How TPLF Further Corrupts MDL: Lawyers-as-Lawyers vs. Lawyers-as-Financiers

Esquire Bank: A Case Study

I. INTRODUCTION

Third-Party Litigation Funding

Third-party litigation financing (TPLF), also referred to as litigation funding or alternative litigation financing, is an arrangement in which a funder that is not a party to a lawsuit agrees to provide nonrecourse funding to a litigant or law firm in exchange for an interest in the potential recovery in a lawsuit.

Plaintiffs that win their cases will generally repay the funder the amount funded plus a return on their investment as outlined in the TPLF agreement. Return structures can vary. Examples include returns based on a multiple of what a funder invested, a pre-negotiated percentage of the recovery, or a percentage rate of return.

TPLF has raised concerns about the transparency of these arrangements and the high fees litigation funders charge their clients. TPLF has turned the courts into profit centers.

Regulation of TPLF

There are few rules dealing with third-party litigation funding. Advances from third-party litigation funders typically operate in much the same way as payday lenders.

The U.S. District Court for the Northern District of California is the only federal court in the country specifically mandating parties involved in class actions to disclose any agreements with third-party funders. The Court revised Civil Local Rule 3-15 requiring the disclosure of nonparty interested entities or persons that are funding the prosecution of any claim or counterclaim in any proposed class, collective, or representative action.

RD Legal Capital, LLC and RD Legal Funding, LLC

On July 14, 2016, the Securities and Exchange Commission (SEC) announced fraud charges against RD Legal Capital, LLC, et al. (RDLC). Investors testified that they were enticed by marketing representations that RDLC funds invested only in settled or otherwise resolved cases and did not take on litigation risk. SEC alleged that RDLC made materially false and misleading statements in violation of the antifraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 because at times 90% of the funds’ portfolios were tied up in unsettled cases that involved litigation risk.

On October 15, 2018, the SEC issued an initial decision ordering, in pertinent part, Roni Dersowitz, the president, CEO, and owner of RDLC, to pay a civil monetary penalty in the amount of $56,250, ordering RDLC to pay a civil monetary penalty in the amount of $575,000, and ordering RDLC “to cease and desist from further violations.” These penalties do not even amount to a slap on the wrist.

On February 7, 2017, the Consumer Financial Protection Bureau (CFPB) and the New York Attorney General’s office filed a federal lawsuit against RD Legal Funding, LLC, et al. (RD). RD is a TPLF institution that offered financial advances to police officers, firefighters and other first responders to the 9/11 terrorist attack who were awaiting compensation and settlement payouts. Many first responders to the 9/11 terrorist attack later suffered respiratory illnesses, cancers and other ailments deemed related to their efforts at Ground Zero in New York City. RD similarly targeted former National Football League players diagnosed with Alzheimer's disease and other playing career-related illnesses that made them eligible for payments from a class action court settlement, the lawsuit alleged. The lawsuit further alleges that “on many of their loans in New York, RD collected an effective interest rate ranging from 18% to over 250%. These interest rates exceed New York’s civil usury cap of 16% and criminal usury cap of 25%.”

The first responders and former NFL players usually had to wait for their payments. As they waited, RD would “swoop in with a ‘deal,’” the lawsuit alleged. The company provided upfront payments, “which the consumers repay when they receive their awards.”

Using confusing contracts that misrepresented the advance terms, RD allegedly misled the consumers into approving deals with repayments that doubled or tripled the total amounts advanced by RD. “RD’s misconduct thus costs consumers millions of dollars,” the lawsuit charged.

“The alleged actions by RD - scamming 9/11 heroes and former NFL players struggling with severe injuries - are simply shameful,” New York Attorney General Eric Schneiderman said in a statement announcing the lawsuit. CFPB Director Richard Cordray said the lawsuit “seeks to end this illegal scheme and get money back to those entitled to receive it.”

The case was delayed for three years over questions about the CFPB’s legal authority.

On November 23, 2022, RD settled the predatory lending lawsuit brought by the NYAG and the CFPB for just $1.

The RDLC case illustrates how the SEC is incapable of sufficiently protecting investors from fraud by TPLF institutions. The RD case illustrates how the CFPB is incapable of adequately protecting consumers (e.g., mass tort victims, MDL plaintiffs and non-PSC attorneys) from predatory and usurious TPLF parties.

Usury is regulated and enforced primarily by state usury laws, including the rate of interest determined to be usurious. However, there are federal laws that may also apply to predatory and usurious TPLF parties, including the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1961, et seq. Violators can incur civil and criminal penalties.

Multidistrict Litigation (MDL)

Since the creation of the Judicial Panel on Multidistrict Litigation (JPML) in 1968, there have been 1,056,706 civil actions centralized for pretrial proceedings. As of September 30, 2021, a total of 17,357 actions had been remanded for trial and 647,396 actions had been terminated in the transferee court. At the end of this statistical year, there were 391,953 actions pending in 184 Multidistrict Litigations (MDLs) in 45 transferee district courts. New data from the JPML and the United States Courts, analyzed by Lawyers for Civil Justice (LCJ), shows that over 70% of the federal civil caseload (391,953 cases out of 559,653 federal civil cases) resides in MDLs as of the end of fiscal year 2021 (FY21). Over the past decade, there has been a rapid rise in the percentage of the civil caseload in MDLs, an increase in concentration of 142% since FY12.

See Donovan v. Barbier, et al. complaint, Case 8:20-cv-02598, Paragraphs 19 through 28 for an overview of the Multidistrict Litigation Statute (28 U.S.C. § 1407).

How TPLF Further Corrupts MDL

When lawyers serve as both directors of TPLF institutions and lead counsel in multidistrict litigation, they can potentially manipulate the duration of the lawsuit for their own financial gain.

The director/lead counsel may profit by delaying the claims administration process to increase the amount of interest collected by the TPLF institution. This delay may also increase the number of plaintiffs who need to take cash advances from the TPLF in order to financially survive until they receive their settlement payout.

Additionally, if the lead counsel is an investor in a publicly traded TPLF institution, the conflict is greater. The delay, which results in the TPLF institution being able to collect more interest, benefits the lead counsel-investor in the form of stock appreciation and dividends. In sum, the potential exists for the lead counsel-investor to profit at the expense of other lawyers (by delaying the disbursement of common-benefit fund money) and the MDL plaintiffs (by delaying settlement payments).

The director/lead counsel also profits from recommending the TPLF institution to MDL plaintiffs and attorneys for MDL plaintiffs. He also is in position to help the TPLF institution develop its settlement funding program.

As I point out in the Donovan v. Barbier, et al. complaint, members of the MDL 2179 PSC and their law firms excessively compensated themselves by “quadruple dipping.” The known sources of compensation received by the members of the PSC and their law firms in MDL 2179 are: (a) common benefit Fees; (b) contingent fees; (c) co-counsel fees; and (d) hold-backs. The total compensation paid to these 19 PSC attorneys and their law firms is guesstimated to be $3.035 billion. It is beyond cavil that a reasonable, objective observer would not conclude that this amount is out of all proportion to the value of the professional services rendered.

TPLF provides lead counsel in any MDL an opportunity to benefit from an additional layer of greed and corruption. The conduct of Esquire Bank’s directors, lead counsel in the Chinese Drywall MDL, and lead counsel in the NFL Concussion MDL is instructive.

II. ESQUIRE BANK

Esquire Bank, a subsidiary of Esquire Financial Holdings, Inc., was founded on October 12, 2006. Russ M. Herman, Stephen J. Herman’s father, has been a member of the Esquire Bank board of directors since 2007. John B. Morgan has been a member of the Esquire Bank board of directors since 2015. Mr. Morgan founded Morgan & Morgan. On its website, Morgan & Morgan boasts that it is “America's Largest Personal Injury Law Firm.” While John B. Morgan serves on the board of directors of Esquire, Morgan & Morgan attorneys serve as Co-Lead Counsel in numerous MDLs.

Esquire Bank has been actively providing TPLF to litigants, PSC members, non-PSC members, and law firms in various MDLs in a predatory and usurious manner for at least a decade.

Esquire Financial Holdings, Inc. FORM 10-Q filed with the SEC for the quarterly period ended September 30, 2022 boasts:

“Litigation Market Commercial Banking. The litigation market has been and will continue to be a significant growth opportunity for our Company as we offer focused and tailored products and services to law firms nationally. U.S. tort actions alone are estimated to consume 1.5% - 2.0% of U.S. GDP annually according to the Towers Watson 2011 Update on U.S. Tort Cost Trends or a total addressable market (‘TAM’) of $429 billion according to the U.S. Chamber Institute for Legal Reform’s report ‘Costs and Compensation of the U.S. Tort System’;

Our off-balance sheet commercial litigation funds of $496.1 million at September 30, 2022, represents a highly desirable core low-cost funding platform for the entire company fueling growth in other lending areas; and

At September 30, 2022, our Litigation-Related loans, which include commercial loans to law firms and consumer lending to plaintiffs/claimants and attorneys, totaled $402.7 million, or 46.0% of our total loan portfolio. We remain focused on prudently growing our Litigation-Related loan portfolio.”

Chinese Drywall MDL (MDL 2047)

When Esquire Bank went public in 2017, it marketed itself to investors as a new kind of financial institution, built by attorneys for attorneys. The bank promised to leverage the relationships of the prominent trial lawyers on its board of directors and advisory board - among them Russ Herman of Herman Herman & Katz, a pre-IPO investor in Esquire - to capitalize on the surge in litigation finance as an alternative asset class.

The Yance Memorandum of Law

On May 18, 2018, R. Tucker Yance of the Yance Law Firm filed a motion and memorandum of law in the Chinese Drywall MDL (MDL 2047). In his memorandum of law, Yance pointed out that on September 9, 2013, the Court authorized the creation of numerous Qualified Settlement Funds appointing Esquire Bank as the Depository Bank for the QSFs upon motion to do so by Liaison Counsel Russ M. Herman and Lead Counsel Arnold Levin filed on August 19, 2013. Numerous Attorney Fee Qualified Settlement Funds (“QSFs”) are among the QSFs established by the Court on said date. On February 1, 2016, the Court ordered all the Attorney Fee QSFs to be consolidated into one Attorney Fee QSF. Esquire Bank was unreasonably small in relation to the approximately $200 million of attorney fees deposited therein. Esquire Bank is far from a traditional bank. Despite the fact that it holds itself out as a “national bank,” it only has one operating branch in the entire nation (located in Garden City, NY). It is a bank that was started by lawyers, for lawyers and is founded upon new-age financing instruments such as attorney case cost financing, working lines of credit for attorneys, attorney fee advances, and other loan instruments, most of which are secured in large part by attorney case inventories and undistributed settlement funds.

There also existed multi-faceted conflicts of interest pertaining to Esquire Bank continuing to serve as the Depository Bank. For example, Liaison Counsel MDL 2047 and Co-Chair of the Fee Committee, Russ Herman, serves on the Board of Directors of Esquire Bank. In fact, Mr. Herman is one of the longest standing Members of the Board of Directors of Esquire Bank and has been serving since shortly after the bank’s creation. Russ Herman owns 62,412 shares of Esquire Financial stock allegedly valued at $1.4 million, as do several of his family members, including his son Stephen J. Herman (Co-Liaison Counsel MDL 2179, Co-Lead Class Counsel for the BP Settlement Classes and Co-Chair of the Fee Committee).

How Russ Herman Took Advantage of the $200 Million in Deposits from the MDL 2047 Attorneys’ Fee Account to Position Esquire for an IPO

In June 2017, Esquire Bank’s holding company engaged in an initial public offering (“IPO”) and now the stock is publicly traded on the Nasdaq stock exchange under the Ticker symbol “ESQ.” Esquire Bank only had a mere $290 million in deposits reported on its balance sheet in 2014 (the year after Esquire Bank was appointed by the Court in this case) and $383 million in deposits at the time of the IPO. At September 30, 2022, total deposits were $1.2 billion.

The Attorney Fee QSF deposited with Esquire Bank appears to have been a major factor in marketing their stock for sale to the public in their IPO. If the entire Attorney Fee QSF was placed in “on-balance sheet” deposit accounts at the time of the IPO, the QSF accounted for approximately 52% of the total deposits advertised to the public. If the entire Attorney Fee QSF was put in “off-balance sheet” sweep accounts with Esquire, the QSF accounted for 99.5% of their off-balance sheet sweeps they highlighted in their “Investment Highlights” section of their IPO Free Writing Prospectus presentation and confirmed in their full Prospectus. In sum, the Attorney Fee QSF clearly seems to have been an extraordinarily major component of Esquire Bank’s overall financial picture at the time they advertised their stock for sale to the public.

It is worth pointing out, Esquire Bank appears to have paid a near zero interest rate on the subject $200 million QSF while holding it for more than four years. On June 6, 2016, Court-appointed CPA, Phillip Garret signed an affidavit attaching an “Attorney Fee Reconciliation” showing that as of February 29, 2016, the total interest that had been earned by the deposited attorney fees in an entire two-year period totaled a mere $83,711.98. This equates to an approximate annual percentage rate of 0.02%.

In its Initial Public Offering prospectus, Esquire boasted about its very low “cost of deposits”, or to put it in layman’s terms - Esquire doesn’t pay much interest on deposits. It also very clearly boasted about its business model and how the legal settlement process and the delays inherent therein provide multiple “loan and deposit opportunities” and how those opportunities are “funded with core low-cost settlement escrow and commercial operating deposits from law firms, claims administrators, lien resolution firms, courts, etc.”

Esquire Bank, While Paying a Near Zero Interest Rate on Attorney Fee QSFs Uses the $200 Million to Secure Loans and Other Financing for Plaintiffs’ Lawyers Who Are Being Charged Approximately 7% Interest or Higher

Esquire Bank, while paying a near zero interest rate on the Attorney Fee QSFs in this case (0.02%), is actively lending money to attorneys who one day expect to receive a portion of those attorney fees in this case, in the form of loans, attorney fee advances, attorney lines of credit and/or other financing instruments secured by each borrowing attorney’s portion of the very cash in the very QSFs this Court appointed Esquire to hold and manage. Esquire is typically charging these attorneys approximately “prime plus two and a half” (i.e., around 7%) on these instruments. Clearly, Esquire Bank has a very significant financial incentive to hold onto the cash in the QSFs as long as possible.

Esquire, in its IPO and Annual Report has been quite brazen about the fact that there are “well-known” mass tort litigators on its board of directors and that Esquire intends to continue to “leverage” those contacts to attract deposits - including landing more mass tort business and scoring more court-appointed settlement deposits.

Russ Herman, as Liaison Counsel in MDL 2047 and Co-Chair of the Fee Committee controls to a large degree the speed with which the attorney fee phase of this case proceeds. As a longstanding member of the Esquire Bank Board of Directors being paid approximately fifty to one hundred thousand dollars per year in salary and stock options to serve, Mr. Herman has a significant interest in seeing to it that Esquire is profitable and maintains and/or grows its stock price.

Yance moved the Court for an Order to immediately transfer each and every Attorney Fee Qualified Settlement Fund established in this action to a different Depository Bank or back into the Court Registry until final disbursement. On June 12, 2018, Judge Fallon entered an order directing that the Attorney Fee Qualified Settlement Fund shall be transferred from the Esquire Bank to the court’s registry.

This raises two questions. (1) Why did Judge Fallon appoint Esquire in 2013, then a very small, private institution, to serve as the depositor bank for the $200 million attorneys’ fee fund? (2) Why did Judge Fallon wait five years to transfer the fund from Esquire Bank to the court’s registry when he was most assuredly aware of Russ Herman’s egregious conduct?

NFL Concussion MDL (MDL 2323)

From 2012 to May 2016 Christopher Seeger, while serving as Co-Lead Class Counsel in MDL 2323, was on the board of directors of Esquire Financial Holdings, the parent company of Esquire Bank. Esquire Bank, a third-party litigation funder similar to RD Legal Funding, LLC, made loans to NFL players seeking quick financial help. Seeger referred plaintiffs to Esquire Bank which offered the NFL players interest-charging cash advances on their settlement proceeds. Seeger never informed the NFL players that he was a board member of the bank’s parent company.

Many NFL players and their families found it too time-consuming and expensive to work their way through the claims process, and hundreds struck deals with third party litigation funders. These litigation funders offer money up front in exchange for settlement awards, sometimes charging the equivalent of 40% or higher annual interest rates.

“We take the weight off your shoulders,” reads one pitch from a third-party litigation funder, while another urges borrowers to “accelerate your award.” Yet these borrowers are a very specific and vulnerable group: short-of-cash former N.F.L. players with cognitive impairment from years of collisions on the field.

Seeger’s allegiance was to an agreement with the NFL more so than the individual players he was appointed to represent, and therein lies a major conflict of interest. Another conflict-of-interest rests in the fact that Seeger negotiated common benefit fees directly with the NFL, from which he will receive the lion’s share and his compensation is not tied to player recoveries.

Seeger, who stood to earn more than $70 million for his law firm, Seeger Weiss LLP, because of his lead role in the settlement, actively worked on behalf of Esquire Bank. He not only recommended Esquire Bank to NFL players and to attorneys for former NFL players, he also helped Esquire develop its concussion settlement funding program.

Seeger was trying to extract money from his clients and, it appears, potential co-counsel fees from other attorneys on top of what Seeger Weiss would receive from the MDL 2323 settlement's common fund for legal fees.

III. CONCLUSION

In order to be found guilty of violating the RICO statute, the government must prove beyond a reasonable doubt: (1) that an enterprise existed; (2) that the enterprise affected interstate commerce; (3) that the defendant was associated with or employed by the enterprise; (4) that the defendant engaged in a pattern of racketeering activity; and (5) that the defendant conducted or participated in the conduct of the enterprise through that pattern of racketeering activity through the commission of at least two acts of racketeering activity as set forth in the indictment. United States v. Phillips, 664 F. 2d 971, 1011 (5th Cir. Unit B Dec. 1981), cert. denied, 457 U.S. 1136, 102 S. Ct. 1265, 73 L. Ed. 2d 1354 (1982).

Following an investigation into the predatory, usurious, and fraudulent conduct of Russ M. Herman, Herman Herman & Katz law firm, Esquire Bank, John B. Morgan, Morgan & Morgan law firm, Christopher Seeger, and Seeger Weiss LLP, the FBI should conclude that these TPLF parties have engaged in conduct which violates the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. (“RICO”).