Litigation Finance Helps Debtors and Trustees Increase Recoveries
Litigation finance is an important tool that can help debtors and trustees improve recoveries for their stakeholders. Funding can be used to pursue expensive litigation utilizing the best counsel to recognize the true value of a debtor’s or trust’s claims. Funding can also be used to provide a liquidity event to the estate or trust and to finance other expenses of the estate. Funders can serve as a strong partner aligned with the interests of the trustee or debtor and committed to finding financing solutions for its most valuable claims.
Below are some of the ways debtors and trustees can benefit from litigation finance:
Financing Litigation Expenses
High stakes litigation is expensive. Debtors, or trusts set up to hold and litigate debtor or creditor claims, often are underfunded and can’t effectively pursue lawsuits to maximize their return. Trusts require cash from the estate to launch litigation, and claims may take a long time to resolve. Absent funding, a debtor or trustee may be unable to afford to bring certain valuable claims or to hire the best counsel to litigate them. This leads to valuable assets being “left on the table,” or the settlement of strong claims before they are “mature” for much less than they are worth.
By financing the fees and costs of litigation with a funder, a debtor or trust can share risk, align interests and litigate their claims to their full value using top notch counsel. Meanwhile, funds that otherwise would have been dedicated to pursuing litigation can be distributed to creditors, helping stakeholders reach agreement on how the estate can emerge from bankruptcy.
For example, in April 2016, litigation funding was used by an insolvent mining company, Crystallex International Corp. The company won a $1.38 billion arbitration award for Venezuela’s unlawful expropriation of a Crystallex gold mine. The funder there paid for the expenses of pursuing an ICSID arbitration. In return, the funder would be entitled to up to 70% of the net proceeds of any arbitral award or settlement. The Crystallex court noted that there would have been no meaningful recovery, and no successful restructuring, without financing of the arbitration.
Providing A Liquidity Event or Financing Other Expenses
Although counsel can offer debtors or trusts contingency arrangements, they cannot provide capital to them. But funders can. Investment by a funder may allow a debtor or trust to realize a liquidity event on litigation already brought. This might enable a trustee to expand her litigation portfolio or pay other expenses of the trust.
In the recent case of Magnesium Corp. of America, the trustee was locked in a years-long battle with MagCorp’s former owner who was accused of looting the company. In 2015, the trustee won a $213 million judgment. The defendants of course appealed. After years of litigation, the trustee had just $650,000 left to pursue the appeal and manage the estate. The trustee financed the judgment with a funder and received $26.2 million in exchange for a portion of any return. Similarly, in the Crystallex matter, a portion of the funding was used to pay the debtor’s general corporate expenses, enabling the restructuring to go forward.
Advising on the Value and Merits of Litigation
Trustees must determine the value of assets in an insolvent estate, including litigation matters. That is a difficult task. Determining the value of a piece of litigation requires a keen understanding of its merits, potential for success and the possible recovery that may be achieved. Litigation funders carefully due diligence cases to determine which have the highest likelihood of success. Experienced litigation funders are experts on the value of claims. We can be significant resources for trustees in helping them determine how much their litigation assets are worth. Having a funder commit to invest in a litigation can give creditors comfort about the value of the claim.
To learn about funding options for bankrupt estates, contact us for a consultation.