WILMINGTON, Del. (Legal Newsline) - Lawyers who decided to bring in a financial backer to help pay for litigation (on a 26% interest rate) were left defending their home during a series of disagreements with their client, the funder and an arbitration panel.
Spencer Hosie and Diane Rice are in Delaware federal court fighting an arbitration award in favor of Frome Wye Limited, a subsidiary of Woodsford Litigation Funding. At issue is whether a funding agreement between Hosie Rice, a Northern California firm, and Frome Wye applies to $4 million the firm recovered.
When Hosie Rice figured it had paid all its debts to Frome Wye, the two name partners - who are married - received a surprise.
"Without telling Mr. Hosie or Ms. Rice, Woodsford then tried to foreclose on their personal residence of over 30 years, which was security as both Hosie and Rice were co-borrowers under the (litigation funding agreement)..." the firm wrote on Aug. 30 in Delaware federal court.
"Woodsford did not disclose this foreclosure effort, although the parties were in frequent contact, and it did not service Hosie, Rice or the firm..."
The story starts in October 2018, when Frome Wye decided to fund the firm's caseload. Litigation funders play the civil justice system soft of like a stock market, by paying the costs of lawsuits in exchange for a percentage of what is recovered that often exceeds state usury laws.
Because litigation funders say they recover nothing if the case fails, they - in most states - avoid laws against high interest rates. The annual interest rate in Hosie Rice's contract was 26%, and it was required to pay back the principle on the loan plus $250,000 as soon as it recovered that much in litigation.
By April 2019, the firm had borrowed $1.35 million, but had paid $800,000 to Frome Wye in December. That amount represented the original $550,000 principle from October 2018 plus the $250,000 immediate payment, the firm said.
The $800,000 the firm asked for in early 2019 remains unpaid, Frome Wye says, even after Hosie Rice client Space Data Corporation was ordered to pay the firm $4 million. But Hosie Rice says Space Data wasn't paying on a pure contingency fee, and thus what it recovered isn't owed to Frome Wye.
Space Data, a wireless services company, sued Google for patent infringement and violation of a non-disclosure agreement. It agreed to pay Hosie Rice reduced hourly fees, while the firm was to take a reduced contingency fee - a so-called "hybrid" agreement.
Space Data refused to pay, but an arbitrator ruled it owed Hosie Rice $4 million; the firm believed it was all in hourly fees and nothing was classified a contingency fee. But Frome Wye still wanted what it felt was its piece of the award, and when it wasn't paid, in August 2020 initiated foreclosure proceedings on Hosie and Rice's home of more than 30 years.
That judicial foreclosure was stopped later that year, but Frome Wye prevailed in arbitration in May 2022. A panel ruled Hosie Rice owed Frome Wye the $800,000 plus interest that ballooned the award to $1,817,000.
Hosie Rice is now in court arguing the arbitration panel was only supposed to decide a threshold issue that would determine how discovery was conducted but instead issued an opinion on the merits of the case without allowing Hosie Rice to make craft its argument.
"(D)id Woodsford have an interest in the monthly fees due regardless of outcome or not," the firm wrote. "This threshold question materially shaped relevant issues and so prospective discovery.
"For exmple, Delaware usury law does not apply to a non-recourse financing; it does apply to a recourse financing. The usury issue was, therefore, dependent on how the panel resolved the threshold contract question."