Bankruptcy litigation financing: Poised to enter the mainstream

Litigation finance was a matter of considerable interest at ABI’s 2019 Annual Spring Meeting. The conference kicked off with a panel dedicated to the subject, prompting a number of conversations over the weekend about how financing works in practice and general agreement that there’s a definite role for legal finance in bankruptcy. This is consistent with research from the 2018 Litigation Finance Survey, in which nearly a third of lawyers report that they would be likely to consider using legal finance within the bankruptcy context. Together, these pieces of information suggest that bankruptcy litigation financing is poised to enter the mainstream—and for good reason.

Although legal claims held by bankruptcy estates often represent the best avenue of recovery for out of the money creditors, trustees and lawyers require resources to pursue the claims—and funding the litigation can be a challenge. While bankruptcy stakeholders historically have relied on a variety of financing options (e.g., contingency fee arrangements, fee deferrals, or further cash contributions from out of the money creditors), the solutions available often result in stakeholders settling claims for less than they are worth or forgoing them altogether.

Legal finance allows estates to pursue valuable claims that otherwise may have been abandoned or settled, which increases creditor recoveries. Litigation risk is valued and used to secure financing from a capital provider that is not a litigation party in exchange for a share of the future proceeds generated by the litigation risk. Funds are often provided on a non-recourse basis, so if the litigation does not meet the agreed definition of success, the capital provider does not receive back its capital or a return on its investment. This is particularly useful in the bankruptcy context, where appetite for risk among stakeholders may be limited.

Legal finance ensures the efficient administration and recovery of assets for bankruptcy estates or litigation trusts for the benefit of creditors. It enables an estate to pursue claims and achieve recoveries that otherwise may not have been possible. A bankruptcy professional is also able to ensure the best recovery for creditors by negotiating the best fee agreement for each case. For example, to reduce the overall cost and risk of proceeding with litigation in large cases, stakeholders may benefit from litigators working principally on an hourly basis instead of on a full or partial contingency.

If, as many predict, rising interest rates and shifts in the economy continue to spur new bankruptcy filings, there will be an even greater need for financing solutions that enable creditors to pursue litigation so that they can be made whole. Highly sophisticated global legal finance providers, like Burford, are ideal partners in creative problem-solving and commercial deal structuring as more complicated bankruptcy scenarios arise