Litigation finance can serve to help produce meaningful recoveries in bankruptcy situations. This was well illustrated in the case of MagCorp bankruptcy trustee, Lee Buchwald and attorney Nicholas Kajon against MagCorp’s former holding company for driving MagCorp into bankruptcy.
After pursuing claims for over ten years and winning a $213 million judgment, Buchwald and Kajon were wary that MagCorp may win on appeal and wanted to guarantee that whatever the outcome of the litigation, there would be money to distribute to MagCorp’s long-suffering creditors. To do this, Buchwald and Kajon sold an interest in the right to receive proceeds from the judgment on appeal. This was a $26.2 million sale to then, Gerchen Keller Captial (now Burford), which allowed the bankruptcy estate to monetize a portion of the contingent asset and guarantee a minimum recovery to creditors.
The MagCorp situation is just one example of how litigation finance can be used besides the “traditional” case funding method where a financier pays the plaintiff of plaintiff’s law firm to continue a lawsuit. Additionally, litigation finance could be used in bankruptcy scenarios to provide large capital to the estate by purchasing the claim outright when the estate has one, high-value claim with extensive litigation. This method of litigation financing would mean that the financier would assume full litigation risk of the claim.
Or a slight variation on the traditional model of providing money directly to plaintiffs, litigation finance could be used to provide capital to law firms that specifically litigate bankruptcy issues on contingency terms. By giving the firm more upfront cash flow, it allows such a firm to lower its risk exposure and take on litigation even when a cash-poor estate is unable to pay for the litigation on their own.
However, bankruptcy is a more regulated area of the law than many other areas. With specific courts and codes, it could mean that some litigation finance agreements in bankruptcy would require court approval. For this reason, those seeking outside capital should be able to demonstrate the need for the economic arrangement and the justification for it. Additionally, bankruptcy finance transactions should be structured to maximize value and avoid any foreseeable pitfalls.
Even with the extra regulation, the liquidity that the litigation finance industry can provide to cases could be extremely valuable to certain bankruptcy cases, particularly when resources are low and estates need to maximize the value of their assets.
Topics: litigation finance, alternative litigation finance, third-party funding, bankruptcy, investments
Works Cited: Travis Lenkner, Litigation Finance and its Uses in Bankruptcy, Law360 (July 25, 2017).