A New York Appellate Court Weighs in on Litigation Funding Disclosure: Relevance is Paramount

As litigation funding becomes more normalized, the disclosure of litigation funding arrangements is a much talked-about and evolving issue.  The question is simple: under what circumstances can a litigant receiving litigation financing be compelled to disclose details about the funding arrangement.  Calls to require disclosure in federal courts through FRCP rule changes, while not adopted, has prompted some individual courts (notably the District of New Jersey) to require some disclosure. Arbitral institutions have also examined the question and were among the first to set forth rules, requiring modest disclosures.

Considering the significant role New York courts play in commercial disputes, one might assume the state would have well-developed case law on this issue.   Before April of this year, however, no state appellate court in New York had addressed this question in a published opinion.

In Worldview Entertainment Holdings Inc. v. Woodrow, No. 15841-15841A, 2022 WL 1249050 (Apr. 28, 2022), a five-justice panel of the First Department Appellate Division became the first, holding that disclosure of a litigation funding agreement was not warranted because the defendant had failed to establish “how discovery about litigation financing and witness payments would support or undermine any particular claim or defense.” Because the funding arrangement was not relevant, the panel upheld the lower court’s decision to deny the motion to compel discovery.

Relevance is the Test

Woodrow has some idiosyncratic features. Most strikingly, the alleged funder of the litigation was the controlling shareholder of plaintiff company Worldview. The defendant sought discovery into the details of the funding arrangement, and portrayed the funder as Worldview’s “star witness,” alleged that her funding of the litigation was “damning evidence of bias,” and argued that the funding was driven by “personal animus.” Needless to say, these alleged entanglements bear little resemblance to more typical funding arrangements offered by professional litigation finance providers. Yet the court was unmoved by the defendant’s attempts to shoehorn a basis for relevance by calling into question the witness’s credibility, confining its assessment to whether the discovery motion was relevant to a claim or defense.

The panel’s approach aligns with holdings of federal courts in New York that relevance is a critical factor, and alleged credibility implications can’t be used to justify expansive discovery. In Benitez v. Lopez, No. 17-cv-3827, 2019 WL 1578167 (E.D.N.Y. Mar. 19, 2019), the court denied defendants’ motion for discovery in relation to the plaintiff’s acquisition of litigation financing, notwithstanding defendants’ assertions that the funding arrangement “goes directly to plaintiff’s credibility” and that therefore it was proper to inquire about “the motives behind it.” The court explained that “the financial backing of a litigation funder is as irrelevant to credibility as the Plaintiff’s personal financial wealth, credit history, or indebtedness. That a person has received litigation funding does not assist the fact finder in determining whether or not the witness is telling the truth.”

Similarly, the court in Mackenzie Architects PC v. VLG Real Estate Developers LLC declined to permit discovery of the plaintiff’s retainer agreements with counsel and litigation funding contracts, stating that it would “not allow this already contentious case to now travel down an unfruitful path in pursuit of ‘litigation motivation.’” No. 15-cv-1105, 2017 WL 4898743, at *3 (N.D.N.Y. March 3, 2017). Relevance was likewise the basis for denying a request for discovery of funding documents in Kaplan v. S.A.C. Capital Advisors, L.P. The court found that “the defendants did not show that the requested documents are relevant to any party’s claim or defense.” No. 12-CV-9350, 2015 WL 5730101, at *5 (S.D.N.Y. Sept. 10, 2015).

Wider Federal Court Approach

These decisions are not surprising, as discovery grounded in relevance is also the guiding principle in the federal rules: FRCP 26 provides that “parties may obtain discovery regarding any nonprivileged matter that is relevant to any party’s claim or defense.”   And the federal rules committee has declined on multiple occasions to expand Rule 26 to include compulsory litigation finance disclosures.

Outlier Federal courts in New Jersey and Delaware have instituted rules requiring disclosure of certain limited information by funded litigants at the outset of litigation justified by the notion that basic details about funding arrangements are relevant in order to avoid conflicts, confirm standing, and identify parties in interest.  However, the scope of required disclosures is quite limited and “good cause” must be shown for broader disclosure.