One the big winners last week when the 2nd U.S. Circuit Court of Appeals affirmed a $213 million judgment against billionaire Ira Rennert and The Renco Group was the litigation funder Gerchen Keller, now part of Burford Capital. Last summer, before oral arguments in Rennert’s appeal, Gerchen Keller agreed to pay $26.2 million to acquire a $50 million interest in the judgment from the bankruptcy trustee for Magnesium Corporation of America. Thanks to the 2nd Circuit’s MagCorp affirmance, the litigation funder will end up with nearly double its money from a six-month investment.
The deal between the MagCorp trustee, Lee Buchwald, and Gerchen Keller was apparently the first time a bankruptcy trustee has auctioned off a piece of a litigation judgment via an open proceeding overseen by a federal bankruptcy judge. It should not be the last, according to Buchwald’s lead counsel, Nicholas Kajon of Stevens & Lee. Kajon, whose law firm bio highlights his expertise in helping clients “assert litigation claims without committing their own capital” said in an interview Tuesday that risk-hedging through deals with litigation funders “should be in every trustee’s toolkit.”
Off-loading litigation risk by selling an interest to a litigation funder won’t make sense for every bankruptcy trustee pursuing claims, Kajon said. But as fiduciaries, he said, trustees ought to consider whether the bankruptcy estate is better off monetizing a piece of its potential recovery to assure itself of liquidity to keep litigating and some cash for creditors even if it ends up losing the case.
“We think this is an absolutely perfect fit for bankruptcy,” he said.