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Taking Sides in a Divorce Case, Chasing Profit
                               
divorce case 1

MONICA ALMEIDA/THE NEW YORK TIMES
Nancy Napp is the founder of Balance Point Divorce Funding.
 

 BNYAMIN APPELBAUM
 
BEVERLY HILLS, Calif. - Michelle Pont and her husband amassed millions of dollars in properties and investments from a freight-hauling business that they started with a single stake-bed truck in 1991. They bought a four-bedroom home, then a second home, a vacation home, a motor home and half a dozen cars.
                                   
Timeline: Legal Path to Lawsuit Lending
 
But when Ms. Pont decided to seek a divorce last year, she quickly ran out of money. She had no job. Her husband controlled the family's investments. A few months of legal bills maxed out her credit cards and drained her retirement account.

She wrestled with accepting a smaller settlement than she considered fair. Then a lawyer referred her to Balance Point Divorce Funding, a new Beverly Hills lender that offers to cover the cost of breaking up - paying a lawyer, searching for hidden assets, maintaining a lifestyle - in exchange for a share of the winnings.

In October, Balance Point agreed to invest more than $200,000 in Ms. Pont's case.

"It's given me hope," Ms. Pont said. "I don't view it as a loan; I view it as an investment in my future. They are helping me to get what is rightfully mine."

With some in the financial world willing to bet on almost anything, it should be no surprise that a few would see the potential to profit from the often contentious and emotional process of ending a marriage.

So far, the number of companies investing in divorce is small - Balance Point is one of the few that do it exclusively. But other businesses are gearing up. A New York start-up, Churchill Divorce Finance, also is planning to enter the business. The company's chief executive previously co-founded a publicly traded Australian company, ASK Funding, that has invested tens of millions in divorce cases there.

While this business is in its infancy, Balance Point is part of a bigger trend — the growing industry that invests in other people's lawsuits, arming plaintiffs with money to help them win more money from defendants. Banks, hedge funds and boutique firms like Balance Point now have a total of $1 billion invested in lawsuits at any given time, industry participants estimate.
 
divorce case 2

MONICA ALMEIDA/THE NEW YORK TIMES
Michelle Pont is one of the company's clients.
                                                             
Lawsuit lenders initially focused on personal injury cases, but over time they have sought new frontiers, including securities fraud cases brought by disgruntled investors, whistleblower claims against corporations and property development disputes.

Stacey Napp, a lawyer by training who has spent her career in finance, founded Balance Point last year with money from her own divorce. Since then, she has provided more than $2 million to 10 women seeking divorces. She says she is helping to ensure both sides can defend their interests.

"Everybody knows somebody where at the end of the day, the divorce was not equitable," she said. "We want to help those people, the underdog, to make sure they get their fair share."

Divorce cases may be a promising niche for lenders because costs can mount quickly - some top lawyers in Los Angeles charge more than $500 an hour - and because state laws uniformly require plaintiffs to pay lawyers upfront, rather than promising them a contingency fee, or a share of any winnings, as is common in other civil cases.

The state laws were written to make people think twice before pursuing a divorce. But Madeline Marzano-Lesnevich, a New Jersey lawyer who serves as a vice president of the American Academy of Matrimonial Lawyers, which sets ethical standards for divorce lawyers, said she welcomed the use of divorce financing as a workaround because, in her view, society also has an interest in helping people who are determined to separate.

"It furthers the concept of putting both spouses on an equal playing field," she said.

Ms. Napp developed the idea for Balance Point during an eight-year legal battle with her former husband, which she paid for with loans from family and friends. She filed to divorce David Napp in 2001 after 13 years of marriage. Mr. Napp, an investor in mobile home parks, agreed to pay $500,000 and allow her to keep the family home. But shortly after the deal was finalized, Ms. Napp was stunned to discover that Mr. Napp was about to sell his stake in the parks for $5.7 million. She asked the court to reopen the settlement, setting off a legal dispute that lasted until the spring of 2008, when an Arizona judge ruled in her favor.

"Somewhere along the way a light bulb went off," Ms. Napp recalled. "I said, 'I'm kind of a perfect storm. I know how to find assets, I understand litigation, I have resources - what happens to people who are missing even one of those elements?'"

She decided to seed a business with some of the money she had won in Los Angeles, the city of fleeting marriages. Balance Point has since raised additional money from private investors. Ms. Napp said she expected the first case to be resolved later this fall, providing her first profit.

Her customers fall into a pattern. They are women. They generally do not have jobs. They often are raising small children. And their husbands run their own businesses, making it tough to obtain financial information.

A stay-at-home mother with three children spent 16 months trying to compel her husband to produce current financial statements for his solo law practice. She was running out of money when Balance Point agreed in August to provide financing.

A woman who signed up in January has used the backing to build a case that she is entitled to share the value of 17 properties her husband put in a trust for the benefit of his children from a previous marriage. Both women declined to be identified.

Then there is Ms. Pont, who is battling her estranged husband, Jeffery D. Pont, over the value of their trucking company. The couple met in 1990. The next year, he bought his first truck with Ms. Pont's tax refund of $2,300, she said. He started a small business carrying ink and printing supplies. Mr. Pont and his lawyer did not return calls for comment.

By 1996, the couple had married and the company had rented an 1,100-square-foot warehouse. Ms. Pont said she answered the phones while nursing their first child. By the late 1990s, there was enough money flowing in for Ms. Pont to stay home with the child. And the company has continued to prosper. The main warehouse is now 150,000 square feet.

But she moved out in the spring of 2009 and filed for divorce. The estranged couple has since spent several hundred thousand dollars on lawyers, accountants and investigators. The judge overseeing the case has warned that the total could exceed $1 million if the two sides cannot reach a compromise.

Ms. Pont said the money from Balance Point would allow her to sustain the case for as long as necessary. Balance Point does not charge interest; instead, clients pay the company a percentage of their winnings.

Lawyers who finance other civil cases generally keep at least a third of the winnings. Ms. Napp said Balance Point required a "substantially smaller" share from clients, though she declined to be more specific.

The company wants to focus on people with marital assets between $2 million and $15 million, a bracket Ms. Napp described as "the lower end of the high end." She said that investing in smaller disputes was not worthwhile. Wealthier people, she said, seemed to resolve divorces more easily - perhaps because they still felt wealthy in the aftermath. "Anything south of $15 million, when you divide that in half and take out the legal fees, you're not in the same house, you're not taking the same trips - your life is different," she said. "You can't maintain that same quality of life that you're used to."

Ms. Napp says she urges clients to set aside emotions and negotiate a settlement. Indeed, she says she will not take clients who seem unwilling to compromise, fearing that their pursuit of justice will undermine Balance Point's pursuit of profit. She cannot compel clients to settle.

But Ms. Napp concedes that clients are attracted to Balance Point in part because she did not settle her own case. Most lawsuit lenders avoid any role in the management of cases, seeking to disarm critics who worry that lenders seeking profits will corrupt the pursuit of justice. Ms. Napp, by contrast, sells the benefit of her own experience.

Ms. Napp said that as she decided to create Balance Point, she realized that she could not settle her own case. "I had to win," she said. "Because I don't know that, if you don't have a happy ending, that people are going to think it's such a fantastic idea."

Copyright 2010 The New York Times Company. Reprinted from The New York Times, National, of Sunday, December 5, 2010.
                                                              
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