New York Law Journal: Litigation Funding - An Essential Tool for Maximizing the Value of the Debtor’s Estate

Kenneth Epstein, Investment Manager and Legal Counsel at Bentham IMF, and Eric B. Fisher, Partner at Binder & Schwartz, analyze and explain the benefits of utilizing commercial litigation finance in corporate bankruptcy cases in an article published by the New York Law Journal. Epstein and Fisher discuss how litigation funding “is a tool for unlocking the value of a bankruptcy estate’s litigation claims when the estate itself lacks the resources to pursue the claims and traditional sources of financing are not available.” They further explain that litigation Finance can be used “by any party pursuing a claim for the benefit of the estate: the debtor, creditors’ committee or trustee—and at any stage in the case, both before and after confirmation of a plan of reorganization or liquidation.”

In this overview of how commercial litigation funding can be applied in the bankruptcy context, Epstein and Fisher explain how litigation funding “can help level the playing field when an estate representative is up against well-heeled defendants seeking to use their greater resources to drive a settlement unfavorable to the estate.” They point out that “it may be possible to guarantee a minimum recovery to the estate from a particular litigation asset.” In In re Complete Retreats, No. 06-50245, 2011 WL 1424579 (Bankr. D. Conn. 2011), the liquidating trustee entered into an option agreement with its litigation funder whereby the funder paid the trustee an option premium for the right to fund the trustee’s fraudulent conveyance action. The option premium ensured a minimum recovery to the estate while also securing funding to prosecute the litigation.

They also highlight a recent survey conducted by Law360 that found “while lawyers in general have mixed feelings about litigation financing, lawyers who have actual experience using this type of financing view it favorably,” and that “while this concern is based on misconceptions about litigation funding, it is particularly the case that the concern is alleviated in the bankruptcy context,” because “non-ordinary course agreements, like litigation funding agreements, entered into by the debtor post-petition, must be disclosed and are subject to approval by the bankruptcy court.” The process typically involves “an opportunity for parties in interest to object to the funding agreement and for the court to rule on that objection, and “the likelihood that an estate or its professionals would enter into an imprudent agreement are lessened because of this oversight.” The bankruptcy process protects not only the estate but also the funders.

Epstein and Fisher conclude that as litigation finance has become more prevalent in general civil litigation, it “promises to become a more regular feature in bankruptcy litigation.” According to Epstein and Fisher, “bankruptcy estate professionals, including lawyers, trustees and receivers, should remain alert to issues concerning litigation funding, to ensure that they deploy this tool when it can best be used to maximize the value of the debtor’s estate.”