ABI Journal

Third-Party Litigation Funding: Where Do We Go Now?

Issue link: https://insolvencyintel.abi.org/i/954366

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Third-Party Litigation Funding: Where Do We Go Now? 5 The Financially Distressed Litigant TPLF thrives in a milieu where the high cost of war-of-attrition-style litigation (which might have material monetary benefits if won) must be bourne by financially strapped litigants. 18 Innovative ways to finance (and financially benefit from) such high-risk, high-reward litigation has spawned the development of an ever-growing TPLF industry. Where best to find financially distressed litigants than the bankruptcy arena, where they are as common as sick people in a hospital? 19 Given the realities of bankruptcy cases, bankruptcy trustees, DIPs and litigation trustees increasingly focus on opportunities provided and issues raised by TPLF. A highly publicized case in point was In re Magnesium Corp. of America (MagCorp). 20 In September 2016, MagCorp trustee Lee Buchwald auctioned off the rights to receive $50 million of a $213 million judgment in favor of the estate (obtained after 13 years of hard-fought litigation) against billionaire Ira Rennert (MagCorp's former majority shareholder) and the Renco Group based on fraudulent transfers and other theories. 21 The judgment was on appeal to the Second Circuit at the time of the auction. The buyer at the auction was Gerchen Keller Capital, which paid $26.2 million and has since been acquired by Burford. 22 The auction and sale process received objections from both Rennert (who offered to "buy" the judgment against himself for $45 million, payable even if he lost the appeal, and $100 million if the trustee prevailed on appeal), as well as Jeffries LLC (MagCorp's largest noteholder) based on what it asserted were inadequate disclosures by the trustee. Despite the Rennert offer being higher than the Gerchen bid, the trustee voiced concerns about whether Rennert could fund the bid. The bankruptcy court (Hon. Mary Kay Vyskocil) approved the sale to Gerchen in September 2016. The judgment was ultimately upheld on appeal in March 2017, making the recovery to Gerchen approximately $24 million over what it paid for the portion of the judgment (or about a 92 percent return on a seven-month investment). 23 Everyone other than the judgment debtor was happy with the results. 24 The trustee and estate professionals were paid (always good news), 25 and the TPLF funding source made a healthy return on its short-term investment, all in a highly publicized chapter 11 case. 26 While proponents of TPLF hail the MagCorp result as a blanket acceptance of TPLF in bankruptcy cases ("blessing with a capital B"), in reality it is not that broad. The TPLF provider in that case did no more the litigation.… The consistent trend across the country is toward limiting, not expanding, champerty's reach.") (citations and internal quotation marks omitted); Abbott Ford Inc. v. Superior Court, 43 Cal. 3d 858, 885, n.26 (Cal. 1987) ("California... has never adopted the common law doctrines of champerty and maintenance"); Pac. Gas & Elec. Co. v. Bear Stearns & Co., 791 P.2d 587 (1990) ("In fact we have no public policy against the funding of litigation by outsiders.... Our legal system is based on the idea that it is better for citizens to resolve their differences in court than to resort to self-help or force. It is repugnant to this basic philosophy to make it a tort to induce potentially meritorious litigation."). 18 It is axiomatic that absent the ability to print money (like the U.S. government does) or access to substantial insurance backing, litigation can be and often is hugely expensive. As a practical matter, all litigants might be deemed to be financially strapped to some degree. 19 See, e.g., Alison Frankel, "Litigation Funding in Bankruptcy 'Should Be in Every Trustee's Toolkit,'" Reuters (March 14, 2017); see also Michael McDonald, "The Value of Middle-Market Litigation Finance," Above the Law (May 2, 2017) (defining middle-market litigation as involving between $500,000 to a "few million" in damages); Order Authorizing and Approving Litigation Funding Agreement, In re Tropicana Entm't LLC, Case No. 08-10865 (Bankr. D. Del. Jan. 20, 2017). 20 Case No. 01-14312-MKV (Bankr. S.D.N.Y. Aug. 2, 2001). 21 The trustee alleged that Rennert siphoned money from MagCorp in order to build a 43,000-square-foot mansion in the Hamptons valued at more than $200million. See Daniel Fisher, "Billionaire Rennert's Loss Is a Quick Double for Litigation Finance Firm Burford," Forbes (March 8, 2017). 22 See Ryan Boysen, "Renco Loses Challenge to Trustee's Sale of $26.2M Stake," Law360 (July 19, 2017); Roy Strom, "Litigation Funder Burford Poised to Cash In from First-Ever Bankruptcy Deal," American Lawyer (March 13, 2017) (Burford acquired Chicago-based Gerchen for $160million in December 2016); Julie Triedman, "Topping $1 Billion Mark, Big Litigation Funder Gets Bigger," Am Law Daily (Jan. 6, 2016), available at american- lawyer.com/id=1202746351295/Topping-1-Billion-Mark-Big-Litigation-Funder-Gets-Bigger?slreturn=20160006110304; "Burford Acquires Gerchen Keller: What Is Going On?," Fulbrook Capital Management LLC (Dec. 20, 2016), available at fulbrookmanagement.com/burford-acquires-gerchen-keller-what-is-going-on. 23 See "MagCorp Bankruptcy Trustee on Litigation Finance: 'The Only Limits Are Your Imagination,'" Burford Capital Press Release (May 1, 2017); Daniel Fisher, "Billionaire Rennert's Loss Is a Quick Double for Litigation Finance Firm Burford," Forbes (March 8, 2017). In fairness to the MagCorp trustee, he had been involved in ugly litigation with Rennert for five years after the MagCorp bankruptcy filing in 2001. Getting cash to exit the bankruptcy (and pay administrative expenses) was undoubtedly a highly attractive option for him, his professionals and the estate. 24 Clearly, the judgment debtors (and their lawyers) were less than thrilled. The judgment debtor was upset enough that they sued their attorneys for malpractice for allegedly bungling the case. See Emma Cueto, "Renco Sues Ex-Kaye Scholer Attorneys Over $214M Verdict," Law360 (Jan. 9, 2018). Litigation begets litigation, which begets litigation.... 25 Including the contingency fee lawyers, who obtained their 40percent contingency fee award (amounting to almost $90million) even after objection by the same parties that objected to the third-party litigation financing part of the deal. See Cara Salvatore, "Beus Gilbert Granted $88M Fee Request for RenCo Suit Win," Law360 (Jan. 31, 2018) (bankruptcy court overruled objections by noteholders who asserted that Beus Gilbert retention was not a true contingency fee retention approved under §328 (a), but rather a traditional hourly rate retention subject to review for reasonableness). 26 See, e.g., Alison Frankel, "Litigation Funding in Bankruptcy 'Should Be in Every Trustee's Toolkit,'" Reuters (March 14, 2017) ("Travis Lenkner of Burford, who was on the Gerchen Keller team that made the MagCorp investment, told me [that] Judge [Mary Kay] Vyskocil's 'blessing with a capital B' should open the way for other bankruptcy trustees to work with litigation financiers— a concept he's pushing with trustees and their law- yers.").

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