court’s decision, AJA took the matter to a Liberian court, which ruled in its favor and awarded $66.5 million in 1998. The company tried to enforce the Liberian court’s decision, so Cigna requested an anti-suit injunction to stop AJA from pursuing the matter in another jurisdiction. The U.S. court ordered the injunction in 2001.

Attempting to enforce a more favorable ruling violated the U.S. court’s authority, Cigna's attorney, Donald Hawthorne of Axinn Veltrop & Harkrider, said. AJA brought its case to the district court, where it lost. It also lost an appeal to the U.S. Court of Appeals for the Third Circuit, and the U.S. Supreme Court declined to hear the case.

“You had the benefit of U.S. justice,” Hawthorne said. “You’re bound by that judgment.”

But AJA continued its attempts to enforce the Liberian judgment. The Liberian court ruled that the U.S. injunction was unenforceable. AJA’s next step was to get help from outside sources. It retained two lawyers: Martin Kenney, a dual Irish and Canadian citizen based in the British Virgin Islands who had practiced as a foreign legal consultant in New York, and Samuel Lohman, a U.S. citizen and an Oregon lawyer with an office in Switzerland.

According to court documents, those two formed CCI, Ltd., to pursue litigation against Cigna at a court in a neutral jurisdiction. AJA gave CCI the right to receive any proceeds from enforcing the Liberian judgment. They also worked with 22 other Liberian companies that had brought similar lawsuits against Cigna. 

Their next step was to find money. They contacted Garrett Kelleher, an Irish property developer, who agreed to invest $2.85 million.

In 2007, the Liberian court appointed the country’s commissioner of insurance as receiver to collect on debts owed to Cigna’s “Liberian Branch.” The receiver, who was counseled by Lohman and Kenney, sued ACE Limited, an insurance company that agreed to indemnify Cigna for its Liberian liabilities, in a court in the Cayman Islands to enforce the Liberian judgment.

Hawthorne said when that lawsuit was filed, attorneys involved in the defense suspected third-party funders were involved.

“The case was being pursued in the Cayman Islands by the Liberian receiver, who we do not think had a financial incentive,” he said.

However, at the time, the players funding the litigation were veiled. After ACE asked the Philadelphia court to enforce the injunction, it took years to reveal who was behind the continuing litigation. They finally were able to track down the funders, and Judge Diamond held them in contempt for violating the 2001 injunction.

“Although their contumacious conduct in the Cayman Islands litigation appears to have ceased, respondents may well decide to seek enforcement of the Liberian judgment in yet another jurisdiction,” Diamond wrote in his decision. “Because contempt sanctions could deter such wrongful conduct and would compensate (Cigna) for the costs it has incurred, a contempt citation is entirely proper.”

This case had similarities to a 2010 suit in which third-party funding was used in claims filed in Ecuador against Chevron, Terizo said.

In that case, Burford, a U.S.-based company that engages in international third-party litigation funding, invested $4 million with the plaintiffs’ lawyers for a percentage of any award. At the time Burford invested, U.S. courts had already made rulings on discovery disputes that found evidence of fraud in the Ecuador case. 

In 2011, the Ecuadorian court ruled in the plaintiffs’ favor and awarded an $18 billion judgment.

A federal judge in New York ultimately ruled the Ecuadorian verdict was the product of fraud on the part of plaintiffs attorney Steven Donziger, and that ruling was recently affirmed by the U.S. Court of Appeals for the Second Circuit.

“Chevron sued the plaintiffs’ lawyers in U.S. federal court, and the court in that case found that there had been fraud, bribery and other dishonest dealings leading to the judgment. Burford backed out of the case – but sold its interest to other investors,” Terzino said. 

“That situation, and the Liberian case, both demonstrate that third-party funders have high-risk appetites and are willing to back claims of questionable merit.”

Terzino said this case shows the need for greater transparency of litigation-funding arrangements, and the Liberian case should serve as a “cautionary tale.”

“It is difficult to know exactly how much (third-party litigation funding) is being used in the United States, since funders claim confidentiality about their funding arrangements and are generally not required to disclose them to the courts in which their cases are litigated. But it is clear that third party funding is growing,” she said.

Instead of funding individual commercial claims, the industry has shifted to include other models, such as investing in a portfolio of cases. Terzino said those portfolios may include a blend of low- and high-risk investments, which makes it more likely that cases of questionable merit will be included. Some investors even crowdfund to attract investors.

More third-party funding in lawsuits could have a number of consequences. Terzino said it could lead to more lawsuits, and choices about which cases to back may be based on the likelihood of a settlement, rather than the merits.

“Litigation financing also takes control away from the claimant, which is problematic if there is a conflict between the funder and the claimant. This is particularly a concern in portfolio funding, where the law firm’s very viability may be dependent on the funder’s investment, giving the funder a great deal of influence,” Terzino said.

 “And unlike lawyers, funders do not owe a duty of loyalty to the plaintiff. Their sole interest is in making money off of the lawsuit.”

Despite his experience in the Cigna case, Hawthorne said he isn’t against all instances of third-party funding.

“This case highlights there are funders who follow the rules and funders who are inclined not to do so,” Hawthorne said. “In this case, it clearly perpetuated an unfounded claim and gave rise to absolutely unwarranted expenses.

“This is really a case that’s beyond the pale. It’s not a situation of needy parties who have a good faith claim and who have a shortage of cash.”

Even within this example, only some funders involved pushed the case forward despite an injunction by a U.S. court order. Others attempted to avoid funding a case that violated the injunction.

“I’m not an enemy to litigation funding by any means. In the appropriate circumstances, I would consider it for my cases,” Hawthorne said. “Notwithstanding that, I think this was a situation that was egregious. It shows the potential for problems.”

Terzino said mandating some transparency in litigation funding would be a good start to creating oversight for the industry. In U.S. federal courts, that would require amending the federal rules of civil procedure. That idea is opposed by large funders.

Beyond disclosure, she suggested rules that would maintain claimant control of a case, require funders to act in the claimant’s best interest and cap the funder’s portion of any award in a case.

“It does not appear that this industry is going away. Yet we should all be concerned that the practice of litigation financing — a way to make money from investing in the judicial process — is virtually unregulated,” she said. “Oversight by a federal agency would mean that there can be meaningful, enforceable consequences for breaking the rules.”

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