By: Jim Batson, Investment Manager and Legal Counsel
Assignments for the benefit of creditors, or ABCs, can provide a ready-made opportunity to use litigation funding to maximize the value of legal claims and provide a strong return for the creditors of an insolvent enterprise.
Governed by state statutes rather than federal bankruptcy law, ABCs allow insolvent persons or entities to assign their assets to an assignee, who then liquidates those assets for distribution among the insolvent party’s creditors. The assignee is under contract and generally has expertise in the company’s area of specialization. For example, an electronics company would contract with an assignee with expertise in electronics manufacturing.
ABCs are an increasingly common choice for insolvent companies looking to liquidate assets without going through the traditional Chapter 7 or 11 bankruptcy process. In some states, like California, where ABCs are especially prevalent, the process is handled outside the courts, giving companies a private bankruptcy option.
Case law around ABCs is still developing, and specifics often vary from state to state. The mechanics, however, are the same in most jurisdictions.
Naturally, the assets from an insolvent company may include unresolved and potentially lucrative claims. When a claim is assigned to an ABC, the assignee becomes the plaintiff in the case. It’s unlikely, however, that an assignee would want to spend its own money pursuing litigation. One option available is to hire a contingency firm that is willing to bear the brunt of all or most of the attorneys’ fees and costs. An assignee may worry, however, about the quality of the representation it will receive from a law firm that takes cases on a full contingency. Top-tier Am Law 200 firms rarely (if ever) take cases on full contingency.
By partnering with a litigation funder, the assignee can realize two immediate benefits. First, the funder can help assign a value to the claim. Second, the funder can provide the financing needed to hire top-tier counsel, who may be willing to take on some, but not all, of the risk involved in the litigation. Hiring the best possible counsel to prosecute a claim helps improve the likelihood of a successful resolution of the claim at the maximum possible value.
Litigation financing also enables the assignee to level the playing field with the defendant(s). An insolvency can create a classic litigation imbalance: Whichever company is not in bankruptcy is almost always in a far stronger financial position than the one that is. A defendant often can use its deep pockets to force the bankrupt entity to settle for pennies on the dollar or to abandon the case altogether. When a sophisticated assignee brings in a litigation funder, however, the defendant no longer can count on an imbalance of resources to achieve victory.
Most creditors are unwilling to put more money into a company that is already insolvent – even for a potentially lucrative piece of litigation. It’s to their benefit to encourage the assignee to use litigation funding to prosecute claims.
Bentham has long recognized that an insolvent company’s claims may be high-value assets. To learn more about how our team can help evaluate such claims and help fund their prosecution, contact us for a consultation.