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Litigation Funding – Section 107 Needs Amending

By Ken Rosen |

The following was contributed by Ken Rosen Esq, Founder of Ken Rosen P.C. Ken is a frequent contributor to legal journals on current topics of interest to the bankruptcy and restructuring industry.

The necessity of disclosing litigation funding remains contentious. In October 2024, the federal judiciary’s rules committee decided to create a litigation finance subcommittee after 125 big companies argued that transparency of litigation funding is needed. 

Is there a problem in need of a fix?

Concerns include (a) Undisclosed funding may lead to unfair advantages in litigation. Allegedly if one party is backed by significant financial resources, it could affect the dynamics of the case. (b) Potential conflicts of interest may arise from litigation funding arrangements. Parties and the court may question whether funders could exert influence over the litigation process or settlement decisions, which could compromise the integrity of the judicial process. (c) The presence of litigation funding can alter the strategy of both parties in negotiations. Judges may be concerned that funders might push for excessive settlements or prolong litigation to maximize their returns. While litigation funding can enhance access to justice for under-resourced plaintiffs, judges may also be wary of the potential for exploitative practices where funders prioritize profit over the plaintiffs’ best interests.

A litigant’s financial wherewithal is irrelevant. A litigant’s balance sheet also addresses financial resources and the strength of one’s balance sheet may affect the dynamics of the litigation but there is no rationale for a new rule that a litigant’s balance sheet be disclosed. What matters is the law and the facts. Disclosure of litigation funding is a basis on which to argue that anything offered in settlement by the funded litigant is unreasonable and to blame it on litigation funding. 

Ethics rules

The concerns about litigation funding are adequately dealt with by The American Bar Association’s Model Rules of Professional Conduct, as well as various state ethical rules and state bar associations. An attorney’s obligation is to act in the best interests of their client. Among other things, attorneys must (a) adhere to the law and ethical standards, ensuring that their actions do not undermine the integrity of the legal system, (b)  avoid conflicts of interest and should not represent clients whose interests are directly adverse to those of another client without informed consent, (c) fully explain to clients potential risks and implications of various options and (d) explain matters to the extent necessary for clients to make informed decisions. 

These rules are designed to ensure that attorneys act in the best interests of their clients while maintaining the integrity of the legal profession and the justice system. Violations of these ethical obligations can result in disciplinary action, including disbarment, sanctions, or reprimand. Disclosure of litigation funding is unnecessary because the ethics rules adequately govern an attorney’s behavior and their obligations to the court. New rules to enforce existing rules are redundant and unnecessary. Plus, disclosure of litigation funding can be damaging to the value of a litigation claim.

Value maximization and preservation

Preserving and enhancing the value of the estate are critical considerations in a Chapter 11 case. Preservation and enhancement are fundamental to the successful reorganization, as they directly impact the recovery available to creditors and the feasibility of the debtor’s reorganization efforts. Often, a litigation claim is a valuable estate asset. A Chapter 11 debtor may seek DIP financing in the form of litigation funding when it faces financial distress that could impede its ability to pursue valuable litigation. However, disclosure of litigation funding- like disclosure of a balance sheet in a non-bankruptcy case- can devalue the litigation asset if it impacts an adversary’s case strategy and dynamics.

The ”364” process

In bankruptcy there is an additional problem. Section 364 of the Bankruptcy Code sets forth the conditions under which litigation funding – a form of “DIP” financing- may be approved by the court. 

When a Chapter 11 debtor seeks DIP financing, several disclosures are made. Some key elements of DIP financing that customarily are disclosed include (a) Why DIP financing is necessary. (b) The specific terms of the DIP financing, including the amount, interest rate, fees, and repayment terms. (c) What assets will secure DIP financing and the priority of the DIP lender’s claims. (d) How DIP financing will affect existing creditors. (e) How the proposed DIP financing complies with relevant provisions of the Bankruptcy Code. 

Litigation funding in a bankruptcy case requires full disclosure of all substantive terms and conditions of the funding- more than just whether litigation funding exists and whether the funder has control in the case. Parties being sued by the debtor seek to understand the terms of the debtor’s litigation funding to gauge the debtor’s capability to sustain litigation and to formulate their own case strategy.

Section 107 needs revision

Subsection (a) of section 107 provides that except as provided in subsections (b) and (c) and subject to section 112, a paper filed in a case and on the docket are public records. Subsection (b) (1) provides thaton request of a party in interest, the bankruptcy court shall protect an entity with respect to a trade secret or confidential research, development, or commercial information.Applications for relief that involve commercial information are candidates for sealing or redaction by the bankruptcy court. 

But the Bankruptcy Code does not explicitly define “commercial information.” 

The interpretation of “commercial information” has been developed through case law. For instance, in In re Orion Pictures Corp., 21 F.3d at 27, the Second Circuit defined “commercial information” as information that would cause an unfair advantage to competitors.This definition has been applied in various cases to include information that could harm or give competitors an unfair advantage, and it has been held to include information that, if publicly disclosed, would adversely affect the conduct of the bankruptcy case. (In re Purdue Pharma LP, SDNY 2021). In such instances allowing public disclosure also would diminish the value of the bankruptcy estate. (In re A.G. Financial Service Center, Inc.395 F.3d 410, 416 (7th Cir. 2005)). 

Additionally, courts have held that “commercial information” need not rise to the level of a trade secret to qualify for protection under section 107(b), but it must be so critical to the operations of the entity seeking the protective order that its disclosure will unfairly benefit the entity’s competitors. (In re Barney’s, Inc., 201 B.R. 703, 708–09 (Bankr. S.D.N.Y. 1996) (citing In re Orion Pictures Corp., 21 F.3d at 28)). 

Knowledge of litigation funding and, especially, the terms and conditions of the funding can give an adversary a distinct advantage. In effect the adverse party is a “competitor” of the debtor. They pull at opposite ends of the same rope. Furthermore, disclosure would adversely affect the conduct of the case- which should be defined to include diminution of the value of the litigation claim. 

The Federal Rules of Bankruptcy Procedure should be amended to clarify that information in an application for litigation funding may, subject to approval by the bankruptcy court, be deemed “confidential information” subject to sealing or redaction if the court authorizes it.

Conclusion

A new rule requiring disclosure of litigation funding is unnecessary and can damage the value of a litigation claim. If the rules committee nevertheless recommend disclosure there should be a carve out for bankruptcy cases specifically enabling bankruptcy judges to authorize redaction or sealing pleadings related to litigation funding. 

About the author

Ken Rosen

Ken Rosen

Commercial

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Avyana Litigation Funding Strengthens Strategic Model to Expand Access to Justice

By Harry Moran |

Legal disputes often involve not only complex legal considerations but also significant financial pressure. For many companies, asserting their rights requires substantial resources, with outcomes that are uncertain. In distressed scenarios—such as restructuring or insolvency—the burden becomes even more acute.

Avyana Litigation Funding addresses this challenge through a model that transforms legal claims into strategic assets. The company has recently been reinforced by the involvement of two experienced professionals: Dr. Tillmann Lauk (LL.M.), former global board member of Deutsche Bank, and Dr. Raphael Nagel (LL.M.), a long-standing private equity investor and entrepreneur.

A Strategic Approach to Litigation Finance

Rather than simply covering legal costs, Avyana’s model enables businesses to pursue valid claims without affecting operational liquidity. In successful cases, proceeds are shared; in unsuccessful ones, the company absorbs the loss. This shifts the litigation risk from claimant to funder, offering companies a way to enforce their rights without jeopardizing financial stability.

Beyond funding, Avyana also provides companies with the option to sell claims to a network of specialized partners. This approach can be particularly valuable in restructuring scenarios, enabling companies to unlock capital from unresolved legal positions.

“Many firms hold claims that are potentially valuable but lack the capacity or appetite to pursue them,” explains Dr. Tillmann Lauk. “Our structure allows that value to be realized more efficiently.”

Collaborative Model with Legal and Corporate Partners

A core element of Avyana’s approach is its close collaboration with law firms, corporate clients, and insolvency administrators. By aligning with experienced legal teams, the company ensures that funded claims are supported by sound legal strategies and operational execution.

Typical areas of focus include commercial disputes, contract enforcement, claims for damages and shareholder conflicts. In insolvency proceedings, litigation funding can enable administrators to pursue avoidance actions or liability claims, helping to recover value for creditors without depleting estate resources.

“Our analysis considers both legal merit and commercial logic,” says Dr. Raphael Nagel. “Each case is reviewed with the goal of turning legal exposure into financial opportunity.”

Global Scope and Investment Discipline

Avyana Litigation Funding operates internationally, with an emphasis on Europe, the Middle East, and select emerging markets. All cases undergo comprehensive due diligence, with investment decisions guided by principles applied by its leadership in corporate finance and legal risk assessment.

“We treat every claim as an investment opportunity,” adds Dr. Lauk. “This means evaluating enforceability, counterparty risk, and recovery potential before any commitment is made.”

An Evolving Role in Legal and Financial Strategy

Litigation finance and structured claim sales are increasingly integral to the legal and business environment. For companies, law firms, and administrators alike, these tools offer a way to act strategically, preserve capital, and navigate legal complexities more effectively.

“In today’s economy, access to justice should not depend on cash flow or balance sheet size,” concludes Dr. Nagel. “Avyana Litigation Funding provides a structured path forward.”

Fenchurch Legal Owed £2.4m by Nicholson Jones Sutton Solicitors

By Harry Moran |

As LFJ covered earlier this month, concerns have been raised that law firms in the housing disrepair claims sector are operating with unsustainable business models propped up by litigation funders. New reporting on the administration of one of these claims suggests that there is a high degree of volatility in the sector, with funders acting as unpaid creditors to these same law firms.

An article in The Law Society Gazette covers the story of Nicholson Jones Sutton Solicitors Limited, a law firm that entered administration last month, with new filings suggesting that its creditors will be left without millions in unpaid debts. The Gazette’s review of Companies House records found that at the time of the law firm’s administration, it owed more than £6 million to creditors including litigation funder Fenchurch Legal.

The summary of liabilities showed that Nicholson Jones Sutton owed Fenchurch Legal more than £2.4 million, whilst the collapsed litigation funder VFS Legal was also left waiting for £196,000. As LFJ reported last month, VFS Legal’s own administration has experienced a somewhat more positive outcome with its administrators able to repay millions to its own creditors. 

Unfortunately, the Gazette’s reporting suggests that the failed law firm will not be in a similar position, having reported only £159,000 of tangible assets at the time its administrators were appointed. The article explains that the liabilities summary prepared by administrators RSM and DMC Recovery revealed Nicholson Jones Sutton has ‘no assets available to unsecured creditors collectively owed more than £1.5m.’

The statement of affairs filed by the administrators can be found on Companies House here.

Seven Stars Legal Acquires Sandstone Legal’s Assets and Transfers Funded Cases

By Harry Moran |

An insolvent law firm’s administration proceedings in the Insolvency and Companies Court has concluded with the firm’s litigation funder acquiring its assets, whilst preserving funded cases by transferring them to other law firms.

In a post on LinkedIn, Seven Stars Legal Funding announced that it had completed the acquisition of Sandstone Legal’s non-legal assets following the end of the law firm’s administration proceedings in court. The funder also secured the transfer of the existing case load from Sandstone to four of Seven Stars’ client law firms: Brandsmiths, FDM Law, 56 Law and Justizia. Seven Stars explained that this transfer included the appointment of a solicitor manager “to preserve the continuity of legal services”.

Leon Clarance, chief strategy officer at Seven Stars, highlighted that it had taken “six months of dedicated work” to secure Sandstone Legal’s assets and that the funder’s “primary focus has been to ensure that client cases have found appropriate new homes.”

During the administration proceedings, Seven Stars was represented by Louis Doyle KC and a team from Brandsmiths including David Seligman, Ewen Sharpe, Myrto Sevdali, Courtney Bryan-Isaacs and Iona Barron. Ewen Sharpe, senior associate at Brandsmiths, commended the litigation funder on its approach to the administration proceedings in ensuring that Sandstone’s clients have been properly looked after and that their cases will be able to run to conclusion.”

In a follow-up posted on LinkedIn today, Seven Stars revealed additional details on the cases acquired from Sandstone. These include 35,500 Plevin claims which have been assigned to a single law firm, and 603 housing disrepair claims assigned to another law firm. The funder also revealed that in order to balance its lending portfolio, it has also ‘redistributed nearly 900 pension mis-selling and contentious probate claims, as well as 2,000 business energy claims’. Seven Stars stated that these claims have been redistributed across its existing borrowing law firms, with those firms now in charge of seeing these claims through to completion.