litigation

Third Circuit Departs from Momentive and Reinstates EFIH Noteholder Make-Whole Claims Causing Uncertainty over EFH’s Ability to Exit Bankruptcy

Recently, the Third Circuit reversed decisions issued by the Delaware Bankruptcy and District Courts and permitted first and second lien noteholders of Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. to receive payment of a make-whole premium. In re Energy Future Holdings Corp., No. 16-1351 (3d Cir. Nov. 17, 2016).  The decision, which is largely grounded in New York law, departs from recent controversial decisions issued by the Bankruptcy Court and District Court for the Southern District of New York in the Momentive bankruptcy, which we have previously discussed here and here.  In Momentive, the courts reached the opposite conclusion on substantially similar facts.  In Momentive, the courts reached the opposite conclusion on substantially similar facts.  In addition to creating a split between the Third Circuit and the Southern District of New York, the ruling creates uncertainty regarding the ability for the debtors in the long-running EFH bankruptcy to confirm their proposed chapter 11 plan. READ MORE

Litigation Finance: A Brief History of a Growing Industry

Litigation costs money.

Litigation finance can provide the cash a plaintiff needs to prevail in court. Plaintiffs holding valid—and potentially quite valuable—claims sometimes do not have the resources to initiate a lawsuit or to see one through to a favorable resolution. Rules of professional ethics generally prohibit lawyers from providing clients with financial assistance.  A contingency fee arrangement with a lawyer can help reduce a plaintiff’s out-of-pocket legal costs, but such arrangements are not always feasible. Even when they are, the lawyer may not have enough cash available to fully fund the costs of litigation.

Litigation financing (also known as professional funding, settlement funding, third-party funding, or legal funding) is the process by which plaintiffs can finance their litigation or other legal costs through a third party. This third party provides a nonrecourse cash advance to the plaintiff in exchange for a percentage share of the judgment or settlement. Litigation finance is used to fund all types of cases, including commercial litigation, intellectual property disputes, personal injury cases, class actions, whistleblower suits, and even high-profile divorce cases. And funders invest in early stage cases, cases pending appeal, and even finished cases.

Many investors, including big banks, participate in this sector. There are also firms dedicated solely to investment in litigations. These firms now invest about $1 billion a year, and the industry seems to be growing. Topping $1 Billion Mark, Big Litigation Funder Gets Bigger, Julie Triedman, The Am Law Daily, January 6, 2016. The industry’s largest investor, Chicago-based Gerchen Keller, was formed in 2013 with $100 million in capital and now has more than $1.4 billion in assets under management.  In many ways, the firm operates like a typical hedge fund. It maintains several separate funds that invest private capital in portfolios of assets selected by the firms’ managers. The major difference between it and more traditional hedge funds is that Gerchen Keller invests only in this new asset class—namely, interests in lawsuits.  In addition to investments by big banks and funds, accredited investors with as little as $2,500 to invest can get a piece of the action.  Specifically, LexShares, a crowdsourcing website, matches third-party funders meeting certain qualifications with litigants in need of funding.

The foregoing demonstrates that lawsuit investment is a new and burgeoning asset class. In spite of this, there is no uniform regulation.  Congress and state legislatures are looking to change this situation.

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