WILMINGTON, Del. (Legal Newsline) - Lawyers in a dispute with their litigation funder are urging a federal judge not to listen to a magistrate judge who feels they must pay $1.8 million.
Spencer Hosie and Diane Rice, of Hosie Rice LLP, filed objections to Magistrate Judge Sherry Fallon's report and recommendations in favor of Frome Wye Limited, a subsidiary of Woodford Litigation Financing.
Frome Wye said it was owed $800,000 from $4 million Hosie Rice recovered from a client. An arbitration panel agreed, adding more than $1 million in interest, and Hosie Rice took to federal court to try to vacate that judgment.
But Fallon says that shouldn't happen. It will be up to presiding judge Colm Felix Connolly to study her report and issue a final judgment.
At issue is the nature of the $4 million recovered. Hosie Rice says it was a hybrid agreement - part-contingency fee and part-hourly fee - and not subject to the funding agreement between it and Frome Wye, which stipulated payback from contingency fees.
"The decision to cast the Partners (Hosie and Rice) as guarantors and deny them the benefit of the usury statute directly contradicted the (Law Firm Funding Agreement)," Hosie Rice says.
"The two (arbitration) Panel opinions assumed their premise that the partners were guarantors, and cited essentially no law on this point other than copying irrelevant cases from the Petitione's brief.
"The Panel rewrote the plain meaning of the LFFA. And it did so with nearly no citations to the profuse LFFA provision on point."
As co-borrowers and not guarantors, Hosie and Rice say, they were entitled to protection of the Delaware usury law.
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.