Appeals Courts Clarify Litigation Funding for Bankruptcy
At present, the United States has about 40 litigation funding entities actively funding cases. Assets under management are estimated to be close to $10 billion. In the bankruptcy arena, some say legal funding isn’t growing. But there are two recent appeals court decisions that may change that. Pullman & Comley detail the two relevant appeals decisions. First, Dean v Seidel, in the US District Court for the Northern District of Texas. Courts approved a legal funding agreement where $200,000 was given to a trustee to prosecute claims. The recovered funds would be distributed in order: trustee commission, reimbursement of the advancing creditor, a 30% return on investment, and finally the balance would go to creditors. The arrangement was challenged as unfair to creditors, as one would receive a larger share, and again because the recovery was not strictly for the benefit of the estate. Courts were unmoved by these arguments and pointed out that the trustee did attempt to reach an agreement on a contingency fee arrangement, but was unsuccessful. Ultimately a lack of applicable case law meant that despite legitimate concerns in regard to ethics, there was no actual wrongdoing. In another case, Valley National Bank v Warren, funders sought to finance litigation against the bank for its role in fraudulent transfers, and for aiding and abetting breach of duty. Courts approved what many considered an unusual funding agreement in which funders would cover monthly expenses, and would later be reimbursed plus a whopping 85% of any recovery. The bank objected to the agreement, saying it would hinder efforts to liquidate and negotiate a settlement. The appeals court held that the bank did not have standing to appeal, and that in fact, the bank was not aggrieved because it wasn’t directly impacted by the approval of the agreement. In all likelihood, litigation funding in bankruptcy will increase in usage.
