Litigation can be an underfunded estate’s best and only means of recovery for its creditors. Lacking funding and faced with litigation costs coupled with an uncertain outcome, a trustee or plan administrator may choose to forgo potentially valuable claims or settle them below their actual worth.
Outside financing offers another alternative. After determining which cases are best-positioned for recoveries and estimating the projected cost and timing to resolution, Burford can provide non-recourse capital tied to the successful outcome of the litigation. With increased liquidity, the estate can launch a broad litigation strategy that improves the likelihood of prevailing on meritorious claims and recovering funds for creditors while minimizing risk.
An added benefit: The use of a funder and the terms of the funding arrangement typically are disclosed as part of a court approval process. The presence of a finance provider, and thus the assurance of a fair fight as opposed to a one-sided rout, can be motivation for a stubborn adversary to agree to a settlement.
Novel financing arrangements
Burford can do far more than simply fund a bankruptcy estate’s legal fees and expenses. For professional services company Grant Thornton, Burford financed a facility enabling the firm to pursue a portfolio of insolvency cases, including defense matters. In another instance, Burford purchased an interest in the right to receive litigation recoveries from a $213 million judgment on appeal belonging to the MagCorp estate, while mitigating appeal risk and guaranteeing a minimum outcome to long-suffering creditors.
If an estate has a single high-value litigation claim with substantial risk, funders can also purchase the claim from the estate outright. In such situations, the financier assumes the full risk of the claim, including funding and fees. Here, also, court approval of the winning bid is necessary, and is often performed in connection with certain sale procedures proscribed under the Bankruptcy Code which afford protections to purchasers of claims.
Future of financing for bankruptcy professionals
As restructuring practitioners know, invoices submitted for payment by a debtor estate can be subject to a bankruptcy code-mandated holdback pending periodic approval, creating a receivable in favor of the professional. The holdback can be as much as 20% of an invoice. We recently have seen appetite for monetizing these holdback receivables, a solution which grants any professional associated with a debtor estate—restructuring advisors, debtors’ counsel, committee counsel, creditors’ counsel and financial professionals—immediate access to fee revenue earned. Any restructuring professional can benefit from holdback monetization as a year-round strategy.
Given the clear benefits to estates, creditors and professionals themselves, the use of outside finance is sure to become even more widespread in the restructuring industry in 2018.