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CT Bankruptcy Court Invalidates Lawsuit Funding Agreement
Lawsuit funding companies have routinely filed claims as creditors in tort plaintiffs' bankruptcy actions when the debtor has failed to repay litigation funding advances. Whether bankruptcy courts will enforce lawsuit funding agreements depends on the applicable state law.
Creditors should take note of recent cases invalidating or upholding state regulation of lawsuit funding agreements. For example, in Global Injury Funding, LLC v. Knight (In re Knight), 538 B.R. 191 (Bankr. Conn. 2015), a bankruptcy judge in Connecticut recently invalidated a lawsuit funding agreement. The court focused on the applicable state law in rejecting the lawsuit funding company's (Global) attempt to enforce the following provision of its agreement with Jesse K. Knight, a personal injury claimant, to whom it had advanced funds:
Purchaser's interest [is] to be described as an asset of Purchaser (and not as a debt obligation of Claimant in any oral or written communications, including, but not limited to, any schedule or other document filed in connection with said case or proceeding. Claimant agrees, absolutely, irrevocably and without condition, to notify the Bankruptcy court and/or other relevant court that Purchaser owns a portion of any potential recovery from said claim and Purchaser is entitled to notify the court of the same. Accordingly, in light of the fact that the funds advanced herein by Claimant are an investment and not a loan, Claimant's obligation will not be discharged or reduced as a result of any Bankruptcy or Insolvency proceeding.
Id. at 199
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