Take a DIP into Litigation Finance

Take a DIP into Litigation Finance

A recent case in Canada provides a prime example of how the innovative use of litigation funding can unlock potential claims worth millions of dollars to a bankrupt estate. Like the U.S., Canadian courts have the power to grant an insolvent company the right to obtain financing on a priority basis, a key resource for debtors seeking to restructure or liquidate in an orderly fashion.[1] 

The case involves Bluberi Gaming Technologies Inc., an insolvent Canadian casino software company. In its insolvency filing, Bluberi sought to monetize its only significant asset: a $200 million lawsuit against its largest secured creditor that, if successful, could generate a sizable return. To pursue the litigation, the estate needed a substantial infusion of capital.

Enter Bentham IMF. In an agreement recently approved by the Quebec Superior Court, which is overseeing the case, Bentham agreed to provide financing for the litigation in exchange for a percentage of a successful recovery.[2] Bentham’s funding can be analogized to traditional DIP financing in the U.S.

DIP financing is usually thought of as a way for an estate to fund business operations while it proceeds through a bankruptcy. In this case, however, Bentham’s financing was used to cultivate the only asset of the estate. As a senior insolvency lawyer told Canada’s Law Times, the financing “created a recovery where there was none before.”

How It Works

DIP-type financing involving a litigation funder can work in different ways. The Bluberi case represents one possibility, that of an insolvent estate whose primary asset is a case or portfolio of cases. In this circumstance, a litigation funder may be the estate’s only financing option. The debtor may use a litigation funder’s capital for any number of purposes, including operational expenses, chapter 11 expenses, or expenses associated with the litigation itself.

Another scenario involves a debtor with litigation and non-litigation assets. Under such circumstances, a litigation funder may work in tandem with a traditional financial institution that is providing a DIP loan to cover the debtor’s operating costs. Many traditional lending institutions are wary of using litigation as collateral for their debt, as they are not well-equipped to assess the inherent risks and unpredictability of litigation. Accordingly, traditional lenders may ignore these valuable assets, enabling litigation funders like Bentham to collateralize a separate funding arrangement with the litigation assets.

For the estate, litigation funding can provide an attractive alternative, or supplement, to financing from a more traditional lender. A funder can help the estate more accurately assess the value of its claims and focus on those with the greatest potential for a significant recovery. Another key benefit: litigation funding is non-recourse, which means that the funder receives a return on its investment only in the event of a successful recovery.

Made for the USA

While the Bluberi funding arrangement has broken new ground in Quebec, the legal issues involved aren’t unique to Canada. Litigation funding is also being used with increasing regularity in American bankruptcy cases. For example, in In re Fastship, an insolvent freight ship technology company with valuable patent infringement claims against the U.S. government had a seemingly insurmountable problem: it could not pursue its infringement claims without financing, and it could not get financing without the consent of a disparate group of creditors holding liens on all the company’s property. To solve the problem, the company sought bankruptcy protection and approval of a liquidating plan that provided for the establishment of a litigation trust. None of the creditors objected to the proposal in bankruptcy, and it was approved by the court. The debtor obtained capital from a litigation financier to fund the liquidating trust, which has allowed it to pursue litigation recoveries for the benefit of creditors.[i]

Litigation funding has also been used in other Canadian cases. In approving the Bluberi financing arrangement, the Quebec court relied on opinions from Ontario’s superior and appellate courts approving litigation funding for Crystallex International Corp. Crystallex, a Canadian mining company, sought protection from its creditors following the Venezuelan government’s expropriation of a gold mine it operated in that country. To pursue its case, the company obtained $36 million in DIP financing from a litigation funder. In 2016, at the International Centre for Settlement of Investment Disputes, Crystallex won a $1.4 billion arbitration award in its case.

As demonstrated by this growing body of case law, litigation funding in bankruptcy provides debtors a chance to bring meritorious claims that might otherwise wither on the vine. Funding also provides an opportunity for debtors to pursue potentially overlooked recoveries for creditors.

To learn more about how Bentham can help bankruptcy professionals maximize recoveries to their clients, download our bankruptcy funding brochure or contact us.

[1] In Canada, a request for DIP financing will usually occur when a company is undergoing a reorganization under the Company Creditors Arrangement Act (CCAA). While there is no statutory basis under the CCAA for DIP funding, a company can make an application to the court and the court has jurisdiction to grant a DIP lender priority ranking on company assets.

[2] The approval decision of the Quebec Superior Court is currently on appeal. See Callidus Capital Corporation c. 9354-9186 Quebec (Bluberi Gaming Technologies Inc.). http://canlii.ca/t/hrmfc

[i] See Brownstein, Howard B. and Lemisch, Raymond H. (2018, June 26). Creative Use of Chapter 11 to Pursue Patent Claims in Fastship (and a “Chapter Two”). Retrieved from: https://www.abi.org/abi-journal/creative-use-of-chapter-11-to-pursue-patent-claims-in-fastship-and-a-%E2%80%9Cchapter-two%E2%80%9D