How dispute funding can play a vital role in Latin America’s cross-border insolvency cases

How dispute funding can play a vital role in Latin America’s cross-border insolvency cases

What role might dispute funding play in a complex cross-border dispute involving multiple jurisdictions in Latin America?

That question was at the center of a recent virtual seminar featuring a panel of experts on funding, cross-border litigation and arbitration, and Latin America’s legal systems. The seminar, “International Dispute Funding in Latin America,” was held by INSOL International, a global federation of national associations of lawyers and accountants who focus on insolvency matters, and was sponsored by Omni Bridgeway.

Panelists included:

  • Tim DeSieno, global director of distressed debt and senior investment manager, Omni Bridgeway, who moderated the discussion.
  • Henrique Forssell, Sao Paulo, Brazil-based founding partner of Duarte Forssell Avogados.
  • Enrique González, Mexico City-based founding partner of González Calvillo.
  • Nyana Abreu Miller, counsel at Sequor Law in Miami.

Fundamentals of funding

Omni Bridgeway’s DeSieno reviewed the basics of dispute funding. Funders, he said, make non-recourse investments in highly meritorious claims. In exchange for their investment, they receive a return based upon the proceeds of a successful recovery.

Typically, funding is used to pay the fees and expenses of prosecuting a claim, and it is particularly useful for impecunious claimants who do not have the resources to pursue a case and for well-financed claimants who want to avoid tying up resources in a lengthy and expensive dispute.

Funding, DeSieno said, is a “tool for enhancing access to justice for claimants that otherwise would not have the ability to pursue claims.” In the context of insolvency cases, a funding arrangement can be “very valuable, because an estate may have very limited or no resources at all, but may have good claims under any number of laws,” he said.

A corporate insolvency hypothetical

To address how funding might be applied to a cross-border insolvency involving a company in Latin America, DeSieno described a complex hypothetical case involving a fictional conglomerate, “Buena Vista,” headquartered in Colombia and with business interests and relations throughout the Americas.

One of Buena Vista’s businesses is a construction company in Brazil that has been buffeted by the massive Operation Car Wash corruption scandal, which has affected a number of construction businesses in the country. In addition, the construction company has a Dutch subsidiary with substantial operations in Mexico, where it is facing a volatile political and regulatory environment for its renewable energy business. Over the years, the Dutch subsidiary has traded cash back and forth with the company in Brazil, and corporate record-keeping on the transactions has been lax in recent years.

Meanwhile, the family that owns Buena Vista has been receiving zero interest loans from the Brazilian and Dutch businesses, which—prior to the scandal—had been highly profitable for many years. Family members have used the loans to acquire luxury real estate and other high-value assets in the United States and Europe. How much money has gone to the family has not been reliably tracked by the company, and family members have used offshore entities and other means to hide their assets.

The construction company defaults on its debts and seeks judicial recovery protection in a Brazilian court. The recovery effort fails, and the case is converted into a liquidation. A judicial administrator is appointed to look after the estate, determine how to maximize its value and distribute proceeds to creditors.

The view from Brazil

The judicial administrator finds the Brazilian company has no meaningful assets and is now struggling to create a sensible action plan. What might he do to move forward?

Forssell, of Sao Paulo’s Duarte Forssell, said the creditors and administrator must get a clearer picture of the transactions among the companies, as well as those involving family members. Documentation and data must be gathered to allow creditors to understand where they must target their efforts. “You must build a very large amount of data which will allow you to then start litigation to make third parties liable and to start to recover assets,” Forssell said.

Funding may enter the picture at an early stage of the case. Claimants, counsel and funder can then develop a tight connection, discussing in detail their litigation strategy and the potential budget for the dispute. The funder, Forssell noted, should be nimble and flexible in its budgeting to allow for any unforeseen developments that may occur.  

In addition, a highly experienced funder with international capabilities can assist local counsel in connecting with law firms in other jurisdictions, he said. “When you are trying to engage an international legal team and you may have trouble finding specialist attorneys…a funder can assist you in finding lawyers and building a legal team to help you have a better result for your clients,” Forssell said.

A U.S. perspective

Returning to the hypothetical, the data collection and investigation that Forssell outlined have yielded information that many of the family’s assets are in the United States.

Miller of Sequor Law in Miami said Chapter 15 of the U.S. Bankruptcy Code can be a powerful tool in assisting trustees and claimants in targeting assets. “After the foreign representative is recognized [by the U.S. courts], I can, sitting in my office in Florida, sign and issue subpoenas to banks throughout the country, as well as to accountants, asset managers, condo associations, yacht brokers and even private clubs,” Miller said.

The closer creditors get to the assets, however, the more likely they will face fierce opposition, Miller said. This can drive up costs—and make dispute funding vital to pursuing recovery efforts. Counsel and clients should discuss the types of litigation funding available from the outset of the case, and determine which best meets a client’s needs. The clients and law firm may, for example, have a portfolio of claims that can be “negotiated with the funder as a package deal,” she said.

Miller added that counsel should be developing ongoing relationships with funders to facilitate the process. “I think cultivating our relationships with funders is just as important as cultivating relationships with potential clients and referral sources. They can be an essential part of the team in a case like this.”

The market in Mexico

In the hypothetical case, the Dutch subsidiary is facing regulatory and government issues that are imperiling its business in Mexico. Specifically, a concession with the government of Mexico on a major renewable energy project has recently been terminated. The judicial administrator for the Brazilian parent company must determine how to proceed with the Mexican government.

González of González Calvillo provided an overview of the political and legal hurdles the estate may face in Mexico. The cost of pursuing local litigation and investment treaty arbitration will be a major issue. Finding financing from traditional lenders could be difficult because banks and other lenders would be seeking personal guarantees for loans and would be unlikely to provide financing to an estate in liquidation and that is subject to an investigation over potential fraud by the owners.

Non-recourse financing, while still a relatively new concept in Mexico, may provide the estate with the capital it needs to conduct negotiations with the government, local litigation and international arbitration and enforcement.

González also advised discussing dispute funding options early on. In the Buena Vista hypothetical, for instance, he said he would counsel the estate to seek funding quickly, because of the potential length and complexity of the case. “Then, that would take us to the planning of the case, negotiations with government, an attempt at a settlement and at the end of the day, if that doesn’t work, then…local litigation and/or international arbitration.”

The full INSOL Latin America virtual seminar can be accessed on demand with registration. To learn more about Omni Bridgeway’s dispute funding capabilities, visit our Company Insights. While there, explore our recent podcasts, blog posts, and videos. Or contact us for a consultation to learn more about the ways we can help you pursue meritorious claims.