Earlier this week, the AmLaw Litigation Daily reported on what was almost a groundbreaking moment in class-action settlement. Back in August, a judge in the Eastern District of New York had agreed to allow the parties in a class-action to explore securitizing a large class-action settlement. (In other words, they’d finance the settlement by carving it up and selling pieces of it as financial instruments, effectively getting a loan from the market to pay the settlement.) The deal wasn’t to be, however, the parties backed off of it; and the defendants decided to pay the class in a series of lump-sum payments.
I’ll leave it to those better-versed in finance and economics to say whether securitized settlement debt is a good policy choice, or a sound investment. I’m more interested in how defendants will approach it strategically.
Any behavior unavoidably sends a signal to those who are watching. And since no one has tried this particular innovation yet, the largest question looming is: what will taking on securitized settlement debt signal to other parties? There are three potential audiences a defendant will have to consider:
- The Market. Companies sell off debt all the time. But most of that debt is from loans, which may very well signal healthy efforts at growth. Selling off liabilities incurred in litigation may well signal that a company needs a cash infusion to cover the consequences of its bad conduct. That’s the kind of signal that could drive down a stock’s price, making shareholders very unhappy. (The court-appointed expert believed that investors would also be suspicious of novel securitizations given the economic downturn.)
- The Public. Yes, PR matters. And while one might think that the average newspaper reader may find this topic drier than the latest celebrity happenings, popular media has begun equating some securitization practices with corporate malfeasance. Companies may think twice about compounding the bad press from their alleged illegal conduct with the bad press that might result from engaging in unpopular financial tactics.
- Other plaintiffs. Class-action plaintiffs’ counsel have made it their business to pay close attention to corporate behavior. If a corporate defendant agrees to securitize its settlement debt in one instance, that may signal to other plaintiffs that the company is a relatively easy mark, or that it may anticipate having to fund other class-action settlements in the future. And that may raise the question of whether the company currently anticipates very specific future settlements.
None of these considerations means that securitizing class settlements can’t work, but lawyers (particularly defense lawyers) tend to be risk-averse. That will make many defense attorneys (and their clients) hard sells for this tactic, particularly if they think the practice sends out all the wrong signals.