Litigation Funding in Bankruptcy: Lessons From Harvest Sherwood Food, Fresh Acquisitions, and AkinMears

This CLE webinar will explore how bankruptcy courts are dealing with third-party litigation funding (TPLF) agreements, evaluate key issues that parties and their advisers must consider when proposing TPLF for financially distressed or bankrupt companies, and suggest best practices and protective provisions when drafting in light of the potential for the counterparties to file bankruptcy. The panel will review lessons and cautionary tales for all parties, drawing from recent bankruptcy cases, including In re Harvest Sherwood Food Distributors Inc. (Bankr. N.D. Tex.), In re Fresh Acquisitions L.L.C. (Bankr. N.D. Tex.), and In re AkinMears L.L.P. (Bankr. S.D. Tex.)

Litigation funding intersects with bankruptcy in at least two broad ways. 

First, a plaintiff or law firm that has entered into a litigation funding agreement with a company pre-bankruptcy that ends up filing for bankruptcy, and the litigation funder seeks to recover from the funded party post-bankruptcy. In this scenario, the nature and scope of the funder's interests will be evaluated and decided by the bankruptcy court.  

Second, litigation funding may be sought by the bankrupt entity to fund litigation: by debtors to prosecute its claims in new or ongoing litigation unrelated to the bankruptcy as well as avoidance actions, preferences, and claims against officers and directors; by creditors to litigate priority or other claims against co-creditors; by a litigation trustee to recover assets for the estate that will be distributed to creditors; or the outright sale of potential claims in a Section 363 sale. In these situations, some level of disclosure of the terms of the financing and bankruptcy court approval may be required.

Funders should anticipate the possibility of bankruptcy by a counterparty and potential bankruptcy court scrutiny of the funding agreement. For example, a bankruptcy court in Texas recently voided a litigation funding agreement between a liquidating trustee and litigation funder, and another court found that a funder who funded $35 million was nothing more than an unsecured creditor.

Special attention should be given to assessing the creditworthiness of the plaintiff before entering into the funding arrangement, as well as the structure of the funding agreement, the existence of other secured creditors, and the collateral pledged to them, among other considerations.

Listen as these expert panelists (each with significant legal experience with litigation finance and bankruptcy) offer practical guidance about litigation funding and bankruptcy.