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Litigation Funding – Section 107 Needs Amending

By Ken Rosen |
April 7, 2025

Litigation Funding – Section 107 Needs Amending

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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Commercial Regulatory Issues

Congress Debates Litigation Funding Bill

By John Freund |

Republican lawmakers have renewed their push to rein in third-party litigation funding, with a House Judiciary Committee debate highlighting how politically charged the issue has become.

An article in The Daily Signal reports that members of the House Judiciary Committee clashed this week over legislation that would require disclosure of third-party litigation funding arrangements in federal courts. Supporters of the bill framed it as a transparency measure aimed at exposing the financial interests behind major lawsuits, while opponents warned that the proposal risks limiting access to justice and unfairly targeting a growing segment of the legal finance market.

During the committee debate, Republican lawmakers argued that outside investors are increasingly influencing litigation in ways that can distort outcomes and inflate settlement values. Several speakers characterized litigation funders as profit-driven actors operating in the shadows, asserting that judges and defendants deserve to know who stands to benefit financially from a case. Proponents also linked litigation funding to broader concerns about rising legal costs and what they describe as abusive litigation practices.

Democratic members pushed back, questioning whether the bill was designed to solve an actual problem or simply to deter plaintiffs from bringing legitimate claims. Critics of the proposal argued that disclosure requirements could chill funding for complex and expensive cases, particularly those involving individual plaintiffs or smaller businesses facing well-capitalized defendants. They also raised concerns about confidentiality and whether revealing funding arrangements could give defendants a tactical advantage.

The debate reflects a broader national conversation about the role of litigation finance in the civil justice system. While disclosure requirements have already been adopted in certain courts and jurisdictions, the proposed legislation would impose a uniform federal standard. Supporters say this consistency is overdue, while opponents argue it could undermine carefully negotiated funding structures that allow cases to proceed at all.

Commercial

APCIA Supports Federal Litigation Funding Disclosure Bill

By John Freund |

The insurance industry has intensified its campaign for greater scrutiny of third-party litigation funding, with one of its most influential trade groups backing new federal legislation aimed squarely at disclosure.

An article in Insurance Journal reports that the American Property Casualty Insurance Association has thrown its support behind a proposed federal bill that would require parties in civil litigation to disclose the existence of litigation funding agreements. The legislation, which is currently being considered by the House Judiciary Committee, would mandate that courts be informed when a third party has a financial stake in the outcome of a lawsuit. Proponents argue that this information is essential for judges to understand who stands behind a claim and whether outside financial interests may be influencing litigation strategy.

APCIA framed its endorsement around long-standing concerns about rising litigation costs and what insurers describe as “social inflation.” According to the group, undisclosed litigation funding arrangements can drive up claim severity, prolong disputes, and ultimately increase costs for insurers and policyholders alike. By requiring transparency, APCIA believes courts would be better positioned to manage conflicts of interest, assess discovery disputes, and evaluate settlement dynamics.

The association has been an active voice in the national debate over litigation finance for several years, often aligning with other insurance and business groups calling for disclosure regimes at both the state and federal level. APCIA leadership emphasized that the proposed legislation is not intended to ban or restrict litigation funding outright, but rather to ensure that judges and opposing parties have visibility into financial relationships that could bear on a case.

The bill would apply broadly in federal courts and could have significant implications for how funded cases are litigated, particularly in complex commercial disputes and class actions where third-party capital is more common. Insurers view federal action as a way to establish consistency across jurisdictions, rather than relying on a patchwork of state rules and local practices.

Commercial Regulatory Issues

Why Big Law Is Walking Away From Suits Against Governments

Elite global law firms are increasingly declining to pursue massive claims against sovereign states, even when potential recoveries run into the billions. The trend reflects a reassessment inside Big Law of the risk, cost, and strategic value of investor state and public law disputes that can take years to resolve and often carry significant political and reputational complications.

An article in Law.com International reports that top-tier firms which once dominated investor state arbitration and other government facing disputes are now far more selective about taking on such matters. Lawyers interviewed for the piece point to a combination of commercial pressure, client demands, and internal firm dynamics that make these cases less attractive than they once were. Although headline damages can be enormous, the cases typically require years of work, large multidisciplinary teams, and significant upfront investment with no guarantee of recovery.

Another key factor is reputational risk. Firms are increasingly cautious about being seen as adversaries of governments, particularly in sensitive jurisdictions or disputes involving public policy, natural resources, or infrastructure. Partners noted that political backlash, enforcement uncertainty, and the potential impact on other client relationships all weigh heavily when firms decide whether to proceed.

The article also highlights that many corporate clients are less willing to bankroll these disputes directly. Budget scrutiny has intensified, and companies facing disputes with states are often reluctant to commit tens of millions in legal fees over a long time horizon. This dynamic has contributed to a rise in alternative fee arrangements and third party litigation funding, though even those tools do not fully offset the burden for law firms carrying significant work in progress.

As a result, specialist boutiques and arbitration focused firms are increasingly stepping into the space once dominated by global giants. These smaller players often have lower overhead, deeper niche expertise, and a greater tolerance for the long timelines associated with sovereign disputes.