Column: Odd litigation funding deal in class action prompts Delaware judge to order full disclosure

Genworth Financial

26/08/2024 22:22

(The opinions expressed here are those of the author, a
columnist for Reuters.)
    By Alison Frankel
       Aug 26 (Reuters) - For litigation financiers backing
class actions in Delaware Chancery Court, weird facts have just
led to potentially problematic precedent.
    Vice Chancellor Nathan Cook ruled last week that class
action plaintiffs suing insurer Genworth Financial  GNW.N  and
several related Genworth entities must show defendants their
lawyers’ unredacted agreement with the outside funders that are
paying plaintiffs' counsel to prosecute the case. 
    The Delaware judge rejected arguments by plaintiffs' lawyers
at Shapiro Haber & Urmy and Andrews & Springer that the funding
agreement is irrelevant because the as-yet unidentified
financiers backing the case have pledged not to control or
interfere with the litigation.
    Class actions, Cook said, are not like ordinary cases in
which a plaintiff exercises a "heightened degree of oversight." 
So the risk of improper meddling by a third-party funder, the
judge wrote, "seems especially ripe."
    Cook, who appears to have delved deeply into scholarship on
litigation funding for class actions, said concerns about
conflicts of interest between plaintiffs and funders are
particularly acute when lawyers for the class have separately
contracted with a funder to pay their legal fees and expenses.
Class members — including the class representatives in this case
— may not even be aware of such deals, he said.
    The judge agreed with Genworth’s lawyers from Dentons;
Hueston Hennigan; and Richards, Layton & Finger that the
defendants are entitled to know the identity of the funder and
the terms of its deal in order to test their contention that the
class action is being driven by class counsel and their backers.
Genworth's brief opposing plaintiffs' motion for class
certification argues that the name plaintiffs are “asleep at the
switch” and have only a vague understanding of their own case.
    Cook’s ruling is the first Delaware Chancery Court decision
to address litigation funding disclosure in a class action.
Chancery Court judges, as Cook noted, have previously ruled in a
handful of cases that defendants were entitled to the production
of litigation funding agreements with redactions for
work-products privilege. 
    Plaintiffs' lawyers cited that privilege in their opposition
to Genworth’s motion to compel production of the litigation
funding agreement. But Cook, who has already seen the
six-paragraph funding deal after ordering plaintiffs in June to
produce the document for in-camera review, said in last week’s
decision that plaintiffs failed to explain why any part of the
document must be shielded.
    The agreement, he said, “does not reflect any opinion work
product, risk analyses or other meaningful reference to
strategy, mental impressions, or the lawsuit’s merits.”
    What it does show — and why I’ve described the circumstances
of this dispute as weird — is that funder behind the Genworth
class action is not a traditional litigation financier.
    Instead, according to Cook, the class action is apparently
being funded by Genworth competitors with an interest in
“financing litigation against a market peer.”
    The story laid out in briefing on Genworth’s motion to
compel disclosure of the funding agreement is even more odd.
    The class action, broadly speaking, alleges that the
Genworth defendants deliberately stripped assets and capital
from a subsidiary that provides long term care insurance.
Policyholders and insurance brokers contend that the allegedly
fraudulent transfers have left Genworth's long term care
subsidiary without sufficient resources to pay future claims by
policyholders and future commissions to brokers who sold the
policies. 
    The Genworth defendants insist that a 2016 restructuring,
which was thoroughly reviewed and approved by Delaware insurance
officials, was not fraudulent. They also argue that the
post-restructuring long term care business is in good financial
condition.
    None of that is particularly weird. But Genworth contends
that behind the scenes of the class action filed by Shapiro
Haber, another lawyer — Morgan, Lewis & Bockius insurance
regulatory partner Harold Horwich — was secretly communicating
with prospective class members.
    Horwich, according to privilege logs cited by Genworth,
began exchanging emails with prospective plaintiffs, including
another Morgan Lewis partner, in 2017, the year before Shapiro
Haber filed the class action in Chancery Court. His
communications with name plaintiffs continued into 2019.
    Horwich did not respond to my email query. Shapiro Haber
also did not respond.
    We don’t know exactly what the Morgan Lewis partner said in
these email exchanges with class members because the name
plaintiffs asserted privilege when Glenworth lawyers asked about
them. But Shapiro Haber has acknowledged that Horwich was
providing “legal advice about potential litigation” and Horwich
referred the plaintiffs to Shapiro Haber.
    Cook’s opinion did not refer to Horwich or his apparent role
in originating the case against Genworth. The defendants sought
to compel production of Horwich’s email exchanges, arguing that
privilege does not apply because he is not counsel of record in
the case. Cook reserved judgment on that request and said he
planned to issue an order for supplemental briefing.
    But in light of the judge’s revelation that the class action
is apparently being funded by Genworth competitors, it’s
reasonable to ask whether Horwich is somehow involved with those
competitors. If so, Cook’s concern about potential conflicts
between funders and absent class members seems all the more
justifiable.
    The vice chancellor acknowledged that his decision may
provoke “general concerns" that disclosure requirements will
chill litigation funding.
    He said in this case, that concern should be tempered by a
provision in the funding agreement that specifically said the
class action’s backers expected their deal to be “disclosed in
some fashion during litigation.” Cook said that expectation was
“perhaps unsurprising” because the funders are not traditional
litigation financiers.
    But his reasoning on the relevance of litigation funding
agreements in class actions is not limited to the unusual
circumstances of this case. Cook’s ruling is sure to provide
ammunition for litigation funding critics to argue that funders
can’t be trusted to defer to the interests of absent class
members.
    Like I said, strange facts have made caselaw that’s bad for
litigation funders.
    

 (Reporting By Alison Frankel)