MagCorp bankruptcy trustee’s counsel gives insight on the use of litigation finance in the bankruptcy sphere

In 2016, Nicholas F. Kajon[i] of Stevens & Lee, counsel for Lee E. Buchwald, the bankruptcy trustee for Magnesium Corp. of America (“MagCorp”), had a client with $213 million judgment against MagCorp’s former owner, was facing an appeal on the judgment, and needed to get creative in order to withstand the appellate process as Kajon’s client was left with approximately $650,000 to pursue the appeal and manage the estate.

Thinking outside the box, Kajon utilized litigation finance to get MagCorp to the finish line. In a unique move, he obtained $26.2 million from a litigation funder in exchange for the funder’s right to receive a portion of the recovery from the underlying judgment.

We sat down with Kajon to get his take on how the bankruptcy bar has reacted to the use of litigation finance since MagCorp and whether funding should be integrated by lawyers into their practice.

Bentham: Since your success with using litigation finance in MagCorp, have you seen an increased interest in the use of funding from your peers? Do you know any that have utilized financing due to your experience with it?

Kajon: I have seen an increase in the use of litigation finance in the commercial litigation sphere, but not in the bankruptcy arena. A number of practitioners inquired about the MagCorp case, but I am not aware of anyone who subsequently used funding. Of course, very few litigation finance transactions are publicly disclosed. MagCorp was unique in that we had a pending bankruptcy case. Where a post-confirmation bankruptcy trust obtains funding, there is no requirement for public disclosure.

Bentham: Despite your success with funding, do you have any hesitation about using it again in the future?

Kajon: Not at all. It is an invaluable arrow to have in your quiver. While it may not be suitable for every case or every client, like any other useful tool, it should be considered in every appropriate situation.

Bentham: How has the bankruptcy bar reacted to the use of litigation finance in insolvency matters? (Do they embrace it or reject it?)

Kajon: The bankruptcy bar has been slow to embrace the use of litigation finance in insolvency matters, but I believe it is just a matter of time. It is a natural fit for bankruptcy because very often there is little or nothing available for unsecured creditors absent successful prosecution of litigation claims. However, there are rarely sufficient funds available to enable proper funding of litigation claims belonging to a bankrupt estate. Therefore, litigation finance and bankruptcy are a match made in heaven.

Bentham: What are some common misunderstandings you’ve heard about litigation finance?

Kajon: One of the most common misunderstandings is that litigation finance will lead to an increase in the number of frivolous lawsuits. I believe that the exact opposite is the case. Clients are often extremely optimistic about their litigation claims. Sometimes lawyers, especially those with a long-term relationship with the client, can get caught up in this optimism and thus, like their clients, look at the viability of the claims with rose-colored glasses. Litigation funders, on the other hand, bring not just a high level of sophistication to the table, but also unparalleled objectivity because they will have to advance hard cash to a situation in which they have no pre-existing vested interest. Therefore, if a litigation funder passes on a particular matter, it can serve as a reality check for the client and the lawyer. Likewise, the fact that a litigation funder is willing to move forward always provides me with an additional degree of confidence in my case.

Bentham: Do you see any barriers to the overall acceptance of litigation finance by the legal community? Please explain.

Kajon: Like anything that you haven’t tried before, lawyers need to get comfortable with the process, including any concerns about waivers of attorney-client privilege. Absent unusual circumstances (e.g., disclosing confidential information before execution of a nondisclosure agreement), most courts that have considered these issues have held that confidential information shared with a funder are materials prepared in anticipation of litigation and thus subject to attorney work-product protection.

Bentham: To those lawyers and law firms that are thinking about incorporating litigation finance into their practice now, what advice would you give them?

Kajon: Don’t be afraid to try something different. If you have a case that may be an appropriate vehicle for litigation finance, then why not give it a shot? You have nothing to lose. Even if you are unable to obtain funding on financial terms that are acceptable to you and your client, the process of having to explain the merits of your case to a third-party and respond to the prospective funder’s due diligence inquiries will force you to take a more critical look at your case and may assist you in framing the issues more persuasively and avoiding any potential pitfalls. Better to learn about potential problems before you file your complaint, than after.

To learn about funding options for bankrupt estates, contact us for a consultation.