Structuring Litigation Funding Agreements

Over the past 10 years, the cost of complex litigation has exploded, and companies increasingly look to third parties to fund and assume some of the risk of success of litigation. This sector, known as litigation funding, has become a sophisticated big business. These funders expect substantial return for funding litigation costs up front and taking on the risk of low or no recovery. But how should such agreements be structured? If it is structured as a loan, state usury laws may apply. If structured as an assignment of tort claims, longstanding state champerty laws could affect the enforcement of the agreement. Finally, what happens when the plaintiff beneficiary of the litigation funding files a bankruptcy case before the litigation is completed? In a recent decision in In re Harvest Sherwood Food (Case No. 25-08008 (SGJ)), the U.S. Bankruptcy Court for the Northern District of Texas addressed all of these issues, and held a litigation funder that advanced $35 million to prosecute anti-trust claims prior to the bankruptcy filing held no interest in the litigation recovery, and merely held a general unsecured claim for breach of contract like any other contract creditor in the bankruptcy case.