Tag Archives: bankruptcy

Litigation Finance Provides Help in Bankruptcies

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).

 

The Future of Litigation Financing

Alternative litigation financing (“ALF”) has seen dramatic growth in recent years, quadrupling between 2013 and 2016.[i]  Still, “the demand in the legal world is [] much higher than the supply of litigation finance”.[ii]

Several observers have noted that ALF will continue to expand in coming years, not only in volume, but into new areas.  One area set for expansion is the use of ALF by corporate law departments, where companies are increasingly interested in minimizing their litigation costs and risks.[iii]  ALF is also increasingly being used to fund an entire portfolio of cases, for many of the same reasons.

ALF is also being seen as a way to shift away from alternative fee arrangements, which currently may account for 80 or 90 percent of all revenues at many firms.[iv]  ALF provides a funding mechanism for relieving the pressures these fee arrangements place on both attorneys and clients.

Finally, the legal contexts in which ALF is utilized is expanding.  Historically used to fund plaintiffs’ personal injury cases, ALF continues to expand into the areas of appellate litigation, bankruptcy, tax matters, and private equity.[v]  It is also used during the enforcement stage of litigation.[vi]

In the appeals and enforcement context, ALF is recognized as a way to “hedge [against the] downside exposure [] and any further proceedings . . .  at a reasonable price [as well as] provide much needed liquidity” throughout resolution of legal matters.[vii]

For further information, please feel free to contact Roni A. Elias, who leads the litigation finance team at TownCenter Partners, LLC, a boutique litigation funding company that funds plaintiffs and plaintiffs’ law firms nationwide.  TownCenter Partners, LLC is a litigation funder with a social mission and continues to level the playing field in litigation. Mr. Elias can be reached at roni@yourtcp.com or (703) 570-5264. © 2018 Roni A. Elias. All rights reserved.

Topics:  Litigation finance, litigation finance market, third-party funding, alternative litigation finance, trends, enforcement, future, expansion, portfolio financing, bankruptcy, appeals.

[i] New York Law Journal, July 17, 2017, available at https://www.law.com/newyorklawjournal/almID/1202792922820/.

[ii] Mauritius Nagelmueller, “Recent Developments in Litigation Finance (Part 2 of 2)”, Litigation Finance Journal (December 11, 2017), available at https://litigationfinancejournal.com/recent-developments-litigation-finance-part-2-2/.

[iii] Bloomberg, “The Business of Litigation Finance is Booming” (May 30, 2017), available at https://www.bloomberg.com/news/articles/2017-05-30/the-business-of-litigation-finance-is-booming.

[iv] Thompson Reuters/Georgetown Law Center for the Study of the Legal Profession 2017 Report on the State of the Legal Market, available at https://static.legalsolutions.thomsonreuters.com/static/pdf/peer-monitor/S042201-Final.pdf.

[v] New York Law Journal, supra.

[vi] “Recent Developments in Litigation Finance (Part 2 of 2)”, supra.

[vii] Alison Frankel, “Litigation Funding in Bankruptcy ‘Should Be in Every Trustee’s Toolkit”, Reuters (March 14, 2017), available at https://www.reuters.com/article/us-otc-bankruptcy/litigation-funding-in-bankruptcy-should-be-in-every-trustees-toolkit-idUSKBN16L2HJ.

 

Litigation Finance as a Tool for Bankruptcy Trustees

When a company becomes insolvent, it can be difficult for a bankruptcy trustee or liquidator to find the resources to pursue claims that the company might have.   Litigation finance companies can be one place to find such resources.  A current case in Australia illustrates as much.

Recently, the Australian whisky company, Nant Distillery, collapsed, owing an estimated $4.9 million to creditors.  Its liquidator, Deloitte, discovered evidence suggesting that the former distillery company had been trading insolvent for years.  According to Deloitte’s Richard Hughes, “Investigations regarding the company’s affairs revealed [it] may have been insolvent from as early as 30 June 2014.  Moreover, the investigation revealed that Nant’s executives may have engaged in a variety of fraudulent activities, knowing that the company was insolvent.

Perhaps unsurprisingly, some of the parties involved in this scheme have been uncooperative with the liquidator’s efforts to unravel Nant’s finances.  This puts the liquidator in the position of needing to pursue legal claims in order to recover misappropriated assets, but, of course, because the company is insolvent, it can be hard to fund such litigation.

In the Nant case, Deloitte has considered solving this problem by reaching out to a litigation funder.  An investment from a litigation funder would permit Deloitte to pursue claims on Nant’s behalf with no risk of loss.  If the claims failed, the cost would be shifted to the funder.  And if the claims succeed, Deloitte would recover something substantial, even if it has to share that recovery with the funder.

This logic would apply to any bankruptcy trustee who needs to pursue claims on behalf of an insolvent debtor.  Litigation funding is more than just a way for personal injury plaintiffs to fund their cases.  It has a variety of applications in different procedural contexts, and it can be an invaluable tool for achieving a just result.

Topics: litigation finance, legal reform, third-party funding, litigation costs, alternative litigation finance, bankruptcy

 Works Cited:  Patrick Billings, Deloitte Liquidator Claims Nant Directors May Have Been Trading While Insolvent, The Mercury (Dec. 2, 2017) available at http://www.themercury.com.au/business/deloitte-liquidator-nant-directors-claims-may-have-been-trading-while-insolvent/news-story/c9a15465fb2b3729c474ee38370524b2

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

Is Litigation Finance Really Such a Contradiction to Established Norms?

Because a third-party litigation financer gains an economic interest in the legal claim belonging to another, the financing transaction can resemble the assignment of a claim. As a general rule, American jurisdictions impose strict rules that limit the ability of a party to assign its legal claim to another who would litigate it.  To a certain extent, discomfort with litigation financing may be traced to the fact that it seems like something that contradicts an established principle.

But is claim transfer really against the grain of the American legal tradition?  There are good reasons to think that it is not.  In fact, claim transfer is more common than one might think.

Under federal law, patent claims are transferable. As a result, patent claim transfer and acquisition is a multibillion-dollar industry. In addition, there is an accepted U.S. market for bankruptcy claim transfers. Creditors with preexisting rights have purchased claims out of bankruptcy and litigate them as their own.

Other transactions give one party an economic interest in the legal claim of another.  Insurers can acquire the claims of their insureds through subrogation.  Attorneys acquire an economic interest in their clients’ claims when they agree to be paid through a contingency fee.

Given these accepted practices through which one party acquires or obtains an interest in another party’s claim, it is harder to understand the idea that litigation financing is contrary to established ethical or legal norms.  To be sure, there is no claim transfer in litigation funding as there is in bankruptcy or patent cases.  In that respect, litigation funding is a less radical departure from the general rules prohibiting claim transfer. The party providing financing is not is such a different position than the insurance company who funds litigation for its policyholders or than the attorney with a contingent fee agreement.  Instead of viewing litigation financing as a doubtful novelty, maybe it is time to see it as an analogue practices that everyone takes for granted.

Topics:  litigation finance, legal reform, third-party funding, litigation costs, legal costs, economics of law practice, assignment of claims, bankruptcy, intellectual property, patent claims

 Works Cited:

Geoffrey McGovern, et al., Third-Party Litigation Funding and Claim Transfer:  Trends and Implications for the Civil Justice System (2010), available at http://www.rand.org/pubs/conf_proceedings/CF272.html

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.