Bankruptcy courts nationwide have seen more litigation-funding deals in recent years, as distressed companies and their creditors sell the rights to pursue lawsuits in exchange for upfront cash, WSJ Pro Bankruptcy reported. With the pace of corporate defaults picking up, litigation funding could fuel more disputes in bankruptcy court that can alter creditors’ recoveries. “We’re seeing a recognition of litigation assets as another source of value for companies and their unsecured creditors in a more robust way than we have in the past,” said Ken Epstein, investment manager and legal counsel at litigation funder Omni Bridgeway. Benefit Street and three other investment firms put up nearly $5.6 million to bankroll a lawsuit on behalf of unsecured bondholders of Sanchez, which exited bankruptcy in 2020 under the new name Mesquite Energy. Earlier this month, a bankruptcy judge ruled that 70% of the company belongs to unsecured creditors, rather than to its former bankruptcy lenders Fidelity Investments and Apollo Global Management. Benefit Street and the three other asset managers negotiated for 90% of the lawsuit’s proceeds in return for their financing. That means only 10% of the recent award would be spread among all the company’s unsecured creditors. One of them, Lake Whillans Capital, sued earlier this month to challenge the litigation loan, saying that a court-appointed creditor representative signed away too much of the lawsuit’s value.
