Gerchen Keller, now part of Burford Capital almost doubled their money in six short months. The deal revolved around a U.S. Circuit Court of Appeals case involving billionaire Ira Rennert and The Renco Group. Before the appeal last summer Gerchen Keller agreed to acquire a $50 million dollar interest in the outcome of the case. They paid just $26.2 million to acquire this interest in the judgement.
There is no doubt this is a record breaking return for the funder given the time frame. However, it is also the first time a deal like this has been done. Nicholas Kajon of Stevens & Lee. Kajon who worked on behalf of the bankruptcy trustee don’t think it will be the last. Nicholas feels that risk-hedging through deals with litigation funders “should be in every trustee’s toolkit.”
Trustees pursuing bankruptcy claims have a fiduciary duty and as such must consider the benefits of reducing risk. Trustees need to contemplate monetizing a piece of the potential recovery so they to assure themselves of liquidity. Doing so in many instances may be the only option to facilitate further litigation. They must also consider the benefits of guaranteeing cash for creditors should the decision go against them. Effectively it allows them to take money off the table in advance of a decision. A powerful tool in bankruptcy cases.
There are several important factors to considering when understanding why third party funding was a good fit in this case.
- This case had been running for nearly 15 years.
- The trustee, Buchwald, did win a jury verdict against Rennert.
- A judgment of $213.2 million was awarded for the trustee in September 2015.
- Then Rennert decided to appeal.
- Despite being confident the judgment would stand Buchwald and his lawyers were worried about liquidity.
- MagCorp had less than $1 million in the bank at this stage. “The judgment was the only asset we had,” Kajon said. “It was the only chance of recovery for the creditors.”
- If the trustee lost at the appeal, creditors might walk away with nothing.
- Additionally if the 2nd Circuit court ordered a new trial it was unlikely the estate could afford it.
These factors led Buchwald and Kajon to see if they could take money off the table for the creditors. The trustee asked Kajon to speak with those he knew in the litigation funding industry. In June 2016, the trustee reached a deal with Gerchen Keller.
This new deal was opposed by Rennert and his team. Their attempts to prevent this deal were of course unsuccessful. Judge Vyskocil allowed their deal to proceed.
Buchwald explained why the deal was good for MagCorp and its creditors. “The sale will hedge the estates’ downside exposure on the appeal and any further proceedings against the defendants at a reasonable price; … provide much needed liquidity to the debtors’ estates; and guarantee that there will be funds available to pay long-suffering general unsecured creditors irrespective of the outcome of the appeal…All litigation is fraught with peril and unpredictability. Litigation claims are inherently speculative. Therefore, I believe it is better to monetize a portion of this speculative asset now when the estates are in the strongest position they have ever been in (i.e., holding a $213 million judgment after a jury trial that is fully bonded on appeal), than to gamble everything on the appeal.”
What is unusual about this case is not the financing of a bankruptcy case by funders. The novel element to this process is how the deal was reached. An open auction was held to find the financier and the chosen outcome was then approved by the court. Most importantly it was approved due to being in the best interests of MagCorp’s creditors.
Travis Lenkner of Burford stated “[Judge Vyskocil’s] blessing with a capital B” will open the door for other bankruptcy trustees to work with litigation financiers.
 http://in.reuters.com/article/us-otc-bankruptcy-idINKBN16L2HJ  https://www.forbes.com/sites/danielfisher/2017/03/08/billionaire-rennerts-loss-is-a-quick-double-for-litigation-finance-firm-burford/#32ff9fa91970