By: Dave Kerstein, Investment Manager and Legal Counsel
Litigation or liquidation trusts are regularly established to administer litigation assets on behalf of a bankrupt estate or its various stakeholders. Often, these trusts are underfunded and thus unable to pursue litigation claims to the highest and best outcome. Such underfunding may force trustees to make cost-driven decisions, such as compromising on the quality of the counsel they hire, the settlement value of the claims, or both. Litigation finance is a resource trustees can use to avoid this dilemma and align with strong partners who share an interest in maximizing recovery of the litigation assets.
Partnering with a funder can also provide a litigation trust with greater confidence about the viability of its claims. Proper valuation of a claim requires a keen understanding of its merits, its potential for success, and the recovery that may be achieved. Litigation funders, whose investments are non-recourse (i.e., only receive a return on their investment if the case is successful), are experts on the value and merits of claims. Funders conduct careful due diligence to determine which matters have the highest likelihood of success so as to finance only the most valuable claims. Their interest in financing a case can give trustees and other stakeholders comfort that the trust is pursuing meritorious claims and attempting to achieve the maximum possible recovery.
Funders can also provide an objective eye on a case as it proceeds through litigation. Because they are generally not as emotionally invested or “deep in the weeds” of the case, funders who are monitoring its progress for financial reasons can provide an objective view of how it is proceeding. Funders like Bentham, whose investment team is made up entirely of experienced litigators, can also offer strategic advice on the best way to prosecute the case to a successful conclusion.
For the trust, funding can also be used to provide a liquidity event on a successful or valuable litigation that is already ongoing. This allows the trust to expand its portfolio or to pay other expenses. Take, for instance, the recent case of Magnesium Corp. of America (“MagCorp”), located in the New York Southern Bankruptcy Court, Case No. 01-14312. MagCorp’s trustee was locked in a lengthy battle with the company’s former owner who was accused of looting its assets. In 2015, the trustee won a $213 million judgment. The defendants appealed, and after years of litigation, the trustee was left with $650,000 to pursue the appeal and manage the estate. The trustee then turned to a funder and received $26.2 million in exchange for a portion of any return.
Finally, funding can also be used to enable stakeholders in a chapter 11 estate to reach agreement on a plan of reorganization more quickly. Absent a funder, litigation trusts are often funded by stakeholders in the bankruptcy - usually secured lenders and/or other creditors. Naturally, those stakeholders would prefer to fund the trust with as little capital as possible, retaining the majority for themselves. Using litigation finance instead resolves this conflict by freeing up capital to be kept by or distributed to creditors. This can make it easier for the stakeholders to reach agreement on a confirmable plan of reorganization.
To learn about funding options for bankrupt estates, contact us for a consultation.