status: draft

Diligence guide

Litigation finance diligence operates at multiple levels: single-case assessment for direct exposure, portfolio analysis for diversified structures, and manager evaluation for fund investments. This guide provides frameworks for each.

Case-level diligence

Single-case exposure is binary—you win or lose everything. Diligence must be exhaustive.

Legal merit assessment

Never rely solely on plaintiff’s counsel. Independent review is essential.

Diligence Element	Key Questions
Liability theory	Is the legal theory established or novel? Prior court rulings in similar cases?
Defenses	What defenses will defendant raise? How have those defenses performed historically?
Prior rulings	Any adverse summary judgment decisions or appellate rulings in comparable matters?
Documentation	Quality and completeness of documentary evidence? Chain of custody issues?
Witnesses	Are key witnesses available, credible, and cooperative? What’s the bench depth?
Procedural issues	Statute of limitations, jurisdiction challenges, class certification risk?

Red flags:

Liability theory depends on novel or untested legal arguments
Key evidence is circumstantial or depends on inferences
Single witness with no corroboration
Prior adverse rulings in substantially similar cases
Procedural challenges likely to delay or defeat claims

Damages analysis

Factor	Assessment Approach
Quantification methodology	How are damages calculated? Is the methodology accepted by courts?
Expert reports	Has plaintiff retained credible damages experts? Are conclusions defensible?
Comparable awards	What have similar cases recovered? Verdict search analysis
Settlement vs. trial	Expected settlement discount (typically 40-60% of trial value)
Punitive damages	Are punitives available? What multiple is realistic?
Collectability	Can damages actually be collected? (see Defendant Analysis)

Damages checklist:

Review expert reports for methodology and supportability
Analyze comparable verdicts and settlements in jurisdiction
Stress test damages assumptions (conservative, base, optimistic)
Understand the gap between claimed and supportable damages
Assess whether damages theory is aggressive or defensible

Duration modeling

Litigation timelines consistently exceed projections. Build in realistic buffers.

Phase	Typical Duration	Variance Factors
Discovery	12-24 months	Complexity, document volume, cooperation
Summary judgment	3-6 months	Court docket, motion practice
Trial	1-4 weeks	Complexity, jury vs. bench
Post-trial motions	3-6 months	JMOL, new trial motions
Appeal	12-24 months	Circuit backlogs, en banc risk

Duration diligence:

Factor	What to Review
Current status	Where is the case? What milestones are complete?
Scheduling orders	Court deadlines and realistic compliance
Docket history	Any delays, continuances, or judicial reassignments?
Judge patterns	Historical time to resolution for this judge
Appeals risk	Will defendant appeal? Is appealable issue present?
Settlement posture	Have parties negotiated? What’s the gap?

Rule of thumb: Add 50% to plaintiff counsel’s timeline estimate. Assume at least one appeal for any case over $10M.

Defendant analysis

A judgment is worthless if you cannot collect.

Factor	Assessment
Balance sheet	Assets, liquidity, debt load, going concern risk
Insurance coverage	Policy limits, coverage disputes, reservation of rights
D&O insurance	For fraud or fiduciary claims
Parent company	Can you pierce to parent or affiliates?
Bankruptcy risk	Will defendant file before judgment?
Jurisdiction	Where are assets? Is enforcement practical?

Insurance analysis checklist:

Obtain insurance policies (or reliable disclosure of limits)
Assess coverage applicability (what exclusions may apply?)
Review reservation of rights letters (insurer may dispute coverage)
Evaluate insurer financial strength
Consider stacking (multiple policy years or towers)

Cross-border enforcement:

For defendants with assets outside the US, assess:

Treaty obligations (bilateral investment treaties, enforcement conventions)
Local enforcement procedures and timelines
Asset tracing complexity and cost
Practical collectability given local law

status: draft

Portfolio-level diligence

Portfolio exposure shifts analysis from individual case merit to construction quality and diversification.

Diversification analysis

Dimension	Target Limit	Rationale
Single case	No >15% of committed capital	Limits binary loss impact
Single defendant	No >20% of committed capital	Defendant bankruptcy risk
Case type	No >30% in single type	Legal theory concentration
Law firm	No >40% with single firm	Firm financial risk
Jurisdiction	No >30% in single circuit/state	Judicial pattern risk
Resolution timing	Staggered maturities	Avoid J-curve concentration

Diversification checklist:

Map concentration by case type (contract, IP, securities, antitrust, etc.)
Map concentration by defendant (individual and related entities)
Map concentration by jurisdiction (federal circuit, state)
Map concentration by law firm (lead counsel)
Assess timing distribution (expected resolution years)

Correlation identification

Even “diversified” portfolios can have hidden correlations that cause simultaneous impairment.

Correlation Type	Example	Detection Method
Same defendant	Multiple cases against Company X	Entity mapping including affiliates
Same legal theory	Antitrust cases relying on same precedent	Legal theory categorization
Same jurisdiction	All cases before Delaware Chancery	Geographic analysis
Same judge	Multiple cases assigned to Judge Y	Docket review
Same industry	All cases against tech companies	Industry classification
Same economic trigger	Cases dependent on market conditions	Macro sensitivity analysis

Key question: What scenarios could impair multiple cases simultaneously?

Adverse appellate ruling on common legal theory
Defendant bankruptcy affecting multiple claims
Legislative change affecting case viability
Economic downturn affecting defendant ability to pay

Reserve and follow-on analysis

Portfolios require capital beyond initial case commitments.

Reserve Purpose	Typical Allocation
Cost overruns	15-25% of committed capital
Case extensions (appeals, retrials)	5-10%
Opportunistic additions	10-20%
Total reserve	25-35%

Stress testing:

Run scenarios where multiple cases require follow-on funding simultaneously:

What if 3 cases need overrun funding in the same quarter?
What if the largest case needs 2x the original budget?
What if resolution extends 18 months beyond projection?

Track record analysis

Historical performance is the best predictor of manager capability.

Metric	What to Assess
Win rate	Percentage of cases with positive recovery
MOIC by vintage	Multiple on invested capital by fund year
IRR by vintage	Time-weighted returns
Duration actual vs. projected	Accuracy of timeline estimates
Loss rate	Percentage of cases with zero recovery
Settlement vs. trial ratio	How cases resolve

Track record questions:

What is the historical win rate by case type?
How does actual duration compare to underwriting estimates?
What percentage of cases required follow-on funding?
How many cases were written off at zero vs. partial recovery?
What is the distribution of outcomes (hits vs. base hits vs. losses)?

status: draft

Funder/manager diligence

For fund investments, manager selection is as important as portfolio construction.

Team assessment

Factor	Evaluation Criteria
Legal expertise	Partners with litigation background? Specific practice area depth?
Investment experience	Prior fund management? Track record at prior shops?
Key-person risk	Dependence on 1-2 individuals? Succession planning?
Team stability	Turnover history? Departures after poor performance?
Sourcing network	Relationships with law firms, plaintiffs, brokers?
Conflicts committee	Independent oversight of investment decisions?

Key-person considerations:

Who are the 2-3 individuals the fund cannot lose?
What happens if they leave? (contractual provisions, track record attribution)
Is there a next generation being developed?

Investment process

Process Element	Best Practice
Case sourcing	Multiple channels; not dependent on single relationship
Initial screening	Clear criteria; high rejection rate (95%+)
Deep diligence	Independent legal review; damages analysis
Investment committee	Multiple approvers; documented rationale
Ongoing monitoring	Regular case updates; red flag identification
Exit discipline	Clear criteria for settlement vs. trial; write-down protocols

Process questions:

How many opportunities are reviewed vs. funded annually?
Who has approval authority? What are the thresholds?
How is ongoing case performance tracked?
What triggers a decision to cut losses vs. continue funding?

Conflicts analysis

Conflict Type	What to Assess
Law firm relationships	Does the funder have exclusive or preferential arrangements?
Co-investment	Does the GP co-invest personally? In which deals?
Fee arrangements	Management fee vs. carried interest balance
Case referrals	Is the funder paying for or receiving referral fees?
Multiple funds	Does the funder have multiple funds that could compete?
Secondary sales	Can the funder sell positions? To whom?

Alignment assessment

Factor	Strong Alignment	Weak Alignment
GP commitment	3%+ of fund size from GP	Minimal GP investment
Carried interest	20% after 8% preferred	Catch-up on dollar one
Fund lifecycle	Early in deployment	Late-stage with legacy positions
Performance fees	Whole-fund carry	Deal-by-deal with no clawback
Hurdle	8%+ preferred return	No hurdle

status: draft

Legal and structural diligence

Champerty and maintenance

Champerty (third-party financing for litigation share) remains a concern in certain jurisdictions.

Jurisdiction Status	Approach
Clearly permitted	CA, NY, TX, FL, IL, NV, AZ, NJ
Delaware	Champerty doctrine retained; courts skeptical of funder control
Uncertain	MN, AL, SC, GA, PA, OH

Delaware-specific caution:

Court of Chancery has expressed concern about funder control
Ensure plaintiff retains all litigation decisions
Frame settlement approval as economic protection only
Consider New York governing law for funding agreement
Obtain Delaware counsel enforceability opinion

Assignment validity

If the structure involves claim assignment:

Factor	Assessment
Assignability	Is this claim type assignable under applicable law?
Contractual restrictions	Does underlying contract prohibit assignment?
Notice requirements	Must defendant be notified? What are consequences?
Anti-assignment provisions	Are they enforceable in this jurisdiction?
Partial vs. full assignment	Different rules may apply

Privilege considerations

Properly structured funding can maintain attorney-client privilege.

Structure	Privilege Status
Funder reviews case memos	May waive privilege if funder not aligned party
Common interest agreement	Can protect communications if properly drafted
Work product sharing	Generally more protected than privilege
Funding agreement itself	Usually discoverable (not privileged)

Best practices:

Execute common interest agreement before sharing case materials
Involve counsel in all substantive discussions
Separate funding negotiation from case strategy communications
Mark privileged communications clearly
Assume funding agreement will be disclosed

Regulatory developments

Trend	Direction	Impact
Disclosure requirements	Expanding (federal, state, arbitration)	Structure for transparency
Champerty restrictions	Contracting (more states permitting)	Broader market access
Consumer regulation	Expanding	Potential spillover to commercial
Institutional acceptance	Growing	More standardized structures

Coming changes to monitor:

Federal Rules of Civil Procedure amendments on funding disclosure
State legislative activity (consumer protection spillover)
Arbitration institution rule updates
Bar association ethics opinions

status: draft

Diligence checklist summary

Single-case diligence

Independent legal merit review (not relying on plaintiff counsel alone)
Damages analysis with conservative, base, and optimistic scenarios
Duration modeling with realistic buffer (add 50% to estimates)
Defendant ability to pay (balance sheet + insurance + enforcement)
Lead counsel evaluation (track record, resources, alignment)
Governing law and champerty analysis

Portfolio diligence

Diversification mapping across all dimensions
Concentration limit compliance
Correlation identification (hidden dependencies)
Reserve adequacy and stress testing
Track record analysis by vintage and case type

Manager diligence

Team credentials and key-person risk
Investment process documentation
Conflicts identification and management
Alignment assessment (GP commit, carry structure)
Reference checks (law firms, LPs, co-investors)

Legal/structural diligence

Champerty risk assessment for relevant jurisdictions
Assignment validity (if applicable)
Privilege protection structures
Disclosure obligation mapping
Regulatory compliance confirmation

status: draft

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