especially when they are financial
institutions, professional firms, and/
or insiders who looted the company.
And all of these costs are in addition
to attorneys’ fees. Even if counsel
can be found to prosecute claims on
a contingency fee basis, a plaintiff
may still need a seven-figure budget
to fund other litigation expenses.
It is axiomatic that sensibly funded
litigation is more likely to yield
positive results than if done on a
shoestring budget, whether through
greater leverage to garner a more
favorable settlement or by increasing
the likelihood of a successful litigated
outcome. Furthermore, plaintiff and
counsel will be better equipped to
move forward aggressively, allowing
a plaintiff to endure through trial.
In the Renco Group litigation,
the trustee’s limited options and
particular constraints suggested
one of two outcomes. The status
quo could persist, with its limits
and unpredictable results, or the
trustee could attempt to alter the
status quo, rather than sit idly by
while the appeal progressed and
hope for a successful outcome.
The emergence of litigation finance
and alternative funding suggested a
new path for the trustee to explore.
In doing so, he and his advisors
conceived and structured the sale
of an interest in net recoveries from
the proceeds of the Renco Group
litigation. The trustee and his advisors
ran a private sale process, approached
and negotiated with multiple funders,
and ultimately advanced a stalking
horse bid. Approval of the stalking
horse (subject to better bids) and
other bid procedures were sought and
obtained from the Bankruptcy Court.
A public auction process followed
approval of the bid procedures.
After three contested hearings,
including denial of a motion for a
stay of the sale order pending appeal,
the sale was approved and closed.
This enabled the trustee to monetize
a portion of this speculative asset,
hedge his downside exposure, provide
much needed liquidity to the debtors,
and guarantee that there would be
money for creditors. 5 The motion
seeking approval of this litigation
finance transaction disclosed that
it was designed, in part, to pressure
defendants to the bargaining table,
but unsurprisingly they failed to
make what the trustee considered
a reasonable settlement offer.
Insights for Businesses,
Litigation finance has established
itself as an option adaptable to
multiple circumstances, even the
defense of litigation claims. In the
aggregate, the top five institutions
that offer litigation finance have
billions of dollars available to invest.
In a typical scenario, a funder
agrees to fund a prenegotiated
budget with respect to one or more
lawsuits against agreed defendants.
The funder, in exchange, agrees to
accept, generally on a nonrecourse
basis, an investment return
solely from any recovery in those
lawsuits. The creditworthiness of
a prospective party should not be
relevant if its positions have merit.
This enabled the trustee to monetize a portion of
this speculative asset, hedge his downside exposure,
provide much needed liquidity to the debtors, and
guarantee that there would be money for creditors.
The relationships themselves are
structured and performed with
strict adherence to common law and
ethical requirements. That ordinarily
includes a client’s retention of
determinative control of an action,
from before commencement through
the final conclusion. It also includes
noninterference with the attorney-client relationship, including its
protections. Litigation finance may
be ideal for businesses in financial
distress that seek to claw back money
or other assets improperly diverted
by insiders or other miscreants.
Litigation funders will also provide
funding directly to law firms for
operating expenses while they
pursue contingent fee litigation.
Litigation finance does not come
cheaply. However, paying a
percentage of a recovery to a litigation
funder appears to be a superior
outcome when the alternatives would
otherwise be not prosecuting the
action at all, prosecuting it on
a shoestring budget, or bearing
100 percent of the risks associated
with litigation claims or illiquid assets.
Some criticize litigation finance,
contending that it promotes the
prosecution of frivolous claims.
However, funders typically only
recover from successful results. A
funder’s overriding interest is to
ensure that it commits its capital
only to meritorious claims. Those
in distress, on the other hand, may
hold less objective views, leading
them to overestimate or irrationally
promote a position. In such instances,
a litigation funder may serve as a
gatekeeper against frivolous claims.