By Allowing Litigation Funder to Recover From Ex-Player, Judge’s Ruling In NFL Concussion Litigation Both Raises Questions While Pointing To Possible Answer

By Allowing Litigation Funder to Recover From Ex-Player, Judge’s Ruling In NFL Concussion Litigation Both Raises Questions While Pointing To Possible Answer

As described here, the judge overseeing the $1 billion settlement of claims by ex-National Football League players against the NFL ordered attorneys for the ex-players to disclose information about prohibited litigation funding agreements.

The same judge, Anita B. Brody, in December, 2017, had ruled that litigation funding agreements were violative of the court’s order approving the settlement.

One litigation funding company appealed that ruling (see here).

The December 2017 ruling did not go as far as it could have, in that it did not preclude the litigation funding companies from seeking to recoveries of payments that they had made – a potential “no call” that is further described in this post here and in this LinkedIn article here.

More recently, Judge Brody issued a ruling in an instance where a litigation funding company sought such a recovery from an ex-player – see In Re NFL Players’ Concussion Injury Litigation, No. 2:12-md-02323-AB, MDL No. 2323, 2018 U.S. Dist. LEXIS 152594 (E.D. Pa. Jul. 25, 2018).  It’s a ruling that raises questions, and may point to at least something of an answer.

In her July 25 ruling, Judge Brody considered the motion of class member Andrew Stewart, who had entered into an assignment agreement with litigation funding company RD Legal Finance, LLC.  Judge Brody explained that “[a]fter Stewart was approved for a Monetary Award, RD Legal sought rescission of the agreement and receipt of the money it originally paid to Stewart absent any interest”, and that “Stewart filed a motion to direct the Claims Administrator to pay him a portion of the rescission amount” after which the Claims Administrator “has sought interpleader with the Court to determine the proper disbursement of the funds.”

Judge Brody reviewed the background of the claims, saying that in December, 2017, the Court entered an “Order addressing the assignment of monetary claims to Third- Party Funders” and explaining that under the the court-approved Settlement Agreement “any assignment or attempted assignment of a Class Member’s monetary claims to a third-party is ‘void, invalid and of no force and effect.'”  The December 2017 order said that litigation funding companies, under principles of rescission, “should be afforded an opportunity to recoup the initial payment to a Class Member”.  Judge Brody explained that ‘[i]f the Third-Party Funder is willing to accept rescission and execute a valid waiver relinquishing any claims or rights under the entire agreement creating the assignment or attempted assignment, then the Claims Administrator will be authorized to withhold — from the Class Member’s monetary award — the amount already paid to the Class Member under the agreement and return it to the Third-Party Funder.”

The Court, said Judge Brody, in February, 2018, “ordered the Claims Administrator to pay any Monetary Award directly to Class Members in situations where Class Members have entered into a prohibited assignment agreement with a Third-Party Funder, but the Funder has not agreed to rescission.”

The Claims Administrator created, and the Special Master adopted, “Rules Governing Assignment of Claims”, which require “every Class Member that qualifies for a Monetary Award to disclose whether he has entered into an assignment agreement or borrowed funds against his monetary claim” and, “[i]f he has, the Class Member must submit any such agreement for review” to allow the Claims Administrator and a Special Master to “review the document to determine whether it is a prohibited assignment with a Third- Party Funder.”  “If it is a prohibited assignment, then the Claims Administrator provides the Third-Party Funder with the option of rescission to recover the amount initially paid to the Class Member without interest”, but before “rescission is finalized, the Class Member can dispute the rescission amount, and then the Claims Administrator and a Special Master will determine how much to pay the Third- Party Funder.”  If the Third-Party Funder “rejects rescission, then the Class Member is directly paid the full Monetary Award . . . .”

Thus, a litigation funding company can “accept rescission and recover the principle payment to the Class Member, or the Third-Party Funder can reject rescission and face the strong possibility that it will be unable to recoup anything from the Class Member,” said Judge Brody.

In the case of class member Stewart, he had entered into three litigation funding agreement: (1) an October 2014 agreement with Ludas Capital for $108,000 at an annualized interest rate of 31.8%; (2) a December 2014 agreement with Ludas Capital for $77,000, also at a 31.8% rate, and (3) a January 2016 agreement with RD Legal, which was to pay Stewart $343,120.53 – $73,120.52 directly to Stewart, and $270,000 portion of that money to pay off monies owed by Stewart, by paying the successor in interest to Ludas Capital, Peachtree Financial, LLC, in both principal ($180,000) and interest on the Ludas agreements ($90,000).  “Like most litigation funding agreements, Stewart only owed RD Legal if and when he received a Monetary Award,” meaning that under the agreement with RD Legal, “Stewart’s obligation to RD Legal was not triggered until October 3, 2017, when he was notified by the Claims Administrator that he was entitled to a $700,000 Monetary Award” in February, 2018.  By that time, the Claims Administrator had examined the agreement with RD Legal and determined it to be a prohibited assignment.  “Consequently, the Claims Administrator issued notice to RD Legal that it could opt for rescission of the agreement.”  Stewart filed a motion to compel the Claims Administrator to pay him $90,000 out of the $343,120.53 rescission amount proposed by RD Legal, leading to the Claims Administrator to seek interpleader and guidance from the from the Court in determining the proper rescission amount.

Judge Brody ruled thatRD Legal was entitled to $343,120.53, “the full rescission amount that it requested.”

She reiterated that that the court has “broad jurisdiction over disputes regarding assignment agreements between Class Members and Third-Party Funders because assignment agreements violate the Settlement Agreement that is incorporated in the Court’s final approval order.”

The court pointed out that, just as it has the power to examine and alter attorneys’ contingent fee agreements to ensure reasonableness, it can “examine and alter funding agreements that directly affect Class Members’ Monetary Awards to ensure that such agreements are reasonable” and therefore “can impose terms of rescission upon parties that have entered into a prohibited assignment agreement.”

Said Judge Brody: “The Court’s rescission approach is based on equitable principles, and equitable rescission seeks to restore the ‘status quo ante.'”

In the case of the Stewart agreement with RD Legal, “[t]o restore the status quo ante between RD Legal and Stewart, RD Legal must receive the entire $343,120.53 that it paid to Stewart pursuant to the assignment agreement.”  The court rejected the argument by Stewart that the portion paid to Ludas Capital’s successor for interest should go to Stewart – that, she aid, would not result in the restoration of the status quo ante with RD Legal.

The court’s “broad” powers in this case no doubt include the power to “leave the parties where it finds them”.  While that is not a path to status quo ante, it is a long-standing method of addressing illegal contracts – and the court would have well been within its authority to conclude that the assignment agreements were illegal in that they violated a court order.  Once again, it seems the litigation funding companies may have benefited from a no-call in this case involving the NFL.  See (“A ‘No-Call’ In The NFL Concussion Settlement Litigation: Violation Of An Anti-Assignment Provision Did Not Lead Judge To Reach Question Of Sanctions“) here.  On the other hand, the choice that Judge Brody gave to litigation funding companies in this case and others may provide an explanation for the no-call: by allowing the litigation funding companies to choose to recover the amounts they paid, the court provided a path to recover only a limited amount while avoiding possible future litigation by lawsuit funding companies (regardless of whether they would eventually prevail on such claims) and the ex-NFL players who are members of the class.

For more, see a Law360 article, 3rd-Party Funder Recovers From Ex-NFLer’s Injury Payouthere.

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