Litigation funders hit with sanctions in $180 million case v. Cigna

July 26, 2016

(Reuters) – Litigation funding is an opaque industry. Sure, extremely large funds like Burford Capital, Bentham IMF and Gerchen Keller put out occasional press releases to announce new capital or quarterly results. Once in a while, as in the burgeoning European litigation over Volkswagen’s clean-diesel cars, a big litigation fund publicly teams up with a plaintiffs’ firm. But mostly, funders prefer not to reveal what cases they have invested in. Disclosures are generally not required in U.S. courts and, in an extremely competitive industry, funders don’t want to give away their secrets.

That lack of transparency was one of Cigna’s big frustrations in more than a decade of litigation over a Liberian judgment against the insurer. Cigna, which has been indemnified by Ace Group for losses in Liberia, wanted sanctions against whomever was backing a Cayman Islands suit to enforce the Liberian judgment, arguing that the enforcement effort violated an injunction imposed in 2001 in federal court in Philadelphia. But it was no simple matter for the insurer and its lawyers to figure out who to target.

Last week, U.S. District Judge Paul Diamond of Philadelphia explained the complex financing behind the attempt to enforce the Liberian judgment in a contempt and sanctions opinion that not only reveals the case’s backers but excoriates them for “outrageous behavior (that) is an affront to the courts of the United States.” The judge invited Cigna, which is represented by Donald Hawthorne of Axinn Veltrop & Harkrider, to propose money damages against three people with a stake in the Liberian judgment: U.S. lawyer Samuel Lohman, who lives in Switzerland; Virgin Islands lawyer Martin Kenney, once a foreign legal consultant in New York, and Irish real estate developer Garrett Kelleher, who invested nearly $3 million to enforce the Liberian judgment, which, with interest, totals about $180 million.

The case goes all the way back to the early 1990s, when a Liberian company called Abi Jaoudi and Azar Trading Corp, or AJA, sued Cigna in federal court in Philadelphia, claiming Cigna had insured AJA commercial properties that sustained damages in the first Liberian civil war. AJA won a trial verdict but the trial judge entered a judgment notwithstanding the verdict for Cigna, holding that the damages fell under the insurance policy’s war risk exclusion. That judgment was upheld by the 3rd U.S. Circuit Court of Appeals. AJA petitioned for U.S. Supreme Court review but the justices declined the case.

AJA then turned to the Liberian courts, where it won another jury verdict and, ultimately, a $66.5 million judgment in 1998. Cigna countered in the U.S., where, in 2001, it obtained an injunction in Philadelphia court that barred “any action to enforce in any jurisdiction the Liberian judgment” against the insurer. Continuing the tit-for-tat, a Liberian judge ruled the injunction was itself unenforceable because Liberian courts do not recognize anti-suit orders.

In 2005, AJA assigned its interest in the Liberian judgment to a company founded by Lohman (the U.S. lawyer) and Kenney (the former New York foreign legal consultant). Kenney, in turn, sought capital from Kelleher, the real estate developer, who took a seat on the board of Lohman and Kenney’s company. Kenney subsequently established another litigation funder, Echemus, in which Burford Capital held an 80 percent stake. According to Judge Diamond’s opinion, Echemus invested at least $100,000 in litigation to enforce the Liberian judgment.

Working in coordination with 22 other Liberian businesses with war-related claims against Cigna, Lohman and Kenney, according to Judge Diamond, persuaded Liberia to appoint the country’s insurance commissioner as a receiver to collect debts owed by Cigna’s former Liberia operation. In 2007, the receiver sued Ace, Cigna’s indemnifier, in the Cayman Islands.

That was a particularly sensitive time for Cigna’s parent, Ace, which was in the midst of transferring its home base from the Cayman Islands to Switzerland. So the insurer went back to court in Philadelphia to enforce the injunction it had obtained in 2001.

Judge Diamond’s ruling, which sanctioned Kenney, Lohman and Kelleher for “a sophisticated and deliberate effort to defy (the) injunction,” came in that proceeding. The three men offered several permutations of the argument that the U.S. court either did not have jurisdiction, was exceeding the scope of its jurisdiction or should not be meddling with a Liberian court’s judgment. They also cited foreign sovereign immunity because the Cayman Islands suit was filed on behalf of the Liberian insurance commissioner.

The judge explained in painstaking fashion why he disagreed with all of those arguments. In short, he said that the original Liberian plaintiff, AJA, had invoked the jurisdiction of the federal court in Philadelphia, and that even parties uninvolved in the original case are barred from working alongside AJA in defiance of the injunction. According to Judge Diamond, undisputed evidence showed Lohman, Kenney and Kelleher “knew of the injunction and the potential consequences of violating it” when they invested time and money in enforcing the Liberian judgment. And sovereign immunity, the judge said, did not apply because the Liberian insurance official was not operating for the benefit of the Liberian government.

“Kelleher  and Echemus were the exclusive source of funding for the receiver’s efforts and would, in turn, obtain the great bulk of any benefit,” Judge Diamond wrote. “Given that these private parties are the only entities that could actually benefit from the receivers’ enforcement efforts on behalf of a sham entity (the non-existent (Cigna) ‘Liberian Branch’), it is preposterous to suggest that the receivers were actually acting on behalf of the nation of Liberia.”

For Ace, the contempt and sanctions case has been overseen by Howard Schrader, general counsel for Ace’s Overseas General Insurance operation, and outside counsel Hawthorne of Axinn Veltrop. Both men said Tuesday that the ruling is a milestone in litigation finance. “The contempt judgment and, we hope, award of compensatory damages should send a message to litigation funders, whether in the U.S. or abroad, that they are not above the law and will be held accountable,” Hawthorne said. “Funders cannot hide behind the scrim of anonymity.”

Added Schrader: “The industry’s picture is not always what it seems. They try to make themselves look like Goldman Sachs when they’re really the Wolf of Wall Street.”

There are two sides to every story, of course, and Lohman, Kenney and Kelleher have portrayed themselves as the champions of Liberian businesses devastated by civil war and abandoned by an insurer that itself broke capital reserve rules when it left the country. In their telling, these businesses could only win justice with capital from outside funders and in a neutral court such as the Cayman Islands, which could resolve an intractable conflict between judgments in the U.S. and Liberia.

I could not reach Kelleher, whose contact information is not in the docket in Philadelphia, where he is representing himself. Lohman counsel Mark Gottlieb of Offit Kurman didn’t respond to my phone message. Kenney’s lawyer, Gary Miller, said in an email statement, “We are disappointed in the court’s decision. In light of U.S. Supreme Court decisions, we do not believe the court has jurisdiction over this matter or over Mr. Kenney. We plan to seek review from the 3d U.S. Circuit Court of Appeals at the appropriate time.”

(This post has been corrected. An earlier version incorrectly reported that Cigna is part of the Ace Group. Ace, which has since merged with Chubb, is Cigna’s indemnifier in connection with losses in Liberia. Cigna is not part of the Ace Group.)

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