Financing Litigation.

My birthplace in Northern California showed up in the news this week. The picture wasn't pretty.

The City of Lodi "borrowed $16 million from Lehman Brothers, at 25% interest, to finance litigation intended to force insurers and others to pay for the cleanup of the town's pervasive groundwater contamination, caused by dry cleaners and other local businesses." (L. Romney, "Lodi Settles Suit Against Lehman Bros.", L.A. Times, March 2, 2005, p. B3; emphasis added.)

With compounding interest, the loan ballooned to approximately $31 million. The City sued Lehman, alleging that Lehman conspired with City's former environmental attorney to profit from the loan to the City's detriment. (Id.) Lehman countersued for the allegedly unpaid balance of the loan. The parties settled their respective suits, and the City agreed to pay Lehman Bros. $6 million (bringing the total paid, or to be paid, to $9 million). (Id.)

As to the results of the underlying litigation, Lodi was reportedly able to obtain agreements to pay more than $6 million toward cleanup. (Id.) In addition, the City has a pending lawsuit for legal malpractice against the former environmental lawyer who allegedly used the borrowed funds to pay for his limousines and private planes. (Id.)

For background, financing litigation is nothing new. It's known as "champerty", as discussed in the Forbes article linked here. This piece also explains how Lehman came to be involved in loaning millions at 25% interest to the City to finance its environmental cleanup litigation.

In tomorrow's post, we'll discuss the options faced by litigants with claims, but no or insufficient resources to pursue them.