Wendie Childress. Photo: ©2019 David Lubarsky. All Rights Reserved.

The Texas market is suffering a significant double blow because of the COVID-19 crisis and plunging energy industry. The institutions that form the backbone of our economy, including in health care and oil and gas, are seeing staggering losses that are reverberating throughout the state. The economic fallout is worse than anything Texas has ever seen, and it has hit fast, with unemployment at 12.8% and over 1.3 million jobs lost since March.

Not surprisingly, disputes are on the rise, as financial stress, reduced demand and forced closures prevent many companies from meeting their legal obligations, prompt some to look to insurance for relief, and force others into bankruptcy. The uptick in legal fights comes just as companies are seeing revenues shrink and struggling to streamline costs. Litigation inevitably puts a strain on their legal spend, even to pursue the strongest of cases. Meanwhile, law firms, experiencing reduced collections and billable work, are feeling the strain and can only tolerate limited risk in the form of contingency or alternative fee arrangements.

Litigation finance can help. By providing nonrecourse funding for a variety of commercial claims, funding is a tool that can ease the financial burden for companies and law firms alike and provide a path forward for good claims to reach the courthouse.

Energy

The causes of the economic fallout in Texas are layered. First, we are faced with what every other region and sector is dealing with—people retreating from public life, staying home, working virtually. But on top of that and because of the new virtual workplace, demand for oil has fallen through the floor, hitting Texas, the largest energy producing state in the nation, especially hard. The decrease in demand has caused a dramatic drop in oil prices, in turn, causing an abundance of oversupply. These forces are wreaking havoc on oil and gas companies' ability to make a profit.

For upstream companies, oil and gas has three levers: prices, production and costs. Prices, which recently plummeted through the ground, can't be controlled. So, there are only two levers left to turn. But at the moment, if you turn up production, there is nowhere to put it. And the cost to produce oil is now higher than the price it can be sold for. Companies are thus looking to turn the third lever and reduce costs wherever they can. And in some instances, they are simply laying down their rigs.

Cutting costs and production affects the oilfield service providers, who now have less or no work to do, suffering substantial losses and cutting staff. And what follows is that midstream and downstream companies are also crippled.

Layoffs are abundant, and as many as 100,000 jobs in exploration and production are expected to be lost by year end. Add in job losses for oil services, pipeline, storage, shipping, refineries and other affected sectors, and estimates are that job losses in the energy industry could be as high as 1 million this year.

Health Care

Meanwhile, our health care system, also vital to the state's economy, is suffering backbreaking losses, including immense lost revenues due to an inability to provide nonemergency services and vast shrinkages in employer-provided health plans. As jobs are lost and bankruptcies persist, the number of patients covered by employer-provided health care plans is declining at a significant rate.

In contrast with hospital overloads in some other states, patient volume at Texas hospitals has plunged by 56%. HCA Healthcare, the second largest health care system in Houston, has seen emergency room visits and inpatient surgeries decline by 50% and 70% respectively. Titus Medical Center in Northeast Texas has seen revenue decline by 33%. Midland Memorial Hospital lost $2.8 million in March and anticipates taking on a $6 million loss in April. The hospital vacancy rate in the Houston area is up 70%, year-over-year.

Losses in the energy and health care sectors then trickle down further, into the real estate, hospitality and retail industries.

The current financial turbulence will necessarily result in an uptick in litigation as companies breach contracts and otherwise dispute who should be left holding the bag. Insurance recovery and contract lawsuits are on the rise, and bankruptcy litigation is expected to follow.

How Litigation Funding Can Help

The economic forces at play have left companies looking to streamline and cut costs across the board, including their legal spend. Meanwhile, they need to increase revenues and pursue their rights and are seeking ways to bring meritorious claims without the financial burden. Clients are asking firms for alternative fee arrangements, but the firms, who are also feeling the squeeze, can't always accommodate their clients' requests.

Litigation finance can help by providing needed capital, in the form of nonrecourse funding, to companies or law firms to bridge the gap between a lawsuit's financial demands and what clients can or are willing to pay. Whether it's converting existing hourly matters to hybrid contingency, or helping clients pay for new cases, funding can help companies pay legal fees and costs, bring their good claims and see them to the finish line. In fact, funding was designed for these circumstances.

Likewise, portfolio funding can provide a law firm with capital in the event that clients slow pay or stop paying firm fees. It also enables a firm to take cases on contingency, while still ensuring a steady stream of revenue supplied by the funder.

Litigation funding is provided in exchange for a return based on the outcome of a case if it is successful. If the case loses, the client pays nothing, and if it wins, the client keeps the majority of the upside.

Armed with litigation funding, in-house counsel can be a hero to their company by keeping the company's legal cost low, while preserving the ability to generate revenues by bringing good claims. For outside counsel, funding is a tool that can stabilize revenues in a shaky legal market.

As always, companies and law firms need a funder that they can trust, who will provide thoughtful insight, clear terms, and a path forward for pursuing legal claims.

Wendie Childress is a portfolio counsel with litigation funder Validity Finance in Houston and former senior counsel at YetterColeman.