The Benefits of Litigation Finance in Bankruptcy

Among its principal benefits, litigation financing is an effective means of spreading risk and maintaining liquidity.  Of course, in bankruptcy cases these virtues have particular value.  No wonder then that one observer has noted that litigation funding should be in every bankruptcy trustee’s toolkit.

The fiduciary duty imposed upon bankruptcy trustees requires them to maximize benefits and minimize risk for the bankruptcy estate, so that the estate’s assets can go as far as possible.  When a bankruptcy estate includes a litigation claim among its assets, trustees often have a challenge in determining the proper balance of risk and reward.  Pursuing the claim means spending the estate’s assets, diminishing its liquidity and creating a risk of loss.  Letting the claim go means losing a potentially valuable asset.

Litigation finance can help solve this conundrum.  Finding a litigation funding company to invest in the claim provides guaranteed cash for creditors and frees up other assets for distribution before the conclusion of the litigation matter.  To be sure, using litigation finance limits the potential upside of the claim; but, in many situations, accepting such a limitation can be a reasonable exchange for an assurance of at least some recovery.

In a recent bankruptcy case, which had been proceeding for nearly 15 years, the trustee won a $213 million judgment on a claim belonging to the estate.  When the losing party decided to appeal, the trustee and his counsel worried about preserving the estate’s liquidity during the appeal process, which could have gone for several years.  Thus, the trustee decided to find a litigation finance company who would guarantee cash for the estate in return for a share of the judgment after an appeal.

As the trustee explained his reasoning:

The sale will hedge the estates’ downside exposure on the appeal and any further proceedings against the defendants at a reasonable price; … provide much needed liquidity to the debtors’ estates; and guarantee that there will be funds available to pay long-suffering general unsecured creditors irrespective of the outcome of the appeal…All litigation is fraught with peril and unpredictability. Litigation claims are inherently speculative. Therefore, I believe it is better to monetize a portion of this speculative asset now when the estates are in the strongest position they have ever been in (i.e., holding a $213 million judgment after a jury trial that is fully bonded on appeal), than to gamble everything on the appeal.

This kind of sound reasoning will undoubtedly be adopted by more and more bankruptcy trustees as litigation finance continues to establish its place in the justice system.

 Topics:  litigation finance, legal reform, third-party funding, litigation costs, bankruptcy, risk management, asset maximization

 Works Cited:

 Alison Frankel, Litigation Funding in Bankruptcy “Should Be in Every Trustee’s Toolkit,” Reuters (March 15, 2017) available at http://in.reuters.com/article/us-otc-bankruptcy-idINKBN16L2HJ

TownCenter Partner Team

TownCenter Partners, LLC lead Asset Manager is Mr. Roni A. Elias. From modest beginnings, and with the help of a hand-picked dream team of professionals we have built one of the most dynamic and fastest growing companies in the country. TownCenter Partners LLC(TCP) is a real estate partner and master-planner providing development, leasing, management, and third party services. The company’s demonstrated ability to apply big ideas in creative and innovative ways has played a defining role in the firm’s success. Yet, TCP's most important insight has been the core understanding that it is not sight lines or site plans, but human activity, that defines a space and creates a place.

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