Untapped Litigation Finance Opportunities in Bankruptcy

I’m pleased to share with you a short podcast I recorded with Debtwire focusing on bankruptcy and litigation finance. My basic point in the podcast is straightforward but important: litigation finance has vast potential to be helpful and relevant in a far broader range of bankruptcy disputes than those in which it has been employed so far. Here’s why.

The good news is that in the last few years litigation finance has become widely accepted in bankruptcy and bankruptcy-related matters, just as it has in most areas of sophisticated commercial litigation. But its use in bankruptcy has focused largely on claims prosecuted by litigation trusts (and in a few other opportunistic situations such as post-judgment monetizations). The reason for this is understandable. Claims brought by litigation trusts against third parties resemble non-bankruptcy litigation financing in most respects because the bankruptcy is essentially over, court approval of the financing might not even be required, and the claims are generally lawsuits against third parties — the kind of funding that has been done for a number of years.

But this is only a sliver of what bankruptcy disputes are about. Litigation trusts occur at the end of a bankruptcy. At Parabellum, we’re interested in what goes on in the entire bankruptcy process. In fact, bankruptcy is all about potential or actual disputes among parties seeking a share of a limited pool of value. Secured and unsecured creditors, shareholders, employees, the government and others are competing based on their legal positions to get as much value and in a form and timeframe that is most favorable to them. These “bankruptcy battles”—whether or not they ever erupt into significant litigation—are the core of mid-market to large commercial bankruptcies. It might be battles over DIP financing, plan confirmation (valuation and cramdown), fraudulent transfer, equitable subordination, plan exclusivity and more.

These bankruptcy battles may not be typical lawsuits and the outcomes might not be as easy to measure. But the potential relevance of informed capital to assist parties with meritorious positions in these matters is just as great as in a standard commercial suit. The challenge is that a funder must understand the bankruptcy process to devise a financing structure in which (a) success metrics can be agreed (for example, a higher plan recovery, maybe because of a higher claim or a better priority position, or a shareholder class that gets some recovery) and (b) the form and timing of consideration to compensate the funder can be established, particularly in circumstances where immediate cash might not be available.

At Parabellum, bankruptcy and distressed investing are in our DNA.  I spent decades as a bankruptcy lawyer working on complex matters, leading practice groups and participating in senior management.   And I work alongside a team with deep experience in the relevant business and legal concepts to permit thoughtful bespoke solutions. Our Director of Special Situations, Jarvis Buckman, with his experience as a senior distressed credit analyst, gives us an added dimension.