Sunday, December 12, 2010

Taking a Cut of the Marital Estate

Readers of this blog may recall an earlier post about how investors are lining up to finance major tort litigation. Predictably, a service now exists that will help finance a divorce for certain parties.

The story, by Binyamin Appelbaum, reporting in last Sunday's the New York Times, tells of yet another instance in which parties to a lawsuit can seek outside help in financing litigation. Taking Sides in a Divorce, Chasing Profit, details the efforts of an investment company, Balance Point, to turn a profit by investing in divorce cases. So far, Balance Point seems to represent (1) women, (2) who do not have jobs, (3) who are raising small children, and (4) whose husbands run their own businesses.

Anyone who has ever handled a divorce case for such a client will immediately recognize the problems. The owner of a business, in full control of the financial records and the ability to hide assets, can stonewall discovery until the other party cannot sustain the litigation and must settle for less than their full due. Balance Point charges a percentage of the total amount of the settlement. To be profitable, Balance Point is only financing cases in which the net worth of the parties is somewhere between $2 mill and $15 million.

Regardless of the justice that might flow from such an arrangement there are recurring, troublesome ethical issues. For example, who is controlling the settlement? How dedicated are the investors? Are they in it for the long haul or do they look for short term returns on their money?

As Appelbaum points out in this series, this is a whole new development in the law. He writes -

While this business is in its infancy, Balance Point is part of a bigger trend — the growing industry that invests in other people’s lawsuits, arming plaintiffs with money to help them win more money from defendants. Banks, hedge funds and boutique firms like Balance Point now have a total of $1 billion invested in lawsuits at any given time, industry participants estimate.

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