In a case that raises a corner of the cloak of secrecy around third-party litigation finance agreements, the Houston [1st] Court of Appeals has partially granted a law firm’s petition for writ of mandamus to overturn a trial court’s discovery order.
In re The Sydow Firm, PLLC and Michael D. Sydow (No. 01-23-00694-CV; May 9, 2024) arose from a breach of contract and declaratory judgment action brought by Virage, a commercial lender that provides loans to lawyers and law firms to finance litigation “against well-funded parties,” against the Houston personal-injury firm Sydow. Virage alleged that it entered into an agreement with Sydow to provide more than $2 million in funding for contingent fee cases and that Virage and Sydow had electronically executed the note. Under this agreement Sydow was required to report quarterly to Virage about the progress of the litigation (hmmm . . .) and grant Virage a security interest in any recovery. Virage alleged that it loaned the money on the agreement but had only received repayment of $22,425. Sydow moved to dismiss for lack of jurisdiction on the basis that Virage could not show it was a holder in due course of the note. Separately, Virage served written discovery on Sydow. Deeming Sydow’s responses insufficient, Virage moved to compel the requested discovery, specifically related to Sydown’s communications with a receiver in a turnover proceeding in a different trial court, documents concerning the collateral cases identified in the note, and financial information and records related to Sydow’s recovery of fees and expenses in matters covered by the note. The trial court denied Sydow’s motion to dismiss and excluded from Virage’s motion to compel only Sydow’s tax records. Sydow sought mandamus relief.
In an opinion by Justice Guerra, the court of appeals granted partial relief. Without much in the way of discussion, the court first denied Sydow’s petition as to the trial court’s jurisdictional ruling. Turning to Sydow’s complaint that Virage’s discovery requests were overbroad and not reasonably tailored to include only relevant matters, the court examined the requests that sought financial records Sydow argued were unconnected to the breach of contract case. Virage argued that it needed the information because Sydow never made the required quarterly reports and thus it didn’t know where the relevant recoveries actually were. The court went with Sydow, holding that Virage failed to show why its requests for all records and bank accounts could not be more narrowly tailored to be sufficient. The trial court thus abused its discretion by approving what essentially amounted to a “fishing expedition” in the firm’s financial information.
This case may show the tip of the third-party litigation finance iceberg. Without disclosure of these agreements up front, we are stuck waiting on the inevitable litigation between the funders and the attorneys over who gets what. We also wonder exactly what those “quarterly reports” entailed and whether Sydow may have thought that Virage was trying to run his lawsuits for him. Until we know exactly how these agreements work and who the funders are, we will not know much litigation financing agreements are distorting the practice of law and administration of justice.
In a case that raises a corner of the cloak of secrecy around third-party litigation finance agreements, the Houston [1st] Court of Appeals has partially granted a law firm’s petition for writ of mandamus to overturn a trial court’s discovery order.
In re The Sydow Firm, PLLC and Michael D. Sydow (No. 01-23-00694-CV; May 9, 2024) arose from a breach of contract and declaratory judgment action brought by Virage, a commercial lender that provides loans to lawyers and law firms to finance litigation “against well-funded parties,” against the Houston personal-injury firm Sydow. Virage alleged that it entered into an agreement with Sydow to provide more than $2 million in funding for contingent fee cases and that Virage and Sydow had electronically executed the note. Under this agreement Sydow was required to report quarterly to Virage about the progress of the litigation (hmmm . . .) and grant Virage a security interest in any recovery. Virage alleged that it loaned the money on the agreement but had only received repayment of $22,425. Sydow moved to dismiss for lack of jurisdiction on the basis that Virage could not show it was a holder in due course of the note. Separately, Virage served written discovery on Sydow. Deeming Sydow’s responses insufficient, Virage moved to compel the requested discovery, specifically related to Sydown’s communications with a receiver in a turnover proceeding in a different trial court, documents concerning the collateral cases identified in the note, and financial information and records related to Sydow’s recovery of fees and expenses in matters covered by the note. The trial court denied Sydow’s motion to dismiss and excluded from Virage’s motion to compel only Sydow’s tax records. Sydow sought mandamus relief.
In an opinion by Justice Guerra, the court of appeals granted partial relief. Without much in the way of discussion, the court first denied Sydow’s petition as to the trial court’s jurisdictional ruling. Turning to Sydow’s complaint that Virage’s discovery requests were overbroad and not reasonably tailored to include only relevant matters, the court examined the requests that sought financial records Sydow argued were unconnected to the breach of contract case. Virage argued that it needed the information because Sydow never made the required quarterly reports and thus it didn’t know where the relevant recoveries actually were. The court went with Sydow, holding that Virage failed to show why its requests for all records and bank accounts could not be more narrowly tailored to be sufficient. The trial court thus abused its discretion by approving what essentially amounted to a “fishing expedition” in the firm’s financial information.
This case may show the tip of the third-party litigation finance iceberg. Without disclosure of these agreements up front, we are stuck waiting on the inevitable litigation between the funders and the attorneys over who gets what. We also wonder exactly what those “quarterly reports” entailed and whether Sydow may have thought that Virage was trying to run his lawsuits for him. Until we know exactly how these agreements work and who the funders are, we will not know much litigation financing agreements are distorting the practice of law and administration of justice.
