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August 30, 2022 Articles

Three Practical Insights from the May 2022 Webinar on Litigation Funding in Bankruptcy

Financial and legal experts offer suggestions for obtaining litigation funding.

By Steven Hilfer

On May 11, 2022, the ABA Litigation Section’s Bankruptcy and Insolvency Committee and Commercial and Business Litigation Committee jointly held a webinar focused on litigation funding within the bankruptcy setting. The panelists were Martin Flics, a former partner at Latham & Watkins and currently a senior advisor at Parabellum, where he advises on litigation funding solutions; Connor Murphy, a director at Burford Capital, another top litigation funding firm; and Stephanie Wickouski, a litigation and bankruptcy partner at Locke Lord.

As a starting point, the panelists acknowledged the increased use of litigation funding across all forms of litigation but commented that its use has been increasing within the bankruptcy setting as well. The panelists highlighted that litigation funding can be a useful way to resolve complex matters during the bankruptcy process, can open the door for more creative litigation with firms other than contingency-based law firms, and can ultimately lower costs for the bankrupt entity. The panelists observed that, while the most typical entry point for litigation funding is through a litigation trust formed during the creation and confirmation of a plan of reorganization, there have been other opportunities for the use of litigation funding earlier in the bankruptcy process. The panel specifically noted the possibility of using litigation funding as a form of debtor-in-possession financing, especially in the case of companies in bankruptcy with few or no assets other than litigation claims.

Below I highlight just a few key practical insights from this webinar for bankruptcy and commercial litigations. I encourage everyone to view the full content through the ABA’s website (see the link at the end of this article).

Key Takeaway 1: “Be Prepared” When Approaching Litigation Funders

The panelists underscored the importance of approaching litigation funders prepared to discuss the case, and they highlighted the importance of a well-drafted and thoughtful submission, even though the litigation funders will also do their own research. Items that litigation funders assess and questions that practitioners should be prepared to answer include the following:

  • Are damages speculative or real?
  • Is there a collection risk?
  • Are there assets of the judgment debtor that can be attached? How difficult would it be to do so?
  • How long will it take to reach a resolution?

In addition to having these questions addressed, litigation funders appreciate a realistic assessment of the merits and weaknesses of the case. In particular, the panelists found it helpful if the practitioners are prepared to explain their argument, as well as the probable arguments that the other side will make regarding the case. The panelists viewed an overly optimistic assessment and a failure to identify weaknesses as potentially problematic, raising doubts more generally about the viability of the underlying case. Finally, the panel recommended identifying for the litigation funder the key documents and court rulings in the docket to assist the litigation funder in conducting its due diligence. The panelists considered this especially helpful in the case of bankruptcies with lengthy and detailed dockets that would make relevant rulings more difficult to identify quickly.

Key Takeaway 2: Don’t Wait until the Last Minute—Some Thorny Issues Can Arise

While many bankruptcy practitioners may wait until their bankruptcy case matures and litigation claims are more fully formed, the panelists recommended consulting litigation funding groups early because certain procedural matters can slow the process and may ultimately limit the ability to use litigation funding. For example, the panelists discussed the many complexities underlying nondisclosure agreements that may be need to be addressed before the parties can proceed. In addition, depending on when a litigation funder is engaged, there may be a need to obtain judicial approval depending on whether approval is sought before confirmation of a plan of reorganization, during plan negotiations, or after confirmation. Finally, the panelists underscored that the process of engaging a litigation funder shares certain attributes with obtaining a loan, although they stressed that litigation funding is not a loan; rather, it is an investment made by the litigation funder. As a result, securing litigation funding requires extensive due diligence and research on the part of the litigation funder—a process referred to in part as underwriting—to determine the matters the funder wishes to fund and the associated terms. For all these reasons, any bankruptcy practitioner contemplating litigation funding should allow for the time necessary to complete the process.

Key Takeaway 3: Litigation Funders Typically Prefer Some Types of Cases over Others

The panelists noted that certain types of cases were more generally desirable to litigation funders, including (i) preference matters, (ii) breach of fiduciary duty claims, and (iii) any cases involving fraud. The panelists also indicated that litigation funders were less likely to have an interest in litigation that would be more likely to result in nonmonetary damages, although they left open the option of considering those types of matters if an equity interest in the future operations of the reorganized debtor could result in a meaningful return. Other less desirable cases are trade-based claims and malpractice claims against the debtor’s lawyers and accountants. In addition, other types of cases present unique issues that make them more complicated for litigation funders (and possibly less desirable as well), including cases involving valuations and the avoidance of liens, as well as litigation between senior and junior creditors over make-whole provisions, the meaning of subordination provisions, and their treatment under a plan of reorganization, especially if it results from an uncertain form of consideration.

In general, the panelists observed that they turn away over 95 percent of the cases seeking litigation funding, a fact that underscores the importance of the suggestions outlined above for obtaining litigation funding.

I encourage you to listen to the webinar in its entirety. Our experienced panel shared even more insights into and background of particular cases in which attempts to obtain litigation funding ran into pitfalls that could have been avoided and, more importantly, opportunities for litigation funding that could ensure a better outcome for the estate as well as the claimants.

To access the program, visit Litigation Funding: A Focus on Bankruptcy Finance.

Steven Hilfer is a senior managing director at Ankura in New York City, New York.

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