Open Records Request Exposes Rare Litigation Finance Document

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By Llewellyn Hinkes-Jones

A proposal designed by Iowa agricultural groups to pay for the defense of three state counties against pollution charges shows how a third-party funder of a lawsuit might control legal strategy.

In 2015, the Des Moines Water Works (DMWW) sued the boards of supervisors of Iowa’s Sac, Buena Vista and Calhoun counties over high nitrate levels in the state’s Raccoon River ( Bd. of Water Works Trs. v. Sac Cty. Bd. of Supervisors, C.C.N.D. Iowa, 5:15-cv-04020 ).

While the parties involved didn’t accept the proposal, published for the first time by Bloomberg BNA, the document is a rare glimpse into litigation finance agreements and how they might affect the outcome of a case that could set precedent on environmental law.

Such agreements are “not uncommon,” Michael Reck, an attorney with Belin McCormick P.C. in Des Moines, Iowa, one of the law firms representing the counties, told Bloomberg BNA. He said that the third-party funding was necessary to mount a reasonable defense.

But the plaintiff in the case said that the outside money and control meant that the counties could afford not to settle and win by attrition.

Legal analysts told Bloomberg BNA that there are numerous instances in which third-party control over a lawsuit is the norm, as in the case of liability insurers, and that they depend on the mutual interest of client and funder.

Whatever the effect the disclosure of funding and potential control by third parties might have on a case, Maya Steinitz, professor of law at University of Iowa and a leading expert on litigation finance, told Bloomberg BNA that bar associations might want to start looking at disclosure issues related to third-party financing.

Hidden Donors

The plaintiff claimed that increased treatment costs for removing nitrates from drinking water cost the utility millions of dollars and pushed to have farm drainage tiles classified as a point source of pollution under the Clean Water Act.

In March of 2016, documents revealed through an open records request showed that agricultural groups—including the Iowa Farm Bureau Federation, the Iowa Soybean Association, the Iowa Corn Growers Association (ICGA) and the Iowa Drainage District Association—secretly funded the defense of the Iowa lawsuit through a 501(c)3 nonprofit, the Agricultural Legal Defense Fund.

According to Internal Revenue Service documents acquired by Bloomberg BNA, fertilizer and other agricultural company officials make up the bulk of the nonprofit’s officers and directors, including representatives from Smith Fertilizer, Monsanto Co., Growmark, Cargill, Koch Agronomics, DuPont Pioneer and the United Services Association.A representative for Monsanto confirmed with Bloomberg BNA by e-mail that the company contributed $25,000 to the fund. Representatives from Koch Industries and DuPont told Bloomberg BNA that they didn’t finance the lawsuit or the fund.

In the weeks following the disclosure and numerous stories in Iowa newspapers, the funding agreement was canceled.

Proposal to Re-Fund the Lawsuit

In September, the ICGA and the Iowa Farm Bureau, two groups that were party to the original funding, crafted a proposal to re-fund the lawsuit’s defense.

The Iowa newspaper, the Storm Lake Times, provided Bloomberg BNA with a portion of that proposal. Confirmed by the parties involved, the documents show that the agricultural groups agreed to re-fund the defense as long as “no legal strategy would be employed which would suggest liability for the plaintiff’s claims rests with the region’s agricultural producers.”

It also would have required that the funders approve the choice of counsel and that a joint advisory group be created to coordinate communications between the funders and the defendants.The proposal was drawn up by the West Des Moines, Iowa, law firm Parker & McNeill, P.L.L.C. and signed by counsel Edward G. Parker, who has previously represented the Iowa Farm Bureau.

Parker is also listed as the registered agent of the Iowa Partnership for Clean Water, a nonprofit advocacy group that spent more than $600,000 last year on ads in Iowa attacking the utility and the case, calling the lawsuit “needless,” and accusing the plaintiff of threatening Iowans’ land, home, and food. A representative from Parker & McNeill did not respond to a request for comment.

ICGA president Kurt Hora told Bloomberg BNA the money would provide the best defense to the counties “to prevent needless regulations that could increase the cost of food” as the lawsuit could affect farmers nationwide. But he did not comment on why the proposal was rejected. Hora wouldn’t comment on whether a similar agreement existed for the previous funding because the Agricultural Legal Defense Fund handled that agreement. Brown Winick attorney Douglass Gross, who represents the Agribusiness Association of Iowa and the Agricultural Legal Defense Fund, wouldn’t comment on whether a similar agreement was made for the funding through the Agricultural Legal Defense Fund.

Aligning Client-Funder Interests

Rules against maintenance—third-party influence on a lawsuit—and champerty—third-party influence on a lawsuit for profit—were mainly aimed at preventing strangers from influencing a case, Lucian Pera, partner with Adams and Reese LLP and previous treasurer for the American Bar Association, told Bloomberg BNA.

He added that there are numerous situations in which outside parties might fund and control the defense of another person’s lawsuit in conjunction with the client. To Pera, this includes liability insurers funding and potentially controlling lawsuits on behalf of policyholders. Or it could be a component manufacturer agreeing to indemnify an automaker.

He added that state bar association ethics rules governing the professional independence of a lawyer depend on whether the outside control goes against the client’s interests. “What current commercial litigation funders will tell you is that they work very hard to align the interests of the funder and the funded party very closely, by virtue of the structure of the deal, so that the funders wind up being very comfortable having no control or decision making authority at all,” he said. Even though liability insurers act as third parties that regularly fund and control lawsuits on behalf of those they insure, Kevin LaCroix, attorney and executive vice president for insurance intermediary RT ProExec, told Bloomberg BNA that the Iowa case differs from that of a liability insurer defending a policyholder in a few ways.

For liability insurers, the insurance policy is the third-party funding contract, and it can include requirements such as hammer clauses, duty-to-defend requirements, and no-action clauses to account for unique situations in which the interests of the insurance company and the policyholder diverge.

Effect of Agreement’s Disclosure

Bill Stowe, the CEO and general manager of the Des Moines Water Works, said he was not sure whether the litigation funding details would affect how the lawsuit would proceed because he is already struggling with his own financing for the case. “The funding by dark money groups certainly puts us at a disadvantage,” he told Bloomberg BNA. “It’s a blank check from hugely well-funded, billion-dollar entities like the Farm Bureau at the national level. We’ve been told that while we can potentially win at the trial level, they will appeal and it will be a 10- or 15-year-long case. The money allows them to win by attrition.” While there are fee-shifting provisions in the Clean Water Act, Stowe was pessimistic about their ability to help his financial issues because “it’s betting on success.” Michael Reck said that it was the counties that were the impoverished party in the case, not the other way around, and that third-party funding was necessary to mount a reasonable defense. He added that there was nothing wrong with the arrangement as long as there were no conflicts. When conflicts arose, the original agreement was terminated. Because the proposal to refund the case wasn’t accepted, the law firm hasn’t had funds for the case since March. – Samson Habte contributed to this story.

Collin McCullough of the McCullough Law Firm, another firm representing the counties, told Bloomberg BNA that “another agreement is in the works, but we don’t know what’s in it yet.”

To contact the reporter on this story: Llewellyn Hinkes-Jones in Washington at ljones@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

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