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Third-Party Litigation Funding in Bankruptcy Cases

By Patrick M. Jones

Third-party litigation financing is a booming form of finance that seems like a natural fit for bankruptcy-related litigation initiated by Chapter 7 trustees, and official committees of unsecured creditors and debtors. Although the disclosure requirements of the bankruptcy code may give the most secretive funds pause, these issues can be managed and should not be a barrier to most participants. Ultimately, third-party litigation finance will assist in the efficient, comprehensive liquidation of bankruptcy estates and provide the maximum benefit for creditors.

This type of litigation finance is an alternative asset class that has experienced rapid growth in the U.S. in the past decade. Explained in its its simplest form, a third party provides capital to a claimant to cover or supplement the cost of litigating a claim or to hedge against an adverse outcome. The third party purchases a portion of a claimant's recovery, less attorneys' fees and costs. The financing is almost always provided on a non-recourse basis, i.e., the claimant is not liable to the third party if the underlying lawsuit is unsuccessful.

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