March 16, 2017 - On March 15th the LSTA hosted a webinar on Bankruptcy and Litigation Claims presented by Justin Brass of Burford Capital and John Mills and Timothy Bennett of Seyfarth Shaw. Trading in claims in bankruptcy cases is simply cashing out at a substantial discount a creditor who cannot, or does not have the patience to, await a promised payout from a bankruptcy case. Most opportunities for sourcing those claims arise in the Southern District of New York and Delaware; however, given last year’s turmoil in the oil & gas industry, there has been an increase in the number of related claims opportunities in Texas. A bankruptcy claim may arise from goods sold or services rendered by a vendor or from contracts terminated, and the diligence needed to vet each claim and determine its prospects will depend on the complexity of the case. Unlike the trading of bank debt, there is no e-settlement platform or public exchange for claims trading. However, like bank debt trading, if the parties orally agree the material terms of the trade, their claims trade can also benefit from the Qualified Financial Contracts exception to the Statute of Frauds and need not be in writing to be enforceable. Identification of those material terms may, however, be more complicated than for a loan trade — with parties sometimes trying to make the trade “subject to mutually agreeable definitive documentation.” Financing litigation claims vesting in trustees, committees, or debtors-in-possession requires bankruptcy court approval during the course of a case, or if it is a post-effective date, will depend on the terms of any litigation trust. Although in economic terms, this is not very different from a lawyer taking a matter on a contingency fee arrangement, a trust approval can sometimes be difficult to obtain, given the traditional hostility of some courts and bar associations to “champerty” (a concept dating back to medieval times which proscribed the buying and selling of legal claims).
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