Improving Efficiency of the Bankruptcy Estate
The casualty of an entity claiming bankruptcy is the potentially valuable claims that go un-pursued or undervalued. This is a common outcome in bankruptcy cases as funds are scarce and risks-takers are few. The duty of a trustee is to maximize the estate and pay back the creditors. In scenarios where the estate is already subject to low or no funds, these goals are extremely difficult to achieve since the trustee’s funds are limited, restricting available options. [i].
Litigation financing is prevalent in a number of fields; however, it is yet to make an appearance in the world of bankruptcy. This may be changing very soon due to a newly formed joint venture between Buford Capital, a litigation financing firm, and Chilmark Partners, a bankruptcy and restructuring firm. [ii].
Bankruptcy litigation funding has the potential to improve the efficiency of the overall process by providing outside funds to fund the bankruptcy. For example, in chapter 11 bankruptcies, where businesses seek aid in restructuring their debts, third party funding can step in to help provide financial assistance during the pendency of the bankruptcy and by funding the litigation
Furthermore, litigation funding can further a plan of reorganization by providing needed cash to fund a litigation trust. Without litigation funding, the estate’s claims are placed in trust and pursued with the goal of maximizing funds to pay back creditors. However, the trust uses the estate’s funds to pursue claims, thereby taking from the creditor’s ultimate share. In fact, the trust benefits at the expense of the estate, often aiming to protract litigation and increase fees. Litigation trusts have been given up to $50 million dollars from an estate, an amount that is negotiated. [iii] Thus, as it stands, the litigation trust seems rather inept. This inefficiency can be improved by the presence of third party funding, allowing the trust to be administered without reaching into the estate’s assets. Third party funding thus ensures higher recoveries for creditors, aligning the interests of the estate and the creditor. [iii]
Additionally, the presence of a litigation financing in the bankruptcy arena can serve to benefit the trustee tremendously. Trustee’s are required to value claims, a skill that funders have achieved an expertise in. Bringing in an institutional player to value bankruptcy claims will improve overall quality and accuracy. [ii] This is the perfect time for litigation financing firms to take the next step and expand funding to bankruptcy litigation, as bankruptcies are relatively low now but expected to rise. [iv].
[i] Justin Brass, Litigation finance: Bankruptcy’s best-kept secret, Sept. 19, 2016, http://www.newyorklawjournal.com/in-focus/id=1202767452753/Litigation-Finance- Bankruptcys-BestKept-Secret?mcode=1202617377215&curindex=5& slreturn=20160819105011.
[ii] Tom Corrigan, The Wall Street Journal, Litigation Finance Comes to Bankruptcy, July 27, 2015, http://www.wsj.com/articles/litigation-finance-comes-to-bankruptcy-1438029968; Stephanie Cumings, Bloomberg BNA, Can Litigation Funding Thrive on Bankruptcy?, Aug. 20, 2015, https://bol.bna.com/can-litigation-funding-thrive-on-bankruptcy/.
[iv] Brian L. Davidoff, Litigation Funders Find Opportunity in Bankruptcy, Jan. 2016, http://www.greenbergglusker.com/news/articles/litigation-funders-find-opportunity-in-bankruptcy.
