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“True Sales” in Litigation Funding Agreements

“True Sales” in Litigation Funding Agreements

The following article was contributed by John Hanley and Douglas Schneller of Rimon Law, P.C An issue that keeps some litigation funders up at night concerns the possibility of a claimant filing for bankruptcy after receiving funding and before their underlying case is resolved.  Proceeds from the case may become property of the bankruptcy estate and made available to the transferor’s creditors.  A carefully drafted litigation funding agreement (“LFA”) can increase the likelihood that the right to receive a portion of litigation proceeds is legally isolated (like the island in the picture above) and beyond the reach of the transferor’s creditors or a bankruptcy trustee.[1] This Insight refers to the litigation funder as the “purchaser” (since the funder acquires rights to receive a portion of litigation proceeds) and the claimant who received funding as the “seller” of rights to receive a portion of litigation proceeds. How can litigation funders ensure that the transfer of rights to receive a portion of proceeds resultant of funded litigation (the “Litigation Proceeds”) under an LFA constitutes a “true sale” divesting seller of its property interest in the Litigation Proceeds and not a secured financing whereby the seller is deemed to have borrowed money from the purchaser secured by the Litigation Proceeds? Determining whether an asset is “property of the estate” of a debtor in bankruptcy is a question of federal bankruptcy law. However, determining whether a property interest held or not by a debtor in bankruptcy is generally a question of applicable nonbankruptcy law, typically state law. As a general matter, “the bankruptcy estate consists of all of the debtor’s legal and equitable property interests that existed as of the commencement of the case, that is, as of the time that the bankruptcy petition . . . is filed.” [2]  If a party has disposed of an asset prior to its bankruptcy petition in exchange for fair consideration, that asset generally will not be property of the debtor’s estate. Litigation funding generally refers to an arrangement whereby the funder advances funds to a litigant with a meritorious cause of action who is financially unable or unwilling to underwrite the full costs of the litigation. In exchange the litigant agrees that the funder is entitled to an agreed-upon portion of Litigation Proceeds resulting from a judgment or settlement. An LFA is typically non-recourse, meaning that if the litigation is unsuccessful and no Litigation Proceeds result, the funder has no recourse to the litigant for the funds used for the litigation. A carefully drafted LFA with attention to the factors indicated below (among others) and conduct by the purchaser and seller of rights to Litigation Proceeds that supports true sale treatment of the transaction, may increase the likelihood that a litigant’s intervening bankruptcy will not swallow up the Litigation Proceeds. And that in turn might provide the funder with less counterparty risk.[3] In assessing whether a particular transfer is properly characterized as a sale or a secured financing, courts generally attempt to discern the intent of the parties to the transaction, based on the facts and circumstances underlying the transaction.[4] Courts considering the issue will examine both the stated intent of the parties as documented in the agreement, as well as the parties’ conduct and other objective factors.[5] Case law reveals that there is no universally accepted set of factors that courts use in determining whether a purported sale should be recharacterized as a financing.[6]  However there are numerous factors that various courts have examined; not every court considers or weighs these factors in the same way, and almost always the particular facts and circumstances of the case may influence the significance of the factors considered by courts.  As one bankruptcy court decision noted, “the reviewing court will look to the substance of the transaction, rather than the form. It is beyond the scope of this Insight to examine in detail each of the factors from the standpoint of a litigation funding arrangement.  Nevertheless, several important true sale factors may be relevant to consideration of these issues in connection with litigation funding. The principal factors that courts have identified and emphasized in the context of “true sale” analysis include: Recourse to the Seller. For many courts, the purchaser having a right of recourse to the seller weighs against characterizing the transaction as a true sale. Such recourse can include  seller guaranties of collectability and repurchase obligations and similar provisions and structures.[7]  Although recourse to the seller is an important attribute indicating a secured loan, there are decisions to the effect that recourse by itself, without other factors indicating a financing, does not require recharacterization.[8] Other courts have held transfers to be sales even where partial or full recourse existed in addition to other factors that are typically indicative of borrowing.[9] Risk of loss. Related to recourse is which party bears the risk of loss with respect to the asset.  Courts have generally held that, where a party does not bear any risk of loss, the result is a debtor-creditor relationship rather than a true sale.[10] By contrast, if the risk of non collection of the Litigation Proceeds shifted from transferor to transferee, that suggests that the benefits and burdens of ownership of the asset have also changed.  Of course, both the funder and the litigant in a funded case would bear the risk of loss with respect to their respective interests in the litigation. Language of the Contract and Conduct of the Parties. When non-sale factors exist, courts will often examine the language of the agreement governing the transaction as well as the parties’ conduct, i.e. terms such as “security” or “collateral” where other secured loan factors exist, or on terms such as “sell” or “absolutely convey” where sale factors exist.[11] Indeed some courts have suggested that the language in an agreement and conduct of the parties are “the controlling consideration[s]” in the true sale analysis, notwithstanding full recourse provisions.[12] Restrictions on Alienation. Courts have found that a provision that restricts purchaser’s right to resell the purchased assets is inconsistent with a true sale of such assets.[13]  The purchaser of the rights to Litigation Proceeds should be able to pledge or encumber the rights without the consent of the seller and the seller should not be able to pledge or encumber the rights to Litigation Proceeds at all. True Sale on Organizational Books and Records.  If the purchaser of rights to Litigation Proceeds, and the seller of such rights, each treats the transaction as a true sale on their respective organizational books and records, a court may be less likely to recharacterize the transaction as a financing. Although the considerations above may be important in structuring a litigation funding agreement, there are several aspects of a typical litigation funding that may be at odds with true sale analysis. For example, in a true sale, buyer acquires all rights to the asset, including the ability to control the use and nature of that asset, while seller retains no, or occasionally minimal, ability to act in respect of the asset (for example, to collect and forward payments on the asset that belong to buyer).[14]  By contrast, in litigation funding the litigant, not the funder, controls the prosecution of the litigation; indeed the ultimate value of any Litigation Proceeds will depend on the litigant’s ability to prove its case or motivate a favorable settlement (acknowledging, however, that the funder provides financial means to enable litigant to do so).[15] In conclusion, and as noted above, there are no reported controlling judicial precedents directly on point, and the authors have not identified any judicial decisions that state that an agreement by a litigation funder and litigant is a true sale, and we have not located statutory or decisional law interpreting specific contractual provisions identical to those contained in “typical” LFAs.  The cases referenced above are only indicative to illustrate the approach some courts have taken with respect to true sale analysis. Generally, the presence or absence in a transaction of one or more of the particular attributes noted above will not, alone, necessarily be dispositive of a court’s conclusion that a sale, or alternatively a secured borrowing, has occurred. Nevertheless, true sale analysis may offer useful concepts and cautions for parties to litigation funding arrangements to consider.   [1] Note that this Insight does not address tax or regulatory issues that may be implicated by litigation funding, including whether there may be tax or regulatory consequences if a litigant or funder were to treat a transaction under an LFA as a sale. [2] 5 Collier on Bankruptcy ¶541.02. [3] An examination of the various complications that may result for a litigation funder from a litigant’s bankruptcy filing is beyond the scope of this Insight. [4] See, for example, Major’s Furniture Mart, Inc. v. Castle Credit Corp., 602 F.2d 538, 543-45 (3d Cir. 1979); Bear v. Coben (In re Golden Plan of Cal., Inc.), 829 F.2d 705, 709 (9th Cir. 1986). [5] See, for example, Paloian v. LaSalle Bank Nat’l Ass’n (In re Doctors Hosp. of Hyde Park), 507 B.R. 558, 709 (Bankr. N.D. Ill. 2013) (noting that “the reviewing court will look to the substance of the transaction, rather than the form. Therefore, it is important to focus on whether the transaction is arms length and commercially reasonable as well as in proper form and subsequent acts actually treat the sale as real” and listing the following factors as relevant: recourse; post-transfer control over the assets and administrative activities; accounting treatment; adequacy of consideration; parties intent; a seller’s right to surplus collections after the buyer has collected a predetermined amount; the seller’s retention of collection and servicing duties; and lack of notice to the account debtor or others of the purported sale). [6] See for example Reaves Brokerage Co. v. Sunbelt Fruit & Vegetable Co., 336 F.3d 410, 416 (5th Cir. 2003) (“the distinction between purchase and lending transactions can be blurred” and therefore the outcome of any case will depend on the precise facts of the case and the manner in which it is argued in court); Savings Bank of Rockland County v. FDIC, 668 F. Supp. 799, 804 (S.D.N.Y. 1987), vacated per stipulation, 703 F. Supp. 1054 (S.D.N.Y. 1988) (“The cases that address whether or not certain transactions are to be considered loans or sales do not lay down a clear rule of law on the issue.”); In re Commercial Loan Corp., 316 B.R. 690, 700 (Bankr. N.D. Ill. 2004) (discussing the difficulties of determining whether a transaction is a sale or a secured borrowing). [7] See, for example, In re Woodson, 813 F.2d 266 (9th Cir. 1987) (seller’s purchase of insurance policy to insure buyers of participations in mortgages against loss an important factor in holding the assignment was a disguised loan); People v. Service Institute, Inc., 421 N.Y.S.2d 325, 327 (Sup. Ct. 1979) (transaction characterized as a loan where assignor had right of full recourse and did not assume risk, charging of interest plus service charge, no notification of account debtor as to the assignment, assignee’s right to withhold payments on accounts until 60 days had expired and right to commingle moneys collected with assignor’s own, and assignor’s offer to help collect the accounts receivable); Aalfs v. Wirum (In re Straightline Invs.), 525 F.3d 870, 880 (9th Cir. 2008) (purported “sales” of receivables were actually disguised loans where seller guaranteed full repayment and correspondence between parties referred to payments for the receivables as “advances”) . [8] See, for example, Lifewise Master Funding v. Telebank, 374 F.3d 917, 925 (10th Cir. 2004) (holding that, under New York law, the term “recourse” in an agreement refers to the liability of a seller of receivables to the buyer if the underlying obligors fail to pay the receivables and that a repurchase obligation for breach of representations and warranties does not convert a nonrecourse assignment into a recourse assignment). [9] Broadcast Music, Inc. v. Hirsch, 104 F.3d 1163 (9th Cir. 1997) (assignment of future royalties to two creditors sufficient to divest assignor of property interest, therefore tax lien did not attach to royalties, even where assignment did not extinguish debt and assignment could be terminated following repayment of debt). [10] See, for example, Woodson, 813 F.2d at 270-72 (debtor relieved the investors of all risk of loss; permanent investors were paid interest regardless of whether original borrower paid Woodson; “[s]imply calling transactions ‘sales’ does not make them so. Labels cannot change the true nature of the underlying transactions.”); and In re Major Funding Corp., 82 B.R. 443 (Bankr. S.D. Tex. 1987) (promising investors a set return on their investment regardless of rate on assigned note, as well as a repurchase of prior lien upon default, indicating that the investors did not have any risk related to ownership and resulting in a finding that the transactions were loans by investors, not sales). [11] Golden Plan, 829 F.2d at 709, 710 n. 3 (provision in assignment agreement “without recourse” suggests sale where other countervailing factors are not present); Palmdale  Hills  Property,  LLC v. Lehman Comm. Paper, Inc., 457 B.R. 29, 44-45 (B.A.P. 9th Cir. 2011) (parties’ manifestation of intent that transaction constitute a sale evidenced in their use of terms “buyer” and “seller,” “purchase date,” and “all of seller’s interest in the purchased securities shall pass to buyer on the purchase date”); Paloian, 507 B.R. at 709 (“[w]hether the documents reflect statements that the parties intend a sale” is a relevant factor to consider in determining if the transfer of healthcare receivables constituted a true sale); Goldstein, 89 B.R. at 277 (“orders, assigns and sets over” language supported sale treatment); In re First City Mortg. Co., 69 B.R. 765, 768 (Bankr. N.D. Tex. 1986) (contract language coupled with preexisting debtor-creditor relationship indicated loan). [12] In re Financial Corp. (Walters v. Occidental Petroleum Corp.), 1 B.R. 522, 526 n.7 (W.D.Mo. 1979), aff’d. sub. nom., Financial Corp. v. Occidental Petroleum Corp., 634 F.2d 404 (8th Cir. 1980) (“While this repurchase agreement had many attributes of a secured loan, there was nothing in the record to indicate that this transaction was intended to effectuate a security interest.”). [13] See In re Criimi Mae, Inc., 251 B.R. 796, 805 n. 10 (Bankr. D. Md. 2000) (“[A] restriction on alienability is inconsistent with [the] claim that the Repo Agreement accomplished a complete transfer in ownership of the Disputed Securities.”) [14]   See for example Southern Rock v. B & B Auto Supply, 711 F.2d 683, 685 (5th Cir. 1983) (noting that the retained right of assignor to receive proceeds, coupled with a “Security Agreement” and assignment of “collateral security” defeats claim of absolute assignment); and Petron Trading Co, Inc.. v. Hydrocarbon Trading & Transport Co., 663 F. Supp. 1153, 1159 (E.D. Pa. 1986) (no absolute assignment of right to payment under contract where assignor continued to prepare invoices for contract payments, did not notify account debtor and retained rights under contract to petition account debtor for price adjustments). [15] See, for example, Hibernia Nat’l Bank v. FDIC, 733 F.2d 1403, 1407 (10th Cir. 1984) (participation agreement permitting the loan originator to, inter alia, release or substitute collateral and to repurchase the loan, did not transfer ownership of the loan to participating bank; grantor/originator retained complete discretion to deal with the loan); and Northern Trust Co. v. Federal Deposit Ins. Corp., 619 F. Supp. 1340, 1341-42 (W.D. Okla. 1985) (because loan participation agreement gave participant little input into grantor’s management of the participated loans and collateral backing such loans, court held the participation “did not create or transfer any ownership or property rights” in the participated loan).
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Harris Pogust Joins Bryant Park Capital as Senior Advisor

By John Freund |

Bryant Park Capital (“BPC”) a leading middle market investment bank and market leader in the litigation finance sector, is pleased to announce that Harris Pogust has joined the firm as a Senior Advisor.  Harris (Mr. Pogust) is one of the best known and prominent attorneys in the mass tort and class action fields, he was the founding partner and Chairman of Pogust Goodhead worldwide until early 2024 and is currently working with Trial Lawyers for a Better Tomorrow, a charity Harris founded, to help children reach their educational potential all over the world.  Harris’ life work has been to deliver justice for those who have been damaged or injured through the negligence or bad faith of others.

“We are thrilled to have Harris as part of our team.  His knowledge, experience and relationships in the litigation finance sector are of great value to Bryant Park and our clients.  As the litigation finance world becomes more competitive, complex and challenging, having an expert like Harris on our team is invaluable,” said Joel Magerman, Managing Partner of Bryant Park.

Harris’ efforts, in conjunction with Bryant Park will focus on assisting law firms and funders in developing strategies to more efficiently fund their operations and cases and assist them in establishing the right relationships for future growth.  Harris commented, “I have been fortunate to have been a practicing attorney and partner in law firms for over 35 years focused on building and growing a worldwide book of business in the class action/mass tort field.  That required significant capital and throughout my career I have raised over $1 billion for my firms.  I have learned what works and what doesn’t.  I have seen both the risks and rewards in this industry.  I look forward to being able to work with law firms and funders to assist them in putting the right strategies in place with Bryant Park and bringing capital and liquidity to help them grow and flourish.”

About Bryant Park Capital

Bryant Park Capital is an investment bank providing capital raising, M&A and corporate finance advisory services to emerging growth and middle market public and private companies. BPC has deep expertise and a diversified, well-founded breadth of experience in a number of sectors, including specialty finance & financial services. BPC has raised various forms of credit, growth equity, and assisted in mergers and acquisitions for its clients. Our professionals have completed more than 400 assignments representing an aggregate transaction value of over $30 billion.

For more information about Bryant Park Capital, please visit www.bryantparkcapital.com.

20 Legal Firms and Groups Calling on UK Government for Urgent Legislation to Reverse PACCAR

Despite a government-commissioned independent review recommending priority standalone legislation to reverse PACCAR, the Government has failed to act, the letter to the Lord Chancellor says.

“As a highly respected member of the legal community, the Prime Minister rightly often speaks of ‘following the evidence’.

“The independent experts have provided the evidence that this issue needs fixing, yet this Government refuses to act, delaying justice for some and denying justice for future claimants.

“We call on the Government to act swiftly and legislate for the sake of claimants and the reputation of the UK’s justice system.”

The letter follows earlier calls on the Government from claimants to reverse PACCAR urgently, including from Sir Alan Bates , truck hauliers and the lead claimant in a mass action case against six water suppliers for alleged customer overcharging.

This comes amid a drop off in collective proceeding cases in the Competition Appeal Tribunal this year according to Solomonic, as reported in the Financial Times this morning (link). 

Neil Purslow, Chairman of the Executive Committee of ILFA, said:

“We’ve been warning successive governments for more than two years about the potential impact this uncertainty will have on consumers and small businesses’ ability to access justice.

“These figures show that stark reality. Meritorious claims are going unfunded, alleged wrongdoers are unchallenged and competition - one of the great drivers of growth - is not being enforced.

“The Government must act before this small trickle of cases dries up altogether.”

Martyn Day, co-founder of Leigh Day and co-president of the Collective Redress Lawyers Association (CORLA) which signed the letter, said: 

“This issue has created a great deal of uncertainty that is blocking access to justice for ordinary people taking on powerful corporations accused of wrongdoing. 

“The system simply cannot work without litigation funding, and this is a timely reminder to government to fix this issue, and urgently.”

In July 2023, the Supreme Court ruled in the PACCAR judgment that litigation finance agreements were unenforceable unless they met the requirements of Damages-Based Agreements, rendering many ongoing cases invalid and causing delays in the pursuit of justice for millions of claimants. 

The Civil Justice Council (CJC) concluded its comprehensive review of the funding sector four months ago, after the Government had promised to review what legislation might be needed to address PACCAR once the review was complete. The CJC’s review urged priority standalone legislation to reverse the damaging effects of PACCAR. Yet, despite earlier promises, the Government has said the review would merely “help to inform the approach to potential reforms” in “due course”. 

The letter highlights how the Government’s continued inaction contradicts the Prime Minister's own commitment to "following the evidence”.

The signatories, representing firms including Mishcon de Reya, Stewarts, Freeths, and Scott+Scott UK, highlight the “pivotal role” of group actions. They call on the Government to “act swiftly” to adopt the CJC’s recommendation to reverse PACCAR to protect the reputation of the UK’s justice system. The firms also include those who have provided legal representation for Sir Alan Bates, hauliers ripped off by truck manufacturers (link), and leaseholders fighting secret insurance charges (link).

Since the ruling, crucial investment into the UK economy is rapidly being lost. Litigation funders like Burford Capital are taking their funds elsewhere, with CEO Chris Bogart, stating his firm has begun ‘migrating some dispute resolution away from London’, following PACCAR. 

Litigation funding enables claimants with limited means to access justice, enabling landmark cases including those brought by the subpostmasters, retail workers, and small business owners, to hold multinational corporations accused of serious wrongdoing to account, while promoting fair, competitive markets and securing investment into the UK.

--

Below is the letter to the Lord Chancellor, in its entirety:

Rt Hon David Lammy MP
Lord Chancellor and Secretary of State for Justice
Ministry of Justice
102 Petty France
London
SW1H 9AJ

Dear Lord Chancellor,

Congratulations on your new role as Lord Chancellor and Justice Secretary. While we recognise the many challenges you'll face stepping into this role, we wanted to highlight a critical issue that is undermining access to justice and stifling investment in the UK's legal system. But it's an issue with a quick and simple fix.

Group actions in the UK play a pivotal role in enabling individuals to come together to bring claims against those accused of wrongdoing - often multinational corporations with significant resources. It has helped claimants like the subpostmasters, shopworkers, retail investors, and small business owners access justice.

The regime is underpinned by claimants’ abilities to access finance - often through litigation funding where funders provide financial backing for an agreed return of any settlement. However, as you know, the future of this mechanism and the regime is under threat thanks to the disruptive effects of the 2023 PACCAR judgment, and subsequent challenges to the enforceability of funding arrangements.

Claimants with limited means are struggling to access funding to bring their cases, and investment from funders is draining away from the UK legal system.

The Government promised to review what legislation might be needed to address PACCAR once the Civil Justice Council’s review had concluded. 

The CJC reported back 4 months ago with a thorough and nuanced perspective on the funding sector. As members of the legal community, we are sympathetic to sensible reforms and are reassured that the Government is considering these carefully. 

But one unequivocal and pressing recommendation from the CJC was for urgent standalone legislation to reverse the effects of PACCAR to end the uncertainty damaging access to justice. Disappointingly, the Government has so far failed to hear that call, saying only that the review would “help to inform the approach to potential reforms” in “due course”, despite its previous promises.

As a highly respected member of the legal community, the Prime Minister rightly often speaks of “following the evidence”. The independent experts have provided the evidence that this issue needs fixing, yet this Government refuses to act, delaying justice for some and denying justice for future claimants. 

We call on the Government to act swiftly and legislate for the sake of claimants and the reputation of the UK’s justice system.

Signed

The Collective Redress Lawyers Association (CORLA).
Stewarts
Group Actions & Competition, Stephenson Harwood
Scott+Scott UK LLP
Backhouse Jones
Freeths 
Humphries Kerstetter LLP
Mishcon de Reya LLP
Velitor Law
Milberg London LLP
Fladgate LLP
Geradin Partners
Harcus Parker
Tim Constable, Bates Wells
Phi Finney McDonald
Keidan Harrison LLP
Asserson
Leigh Day
Cooke, Young & Keidan LLP
KP Law

Shai Silverman Departs CAC Specialty, Joins Litica as U.S. Head of Underwriting

By John Freund |

After four years helping to build CAC Specialty’s contingent risk insurance practice from the ground up, Shai Silverman is departing the firm to join litigation risk insurer Litica as its Head of Underwriting – U.S.

In a LinkedIn post, Silverman reflected on his time at CAC, where he joined in the early days of the firm’s efforts to turn contingent risk insurance into a mainstream product. Alongside colleagues Andrew Mutter, Michael B. Wakefield, and David Barnes, Silverman helped develop insurance solutions for a wide array of legal risks, crafted bespoke products for hundreds of clients, and played a key role in launching the first-ever contingent risk insurance conference.

Silverman now moves to Litica, a UK-headquartered specialist insurer focused on litigation and contingent risks, to lead its U.S. underwriting function. His move signals not just a personal transition but also the growing transatlantic ambitions of insurers operating in this once-niche corner of legal risk.

Silverman’s departure marks a broader inflection point for contingent risk insurance—a sector now poised for significant expansion. As underwriting talent like Silverman shifts into leadership roles at specialist firms, questions emerge around how traditional insurers will respond, and whether contingent risk insurance will continue its trajectory toward becoming a standard risk-transfer tool for litigation and arbitration.