Hall v Pitcher Partners [2022] FCA 1524 | Case summary

BEACH J: 1 These reasons deal with select aspects of two settlement approvals in this representative proceeding. Let me begin with the principal settlement. 2 On 28 October 2022 I approved under s 33V of the Federal Court of Australia Act 1976 (Cth) a settlement in this representative proceeding of claims made by the applicant in his representative capacity against the first respondent, Pitcher Partners. The settlement sum agreed to be paid was $41 million. The funder, International Litigation Partners No 15 Pte Ltd (ILP15), sought a common fund order of 28% of the gross settlement sum. 3 For the brief reasons that I gave at the time, I approved the overall settlement and also deductions with respect to the CFO sought and the legal costs and disbursements. 4 It is appropriate that I say something more concerning the CFO. It is unnecessary to say anything more specifically concerning the background to this proceeding and related proceedings or as to the general principles applicable to settlement approvals given what I said in Hall v Arnold Bloch Leibler (a firm) (No 2) [2022] FCA 163 at [15] to [19]. 5 The question before me under s 33V(2) was whether the making of a CFO and ILP15's proposed rate were just in all the circumstances. I was satisfied on both aspects, although the applicant contended for a lower rate of 25.6%. 6 First, were it not for the funding provided, the applicant would not have been able to bring or maintain the class action and procure the settlement sum. 7 Second, ILP15 has provided the majority of funding, as well as security for costs in cash. 8 Third, ILP15 assumed the risks associated with this action from its beginning, and indeed at the beginning of the first of the three related actions in 2016. The risks it faced as to the costs and delay before resolution, whether any resolution would be favourable, and whether any resolution would be sufficiently favourable as to yield a strong rather than meagre return, were unknown and unknowable. Moreover, they became increasingly complicated as the original Slater and Gordon Limited (SGH) class action was supplemented by this proceeding and then the ABL class action. 9 Fourth, ILP15 agreed to fund the three actions including this proceedings during the period after Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 and before BMW Australia Ltd v Brewster (2019) 269 CLR 574 when s 33ZF-based commencement CFOs were regularly made. In cases like the present, being legacy cases from the pre-Brewster era, it was appropriate that funders who in good faith provided the finance that enabled the successful action to be run, and did so in accordance with the law as it then stood, should be remunerated fairly for their services. 10 Fifth, the CFO contemplated in this case was a transparent mechanism for fairly apportioning funding across the class. 11 Sixth, the group members were given adequate notice of ILP15's intention to seek a CFO, both in the opt out notice and the settlement notice. 12 Now given that I had power under s 33V(2) to make the CFO, the real issue before me was the rate of the CFO. The pre-Brewster cases identified a number of considerations that have remained apposite when considering whether the proposed commission rate was fair and reasonable. These include: (a) whether the rate was commercially realistic and properly reflected the costs and risks taken by the funder; (b) whether the rate avoided excessive or disproportionate charges to class members; (c) how the proposed rate compared to approved rates in other class actions; and (d) whether group members were given appropriate notice of the magnitude of the rate. 13 Now the starting point before me was the contractual arrangements made with funded group members. The commercial value of the services provided by ILP15 was, at the time this proceeding commenced, reflected in the funding agreements. Those agreements provided between X% and Y% commission in most cases, but down to Z% for large shareholders. The actual weighted average commission rate across the funded group members under the funding agreements was above the rate proposed for the CFO being 28%. 14 Of course, ILP15 performed its contractual obligations at a time when the outcome of the litigation could not be known. Moreover, it progressively paid A% of legal costs and all of the disbursements, amounting to approximately $B. It provided security for costs in cash in the sum of approximately $C. Accordingly, ILP15's cash exposure was more than $D. 15 Furthermore, ILP15 assumed the risk of significant adverse costs orders if the action was unsuccessful. This risk was estimated as around $E if the relevant contingency occurred. Further, when one adds ILP15's outlays for own side costs, its total exposure from the litigation was almost $F. 16 Now I note that in my approach to this question in the related ABL class action, I compared the proposed CFO rate of 28% to the range of rates that had been available in the market over the relevant period, and especially when funding was first offered in 2016. I also contrasted the ABL class action with the earlier SGH class action, noting that the SGH class action had settled in 2017 and been approved for a CFO at 21.92% of gross proceeds. I noted that the SGH class action settled relatively early with few substantive steps having been undertaken. I commented that compared to the SGH class action, the ABL class action was a riskier proposition, being an apportionable claim maintained against a secondary actor as part of a complex web of claims. In the result, in the ABL class action I approved the CFO rate of 28% of gross recovery. 17 Further, unlike the ABL class action that settled prior to trial, the present action before me now only settled after the completion of a lengthy trial and whilst judgment was reserved. Moreover, as a consequence ILP15 also had greater exposure in these proceedings. 18 Further, it may be said that the rate now sought by ILP15 is not manifestly excessive given the risks specific to this proceeding and that: (a) the rate is lower than the rates set out in the funding agreements; (b) ILP15's total own side cash exposure was $D, and total cash exposure for the whole proceedings was almost $F; and (c) the rate sits comfortably within the range of the funding rates ordered in other proceedings, and in particular is equal to the rate in the CFO made in the ABL class action. 19 Let me make some other points. 20 First, the SGH, ABL and Pitcher Partners class actions were related as to subject matter. And there was extensive but not complete overlap of group membership. 21 Second, the CFO rate of 28% was estimated to result in net recoveries to group members in this proceeding of 40.78% of the gross settlement sum and estimated to result in net recoveries to group members, aggregated across the three proceedings, of approximately 50% of the total settlement proceeds. I note that the return to group members in the SGH class action and ABL class action was 57.5% and 53.6% respectively. 22 Third, the notice to group members informed them of two things: (a) first, the applicant may seek Court approval of a payment to ILP15 based on its contractual entitlements in an amount of up to $10.5 million; and (b) second, ILP15 may separately make an application that it receive an amount of up to $12.3 million. 23 As I say, ILP15 has sought a 28% rate which cashes out at $11.48 million. Contrastingly, the applicant contended that I should only approve a payment in the amount of $10.5 million which was 25.6% of the settlement sum, rather than bless ILP15's 28% rate. 24 The applicant said that the question of ILP15's return in this proceeding was not only to be looked at individually within the four walls of this proceeding, but was to be considered in the context of a common funding agreement with the two other class actions commenced by the applicant for the same or overlapping group members. 25 Moreover, in the SGH class action for an entirely overlapping group, ILP15 was awarded commission of $8,000,000 from the settlement sum of $36.5 million. This had regard to the early stage at which settlement was reached. 26 Further, in the ABL class action for a substantially overlapping group, ILP15 was awarded commission of $7,480,000 from the settlement sum of $28 million. 27 But in the circumstances of this case, the applicant says that any assessment of the risk ILP15 has taken on and the reward for that risk must take into account that although ILP15 has remained on risk for substantial costs, its risk has also been reduced periodically by receipt of both returns of capital and profits by way of interim dividend, if you like, from the earlier settlements. In total, ILP15 has received $15,480,000 from settlements to date of $64,500,000, and it has had the benefit of those financial returns for some time, especially in the case of returns from the 2017 settlement with SGH. 28 So, the applicant contends that a lower rate than 28% should be approved. 29 Before proceeding further, let me say something about the complexity of applying equalisation. Now equalisation is a well-established means of ensuring that justice is done as between group members in circumstances such as the present. It has a particular meaning when dealing with the spreading of litigation funding costs because most other categories of costs have generally been treated as a cost to the fund which are taken off the top, that is, deducted on a common fund basis. 30 One can understand the development of the equalisation technique. 31 Initially, most securities class actions were commenced on a closed class basis where membership of the group was limited only to persons who had signed a funding agreement with the litigation funder. If the class was closed in this sense, the common form litigation funding agreement usually entered into by all class members made contractual provision for each group member to bear their proportionate share of almost every kind of conceivable cost incurred by the funder, the solicitors or the representative applicant, but importantly only out of their proportionate share of the recovery from the litigation. In this sense, in a truly closed class the settlement sum was properly to be described as a common fund out of which all deductions were contractually to be regarded as common and deducted accordingly. 32 The next "innovation" was the technique of the opening up of a closed class by amending the group definition to include persons who had not entered into funding agreements. This was done for the purpose of ensuring that litigation finality could be achieved for respondents, rather than being plagued with an interminable succession of further closed class actions each time they settled one such action, until the expiration of any limitation period barred the commencement of a new closed class action; any s 33ZE suspension only applied endogenously within a particular closed class action. But such an opening up of the class posed a problem in terms of class members' relationships inter se. Why should persons newly admitted to the class who had not agreed to pay the costs of the action get a free ride at the expense of those who had agreed to pay those costs, including the litigation funding commission? 33 So in these circumstances and whilst legal costs continued to be deducted on a common fund basis, as had occurred in closed class actions, so far as litigation funding commission was concerned what was developed in a succession of settlements approved by this Court under s 33V was the device of a funding equalisation order (FEO) to redistribute the additional amounts received in hand by unfunded class members pro rata across the class as a whole; of course they were otherwise receiving more because they had no contractual obligation to pay the commission. 34 Now it does not seem to have been appreciated that two different formulae for equalisation enshrined in FEOs have been employed so far as litigation funding costs are concerned. 35 The first method, which was used traditionally in the first equalisation cases, worked by notionally deducting from the share of the settlement attributed to unfunded group members, that is, those people who had not entered into funding agreements but had identified themselves prior to the settlement, amounts equal to the funding costs that would otherwise have been payable by them if they had entered into a funding agreement. What was then done was to distribute those notional amounts across the whole class. The relevant formula distributed the notional amounts calculated such that the net outcome to both the cohort of funded group members and the cohort of unfunded group members was the same. The formula allocated more money to the funded group, so that after the funders' contractual entitlements were satisfied the funded group was in the same position as the unfunded group. This can be called FEO Method 1. It is what was described in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd (2020) 281 FCR 501. Lee J (at [57] to [59], and agreed to by Middleton and Moshinsky JJ) explained equalisation by reference to what I said in Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs and mgrs apptd) (in liq) (No 3) (2017) 343 ALR 476 at [99]: …When a percentage amount is deducted from unfunded group members and added back pro rata across all group members, that incrementally increases the recoveries for the funded group members… 36 Contrastingly, the second method operated differently. It redistributed the amounts which the funded group had collectively agreed to bear across the whole group, so that the whole group shared the expense contractually incurred only by the funded group. This can be called FEO Method 2. Now this was not the way in which the formula had traditionally operated, but this approach has been referred to in some authorities, including Brewster. The description of funding equalisation by Kiefel CJ, Bell and Keane JJ at [88] ("the making of a FEO, which takes, as its starting point, the actual cost incurred in funding the litigation") is a description of FEO Method 2. Contrastingly, Gordon J at [131] cited the Full Court's description of funding equalisation in Money Max, which was a description of FEO Method 1. Later she indicated that although she accepted that a funding equalisation order distributed notional amounts, it was also "limited to redistributing actual costs incurred". Edelman J (dissenting in the result) at [183] to [185] referred to FEOs developed by the Court of Chancery to ensure costs incurred were borne pro rata by all who benefited, which is consistent with FEO Method 2. 37 Now both FEO Method 1 and FEO Method 2 are predicated upon the basis that benefiting group members should obtain equal returns, rather than litigation funding commission only being borne by the funded group members. But as Mr William Edwards, counsel for the applicant, pointed out, the difference between them was that FEO Method 1 was premised upon the notional deduction from the unfunded group members and then grossing up the allocations of the settlement sum to funded group members such that after application of the obligations under the funding agreements to those grossed-up allocations, net returns were equal, whereas FEO Method 2 was predicated upon allocating the settlement sum pro rata and then applying the funding agreements to determine the aggregate contractual expense to be then spread across the group as a whole. 38 In terms of strict formalism, FEO Method 1 results in only the funded group members paying commission out of the share allocated to them, whereas FEO Method 2 results more directly in commission being paid by both groups. Both methods have continued to be used. 39 Now in the present case, applying the loss assessment formula in the settlement distribution scheme to determine the relative claim values of funded group members to unfunded group members produced the ratio of 76.58 : 23.42. If the settlement sum were applied between the two cohorts according to that ratio, the amount of commission to which ILP15 would be entitled under its funding agreements with the funded group members would have been approximately $9.78 million. 40 But under FEO Method 1, the amount of commission payable to ILP15 would be $10,493,928.23. The reason that this exceeds $9,780,414.70, which is produced by applying the settlement sum between funded group members and unfunded group members at the ratio I have indicated, is because of the features of FEO Method 1. The funding agreement here is one which has the feature remarked on by the Full Court in Money Max at [56], namely: …the Funder is permitted to charge funded class members a funding commission based on the "grossed up" amount of their Resolution Sums following the redistribution of amounts deducted from unfunded class members under a funding equalisation order… 41 Now having addressed the possibility of a FEO I am satisfied that it is preferable to make a CFO, as both the applicant and ILP15 invited me to make. 42 Now in addition to the fact that awarding a CFO would be conceptually consistent with how funding commission has been treated in the past settlements in the SGH class action and the ABL class action, the following matters justify a CFO. First, were it not for the funding provided by ILP15, the applicant would not have been able to bring or maintain the class action or procure the $41 million settlement sum. Second, ILP15 has in fact provided the funding and assumed the risk of significant adverse costs orders. Third, ILP15 assumed the risks associated with these proceedings at a time when it could not be known the stage at which the proceedings would settle. Fourth, it did not cease to provide funding when the primary wrongdoer (SGH) had settled. Moreover, when the settlement with SGH occurred, this left only difficult claims against third parties such as ABL and Pitcher Partners. Fifth, the s 33V notice informed group members that ILP15 may seek a CFO. 43 Now these matters support the award of a CFO, but do little to resolve whether the rate should be $10.5 million (25.6%) as the applicant seeks, or $11.48 million (28%) as ILP15 seeks. It is fair to say though that the applicant's position is more closely calibrated to the figure that FEO Method 1 would have justified if I had applied it. 44 Now the applicant says that risk and return have to take into account the degree of de-risking which occurred from the earlier settlements, both in terms of return of capital, profit and reduction in adverse costs exposure. The applicant says that it would be an incomplete picture to look only at the capital on risk in this proceeding plus exposure to adverse costs, without appreciating that the source of that capital was largely the returns achieved from the $8 million obtained on the investment in the SGH class action. 45 Of course counsel for the applicant was anxious to eschew the suggestion that the success of a previous investment is a reason for moderating the returns from a subsequent investment. Rather, Mr Edwards' point was that it was the same investment, that is, a single project. 46 Counsel said that looking across the proceedings as a whole, a $10.5 million commission payment to ILP15 as proposed by the applicant would result in it receiving by way of commission $25.98 million of the total settlements achieved of $105.5 million, producing an overall commission rate of 24.6%. Contrastingly, ILP15's proposed CFO rate would produce total commission of $26.96 million (25.55%). The applicant contended that the former was more consistent with the progressive de-risking that had occurred. In other words, although ILP15 had left risk on the table, it had already been at least partly compensated for this. 47 Further, it was said that my reasons in the ABL class action settlement approval made plain that I took this into account as a factor in approving the 28% rate. That being the case, it was said that the 28% awarded in the ABL class action already compensated at least in part for the additional risk associated with ILP15 leaving its investment in the current class action on the table. So, in previously receiving 28% ILP15 was receiving a higher rate than it would otherwise have received absent that fact. So it was said that ILP15 could not now seek to be twice compensated for that particular additional risk. So, it was said that a rate lower than 28% would be appropriate if the funder had de-risked itself from the current class action costs. This was all said to suggest that the correct rate should be lower than 28%. 48 Accordingly, the amount which the applicant said should be deducted by way of litigation funding commission was $10.5 million. 49 But I agree with the funder's position. First, the applicant has read too much into my reasons concerning the settlement approval in the ABL class action. Second, a distinguishing feature here is that although this class action was the second of three to be issued, it was the last to be settled; it might be said that it carried the most risk. Moreover, this class action only settled at the heel of the hunt. Third, although the funder enjoyed both a return on and a return of capital from the other two class actions, it had to continue to deploy more capital in the present class action. It accrued more risk as it deployed more capital. So understood, Mr Edwards' de-risking narrative loses much of its allure. And relatedly, the adverse costs exposure that ILP15 had could not be de-risked. In fact the quantum of such risks was magnified as the trial ran. Fourth, Mr Lachlan Armstrong KC for ILP15 made an attractive submission, which I accept, in the following terms: MR ARMSTRONG: …These proceedings raise this interesting question about how one takes into account related but nonetheless different proceedings, and, in our respectful submission, the funder was fairly remunerated - and, indeed, the court accepted that the remuneration for those other proceedings was a fair recompense for the risks in the capital outlay. Really, of course, they're just wrapped up in the whole concept of risk. But it had been fairly compensated on a standalone basis on those other proceedings. And although it is, we agree, proper to look at the overall returns to the group members across the three different proceedings, the funder also needs to be acknowledged to have had an independent exposure for its capital outlay and for the risks of adverse costs order in this proceeding and the … remuneration that we are seeking for the funder in this proceeding, we say, is standalone reasonable, having regard to the outlay and risk that the funder took on specific to this proceeding. 50 So the context and returns under the other settlements must be taken into account. Nevertheless, the stand-alone investment lens is a more useful conceptual perspective than a lens which aggregates the three proceedings into the one project. It need hardly be said that financial economics provides a better justification for the former approach than the latter approach. 51 For all of these reasons, I have given ILP15 what it sought. It is in the interests of group members that funders be given a commercial return commensurate with their capital outlays and risks.

Hall v Pitcher Partners

At a glance

Court

Decision date

Before

Source

Judgment (10 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (5)

Cited By (5)