Episode 17

Read the transcript below:

Amy Geise:

Hi, and welcome to this episode of Beyond Hourly, hosted by Omni Bridgeway, one of the world's most experienced dispute funders and enforcement specialists. Our podcast, like our company, focuses on commercial disputes around the globe and innovative ways to maximize value for clients and for law firms. Episodes of this podcast can be found on our website, www.omnibridgeway.com, iTunes, Spotify, and other podcast networks.

We welcome you to subscribe to the podcast and leave us reviews. My name is Amy Geise and I will be your host today. On this episode, we're going to talk to Ken Hill of Quilling, Selander, Lownds, Winslett & Moser, P.C. and we're going to focus our conversation on litigation funding for bankruptcy trustees. I asked Ken to join for this conversation because he has substantial experience representing trustees and he has firsthand experience using litigation funding to achieve particularly great results for one of his trustee clients.

Before we dive in, I'll briefly introduce myself and Ken just to give our listeners today a little context. I am an associate investment manager with Omni Bridgeway, based in our Houston Texas office. I've been with Omni for almost three years now, and prior to joining, I was a bankruptcy attorney and a litigator at Porter Hedges. My bankruptcy practice was pretty broad based. I did debtor work, secured creditor work andI also did trustee representation. Our topic today is certainly one that I have experience with firsthand.

At Omni Bridgeway, since joining, my primary role has been to underwrite investments that come to us for funding and given my background, I have a particular focus in our bankruptcy and insolvency investments, but I also work on a broad array of our commercial litigation investments outside of the bankruptcy context as well.

Ken Hill, our guest today is a shareholder with the law firm of Quilling Selander, as I mentioned, and there he practices bankruptcy law and general litigation. Ken has been practicing for 29 years and is board certified in business bankruptcy law by the Texas board of legal specialization. A large part of his practice involves representing chapter seven bankruptcy trustees in both consumer and in business cases.

Ken, welcome.

Ken Hill:

Thank you for having me.

Amy Geise:

Absolutely. Just some intro questions about your practice to let our listeners get to know you. Is there a particular type of trustee engagement that you typically take on?

Ken Hill:

Sure. Typically, I represent a chapter seven trustee as his or her general bankruptcy counsel to handle all legal matters that come up in the bankruptcy case—from locating assets to selling assets, to pursuing litigation claims, to claim objections—whatever comes up in the case is my typical representation.

Sometimes I'll represent a bankruptcy trustee as special counsel for a more limited range of service, but that's probably about 10% of the total work that I do for trustees.

Amy Geise:

Got it. When you're undertaking the more general counsel representation, how do you typically structure your fee?

Ken Hill:

A general representation for a trustee is always on an hourly plus expenses arrangement. Occasionally, if I'm representing a trustee as special counsel for either a group of cases or a particular litigation matter, then it might be on a contingency but that's very, very rare for me or my firm to do.

Amy Geise:

If you're working in the general counsel capacity for one of your trustee clients and in the course of representing the estate, a particularly juicy piece of litigation is discovered, how would your firm handle that particular litigation? Would it pivot and act as litigation counsel as well, or would you tend to engage a separate firm to take on immediate litigation work?

Ken Hill:

If it were something that my firm was not comfortable taking on an hourly basis with the existing arrangement that I had with the trustee, recognizing that there's significant risk of non-payment in that situation, then I would not be comfortable adding a second layer or a second type of fee arrangement and taking on part of the representation on a contingency, leaving part of it on an hourly basis.

In that scenario, I would suggest to the trustee that he or she engage special counsel on a contingency arrangement for that particular single piece of litigation or maybe a group of related litigation matters. I just don't think it looks good and I think there may be some ethical concerns with having the trustee's general counsel representing the trustee on an hourly basis for things that don't really produce revenue for the estate, like client objections and those sorts of things, and then what looks to me almost like double-dipping and saying, "Oh, here's this great piece of litigation and I want a bigger piece of that."

I want to do that on a contingency basis to allow me to recover more than I would get if I just took it out on an hourly basis.

Amy Geise:

Right. I guess the concern might be that the US Trustee or maybe even the bankruptcy court would question your firm in trying to have two different fee arrangements in its representation of the same client, essentially?

Ken Hill:

Yeah, I think that's right.

Amy Geise:

That's an interesting tension and I think a place where litigation funding could actually provide a great solution. If the trustee in that circumstance obtains funding for the litigation, he could continue to engage your firm on an hourly, or at least partial hourly, basis and your firm wouldn't have to face the tension of pivoting and having an alternative fee structure for just the litigation component of its engagement. And likewise, it wouldn't have to outsource any of the work to another firm, it could keep all that litigation work in-house in conjunction with the overall representation of the estate. It seems to me like that might solve the problem quite nicely.

Ken Hill:

Yes, absolutely.

Ken Hill:

That would solve my concerns about it either appearing or being an ethical problem and it would also help me to get the assistance that I would need from my colleagues within my firm, because I have a long-standing relationship with most of the trustees that I represent and I tell them that I take the good, the bad and the ugly, and sometimes the cases either look good at the beginning, or maybe they look bad at the beginning, but sometimes they just don't work out and I end up not getting paid or having to take a significant discount.

And I understand that, and I'm willing to take that risk, but that's a risk that my colleagues typically are not willing to take and having litigation funding in place would solve that concern for my colleagues, because if it's a significant piece of litigation., Obviously I'm going to need help from other partners and associates within my firm and asking them to take a leap of faith with me is a lot more difficult than asking them to help me work on a case where we have at least a hybrid arrangement where they're not going to get completely zeroed out on their fees.

Amy Geise:

And just to provide a bit more color on that hybrid structure that you referenced. That's something that is very commonly effectuated by litigation funders sometimes referred to as the 50/50 model in which the trustee would be the direct recipient of the litigation funding proceeds and the trustee would use those proceeds on a monthly basis to pay the attorneys.

The trustee maintains authority to approve bills and to govern litigation strategy, but the funder is merely providing the ongoing litigation fees and costs. The reason it's called the 50/50 model is that typically the firm will be getting paid about half of its hourly rate and in exchange, the firm retains a partial upside of the ultimate recovery, typically about half of what a full contingency would be—in the neighborhood of 20%. In the bankruptcy scenario specifically, a litigation funding transaction with a trustee would be subject to court approval.

It is financing outside the ordinary course of business so it would be brought pursuant to section 364.I think an important part of this caveat for a trustee to consider is that the funding partner is going to be directly in focus by the court and potential objecting parties when the trustee is seeking approval of this arrangement.

The litigation funding industry is growing quickly. There are a lot of players in the market right now. It makes it, I think, particularly important that the trustee find a financing partner that is going to appear reputable and not raise concerns on behalf of the court or other parties that may not want litigation funding (often the defendants).

Ken Hill:

Yeah, absolutely and one thing that I could see the court or objecting party asking is why do you need litigation funding, why don't you just hire a firm on a straight contingency arrangement. And it seems to me that the answer to that question is, well for this particular case, the trustee believes this firm is best suited to handle this and is not willing to do it on a pure contingency arrangement and, depending on the type of case and the likely outcome or likely recovery, litigation funding could end up providing a greater return to the bankruptcy estate than giving away a full contingency arrangement on a straight contingency fee.

Amy Geise:

Right. I think that's a great point and one that really necessitates the trustee to think about the economics of each particular litigation. This a case where there's a huge damage model, but the litigation trajectory doesn't look like it's actually going to be commensurately time-consuming and expensive. If so, then it might not make economic sense for a trustee to give 40% of that upside to a firm.

What would make more sense is to do a hybrid fee where the firm gets a smaller percent of the upside and the trustee gets to retain, instead of 60%, it gets to retain 80%. And meanwhile, a funder is not going to get paid a contingency. A funder is going to receive a return based on the money that is actually put in. If we're talking about litigation, that's going to be relatively inexpensive to pursue,the trustee would much rather pay dollar for dollar than a percentage of the ultimate recovery.

Ken Hill:

Absolutely. It's nice to have another arrow in the trustee's quiver.

Amy Geise:

And litigation funding can also be an arrow in the law firm's quiver outside of the 50/50 model. Litigation funders also offer portfolio funding directly to law firms. In which case, the lawyers rather than the trustee would be the recipient of litigation funding proceeds and the collateral would be the law firm's contingency interest in the cases themselves, and yet another alternative structure for bankruptcy lawyers to consider when looking at litigation funding is an asset sale pursuant to section 363.

In this context, a litigation asset, whether it's a judgment or even an unliquidated claim can be auctioned off to a litigation funder, which creates an immediate liquidity event for the estate. This approach poses, I think, very different advantages than a traditional 50/50 funding, or even a portfolio funding arrangement, and it's also an area Ken, I think, where your expertise really comes into play.

So (Ken), you were counsel to the trustee in the Latitudes Solutions case in the Northern District of Texas. I'm wondering if you could tell us a little bit about that case?

Ken Hill:

Sure. Latitude Solutions was a publicly traded corporation that designed large mobile water purification units that were built to be carried around on semi-trailers, and then in theory, those could be taken to various different locations to clean water. For example, oil and gas drilling sites, other commercial applications, and even for humanitarian uses like in third-world countries where pure drinking water is a real problem. But they just didn't have enough capacity and they required way too much maintenance to be commercially cost-effective and so the company had, for some reason, 15 of these units built without having any of them really proven to be commercially viable.

Each one cost over a million dollars and that ultimately led to the bankruptcy filing. The company filed for chapter seven in 2012, and Carrie Ebert was the chapter seven trustee and I was fortunate enough to represent Ms. Ebert in that case. The part where the litigation funding came into play was the trustee identified some potential causes of action against the debtors, former directors and officers, and some other insiders, but it was going to be a very time intensive and expense intensive undertaking to pursue that litigation.

In that situation we looked for and eventually found special counsel to pursue those director and officer claims on a pure contingency arrangement. The trustee interviewed several different law firms that were not willing to take the case on a pure contingency arrangement and those were firms that the trustee and I believed would have been very good candidates to pursue that litigation.

Fortunately, for the trustee and for me, we ultimately located special counsel, lead counsel with Jay Cullens, and he was willing to take it on a straight contingency arrangement and did a fantastic job and I would hire him again, either on a straight contingency fee arrangement or on an hourly fee arrangement if we had the litigation funding in place. But that was really a lucky break for the trustee that we were able to get in touch with Jay and get him to take the case because the firms that we had talked with before him were not willing to do it on a straight contingency. Then, just by a little bit of background, there was a week-long jury trial in 2018, and the jury returned a verdict in favor of the trustee against several defendants totaling over $20 million. And then of course not surprisingly, the defendant filed an appeal to the fifth circuit and it was at that point that we were looking at selling the judgment while the appeal was pending, and so there was a short window of time there that we had to work with.

The litigation funders that we were talking to at that point were much more sophisticated and much more familiar with litigation and appeals and the risks and rewards involved than I think most other traditional asset purchasers. I think we were able to work within those shortened time constraints because of that and it didn't require as much of the trustees time or as much of the time of the trustee's special counsel to get the potential buyers up to speed because they were so sophisticated that they knew the right questions to ask and didn't waste anybody's time going down rabbit trails and asking for information and documents that really would not end up being relevant.

 It was actually a very, very good experience, probably better than dealing with a wider range, I guess, of asset purchasers in bankruptcy.

Amy Geise:

Well, that's, I mean obviously great to hear from a funder's perspective and I'm wondering overall, did it lead to good results for the trustee and creditors?

Ken Hill:

It absolutely did. That's where the rest of the story comes into play. Ultimately, we had two litigation funders who were bidding on the judgment. We did a live auction at the courthouse and there was robust bidding between the two who were bidding for the judgment. Ultimately one was successful. We sold the judgment for, I believe it was 4.7 million and at that point, the trustee was out of it, but there were no strings tied to the sale. The trustee did not retain any upside interest in the case that then allowed the trustee to move on with closing the case and not waiting around for the appeal to be decided.

That was one benefit obviously to the trustee, but the bigger benefit was that, the judgment ended up getting reversed on appeal. If we would have just waited and waited, worked through the appeal, the bankruptcy trustee would have received nothing for that judgment. The trustee wouldn't have received any commission, the professionals wouldn't have been paid, and the creditors would not have been paid and through the litigation, through the sale process, creditors got paid. I think it was around 13 cents on the dollar for general unsecured creditors and all the professionals got paid and the trustee received a commission of almost $300,000 in that case.

Amy Geise:

Yeah and I mean, that reminds me of an important feature of litigation funding to the extent that I didn't emphasize it earlier in our discussion, but it is non-recourse. It's part of the reason that litigation funding is such a great de-risking mechanism for litigants, trustees, and their counsel if the litigation isn't ultimately successful, or if it's reversed on appeal. The funder bears that risk and the borrower, the trustee, or the law firm owes nothing back to the funder. I’m kind of curious if your experience brings to mind any advice you might give to an attorney or a trustee considering selling a litigation asset pursuant to section 363.

Ken Hill:

Yeah. I would say number one would be to consider litigation funders as potential buyers. Before that process started, I had never even thought of contacting a litigation funding company to look at that because I just didn't think about that as a use of litigation funding, but boy, it sure worked out well for us in that case.

So I'd say number one, consider litigation funding because I would not have before the Latitudes Solutions case. The other thing is just to plan ahead, just like any other kind of sale or anything else you do in bankruptcy. You got to plan ahead because you've got some deadlines coming up and make sure that the people you're contacting are serious and reputable companies who can come up with the money to close and who can evaluate the asset without taking up everybody's time or wasting everybody's time if they're not sophisticated enough to really understand the litigation, the underlying litigation, and the issues that are going to be presented on appeal.

Amy Geise:

And I'll just interject, one good resource, there are many good resources in terms of identifying funders that will, like you said, have both the ability to close and the sophistication to underwrite the claim quickly and effectively, but Chambers actually now ranks litigation funders. So that's a good publicly available resource for lawyers and trustees who are thinking about engaging and not exactly sure where to start.

My last question for you, Ken, do you think there are any particular concerns that might prevent lawyers or trustees from reaching out to a funder when they're considering it on one of their cases?

Ken Hill:

I guess the two concerns that I can think of are number one, just that the trustee or her counsel may not be familiar with litigation funding, or at least not be familiar with it, of potentially just being a buyer for the litigation as it wasn't in the Latitude Solutions case and number two, for those that are familiar, I would say it's just that the question of whether a particular piece of litigation has enough money at stake, enough potential recovery, a good enough defendant, solid enough defendant to actually collect the judgment, to make it really worthwhile to first of all, even pursue litigation and second to engage litigation funding, or to explore litigation funding to pursue it.

Amy Geise:

Right, the three-legged stool as they call it right—merits, damages, and collectability-

Ken Hill:

Absolutely.

Amy Geise:

But to that concern, I would just respond that funders are always happy to pick up the phone and serve as a resource in making that initial determination—whether a case is worth pursuing whether the juice is worth the squeeze—and that's what I do every day. That's what the investment managers and legal counsel at Omni Bridgeway do every day and we've got a team that is really experienced and equipped to analyze those types of issues and make a determination of what the case is worth.

I mean, a funder is never going to want to put money into a case if the funder doesn't think that that case is going to yield a sufficient recovery because like I said, it's non-recourse capital. So hopefully lawyers and trustees who've listened to this discussion realize that they don't have to make that initial determination alone and if there is that kind of reluctance, a funder might be the first person you should call to help you brainstorm and make that decision in an informed fashion.

Ken Hill:

It will certainly be high on my list going forward.

Amy Geise:

Well, fantastic. My job here is done. Ken, thank you so much for being our guest today and for sharing your knowledge with all of our listeners. You can access a transcript of this podcast on Omni Bridgeway's website atwww.omnibridgeway.com. I invite you to follow up with me at [email protected] for any feedback, ideas, or insights you have on the topics we covered on today's podcast. Thank you so much for listening and goodbye.