Law firms are finding more and more creative ways to finance litigation these days. But one method said to be used by a Century City firm has turned into a cautionary tale.

William and Roxanne Glenn, former clients of Cohen & Lord, a boutique law firm known for handling business and construction disputes, said they were persuaded by the firm to fund the legal defense in another case to which they had no direct connection.

“This is something I’ve never heard of and is entirely unique from my perspective,” said Donald Vinson, chairman of El Segundo’s Vinson Resolution Management, a company that specializes in third-party financing of lawsuits.

The Glenns, who had previously retained Cohen & Lord in a residential property dispute, are not saying the firm violated any ethical rules – only that they were led to make a bad investment without proper disclosures.

While the case in which they invested is still pending, the Glenns now want out of the deal with Cohen & Lord, leading to a dispute that has landed in Los Angeles Superior Court.

The fight comes as law firms have been increasingly aggressive in coming up with ways to fund cases. Litigation finance firms, which pool money from third parties to invest in commercial legal disputes for a share of winnings, have exploded in number and size, with the largest players boasting pools exceeding $300 million. In September, Australia’s Bentham IMF became the first large-scale funder to open an office in Los Angeles.

Smaller cases involving individuals usually don’t have access to such institutional money. However, Diane Karpman, an attorney and legal ethics consultant, said the increasing use of outside funding by law firms and a rise in participation of nonattorneys in legal cases appeared to be at the root of the dispute between the Glenns and Cohen.

“On one level, it’s unusual, but on another level, it’s not that shocking because of the third-party funding phenomenon,” she said. “There are these new trends going on in the law.”

But David Parker, an attorney representing the Glenns, said the curious arrangement was particular to the situation.

“This is possibly a one-off from the firm’s standpoint,” he said. “They probably just had what they thought was an inspired idea under very unusual circumstances.”

He declined to say how much the Glenns invested in the litigation and what damages they were seeking.

Cohen & Lord name partner Bruce Cohen did not return requests for comment.

The circumstances

Cohen & Lord is a firm of about 20 attorneys with experience in areas including construction, employment and business matters. It has performed legal work on a number of notable construction projects, including Dodger Stadium and the U.S. Bank Tower, according to its website.

In March 2010, according to court papers, the firm was hired by the Glenns to handle what might have seemed like a basic real estate dispute. The couple was in escrow to buy residential property in Torrance, but a neighbor claimed that his property was sustaining damage due to flooding from their property and demanded compensation.

The Glenns sued the neighbor, whose claims were holding up their purchase, and won $282,000, according to court filings.

Then in early 2012, the neighbor sued the couple who were selling the property to the Glenns. At that point, the Glenns claim they were approached by Cohen & Lord to pay for the defense of the previous owner as a “no-risk” investment opportunity.

The idea was that after successfully defending the case, the defendant would file a malicious prosecution complaint, and the law firm and the Glenns would split the resulting winnings 50-50.

“They were parlaying the information they already gained from one prior litigation into another, which they thought would make them more efficient,” Parker said. “My guess is it was an unusual situation and they tried to come up with something creative and that was the advice. But they gave bad advice.”

Ken A. Linzer, an attorney who handles transactions for litigation finance companies, said a corporate third-party financier would not have funded such a case for several reasons: It counted on a successful malicious prosecution case on top of a successful defense, involved a noncommercial legal opponent, and could have led to a conflict of interest if the Glenns and the clients they were funding had a dispute.

“The majority of litigation finance companies are so on top of conflicts of interest that they would run, not walk, but run away from a transaction like this,” he said.

The case the Glenns invested in is still pending two years later.

The arrangement might be unusual, but it’s not forbidden, and there have been cases where an attorney receives business financing from a former client, said Ellen Pansky, an attorney at Pansky Markle Ham in South Pasadena specializing in legal ethics and malpractice. An attorney is hypothetically allowed under State Bar of California rules to ask a client for litigation financing as long as the transaction meets several requirements, including sufficient written consent and disclosures.

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