Practice Finance

Litigation funder's contracts leave some lawyers owing double the amount borrowed

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Lawyers who received litigation funding from Pravati Capital are sometimes tripped up by contract provisions that leave them owing more than double the amount that they borrowed.

Pravati Capital has taken at least 14 lawyer-borrowers to arbitration. At least seven of them were ordered to pay back more than twice the amount that they had borrowed no more than two years before, Bloomberg Law reports.

Bloomberg Law spoke with one lawyer, 81-year-old Brownsville, Texas, lawyer Christopher Phillippe, who borrowed $55,000 from Pravati Capital in March 2018. An arbitrator ruled that he owed more than $130,000 just 21 months after receiving the money—even though Phillippe netted only $3,000 in the only case that he won that was listed in the contract.

Litigation funders typically give money to lawyers preparing a lawsuit and require repayment only if the case wins.

“Pravati’s contracts regularly stretch the industry’s win-win concept by striking a claim to any case that walks through a law firm’s door and by ensuring it will be paid even if a big lawsuit is lost,” the article reports.

Pravati Capital said its contracts are not difficult to understand. It points out that arbitrators have ruled in its favor in all but one case.

“No one here has been misled,” Pravati said. “The people complaining to Bloomberg [Law] signed a contract, accepted advances and elected not to honor their end of the deal.”

Pravati Capital typically charges interest rates of about 18% to 22% annually. In Phillippe’s case, the interest was set at 20%. But in his case, the award to Pravati, including interest and fees, “was the equivalent of a deal that accrued interest at about 78% annually,” Bloomberg Law said.

“The technical reason funders can charge such high interest,” Bloomberg Law explained, “is their deals are structured as ‘non-recourse’ investments, meaning they only have a right to collect from the winnings of specific cases in the agreement. If a court were to find that a deal provided a funder a right to revenue from more than those cases, or regardless of their outcome, it could be considered a ‘recourse’ loan, which carries limits on interest rates.”

Bloomberg Law pointed to these contract provisions that are tripping up some lawyers:

• Pravati’s deals often tie the loan to pools of cases, and any win can trigger repayment obligations. “Investing in what the industry calls a ‘portfolio’ of a law firm’s cases lowers the risk for the funder, since it will have more chances to collect,” the article reports. “Under this approach, the more cases that are in the portfolio, the lower the risk.”

• Many Pravati contracts list specific cases that are subject to the agreement, and they also provide that the law firm will provide “all cases as collateral,” including all fees that the firm “now is or may hereafter become entitled to receive.”

“In Phillippe’s case,” Bloomberg Law reports, “he said he thought he agreed to pay Pravati back from fees generated by the 12 cases listed in his contract. He was surprised when the lender said he had breached the agreement by not paying Pravati ‘a single penny’ of revenue on other cases not specifically listed in the agreement.”

Disputes over which cases are viewed as collateral is an issue in several Pravati disputes, Bloomberg Law said.

• Pravati contracts often include an “interest reserve,” which is used to prevent interest payments from compounding for two years while cases progress. But the interest is then calculated from a principal amount that includes both the amount loaned to the firm and the amount in the interest reserve that it funded.

“A Bloomberg Law analysis of the provision in multiple Pravati deals shows the interest reserve provision is the primary reason the agreements can become so expensive so quickly,” the article reports.

• Pravati contracts require firms to provide regular financial and case reports. If the reports aren’t provided, Pravati can consider the borrower to be in default and charge an additional 6% in annual interest. A default can also convert the case to a recourse loan that requires repayment, even when there are no wins in any of the listed cases, according to allegations by a former employee who spoke with Bloomberg Law.

Alexander Chucri, CEO of Pravati, said Phillippe had valued his cases at $4 million before receiving the company’s money, and he threatened to file bankruptcy when he got behind on payments.

Chucri said lawyers choose the interest reserve provision after the company explains the benefit of avoiding compounding. There is “nothing nefarious” about the provision, Pravati said.

Chucri said lawyers “tend to wiggle out” of collection attempts.

“There is no upside to us to take these guys to arbitration. It’s a challenge for us,” Chucri told Bloomberg Law. “But it’s how we cover our costs while they try to defraud us. … I can’t let it go.”

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