Burford Capital New York Office. (Courtesy photo)
Litigation funder Gerchen Keller Capital LLC made headlines last year when it paid $26.2 million to purchase a portion of a $213 million bankruptcy judgment. Now, the first known purchase into a bankruptcy judgment by a litigation funder appears poised to pay off for Burford Capital Ltd., which paid $160 million in December to acquire Chicago-based Gerchen Keller.
Burford stands to reap a 91 percent return from Gerchen Keller’s investment after the U.S. Court of Appeals for the Second Circuit affirmed last week a large judgment that arose from a 2015 trial over claims that billionaire Ira Rennert siphoned millions of dollars from his investment fund, Renco Group Inc. Burford is in line to receive $50 million of the judgment, which could be paid out as early as later this year pending any potential en banc review or U.S. Supreme Court petition.
The high return on an investment made just last August shows how lucrative the litigation finance business can be when all the risks in a case seem to fall in favor of funders. But that is not to say anyone feels fleeced: The lawyer for the bankruptcy trustee who sold the judgment to Gerchen Keller said he was pleased with the case and that the success of this sale should spur other bankruptcy trustees to seek more deals like it.
“You could see that this will be done more often in light of the successful result achieved here,” said Nicholas Kajon, co-chair of the bankruptcy and financial restructuring department at Stevens & Lee in New York, where he also co-chairs the firm’s litigation finance and alternative funding group. Kajon represented the bankruptcy trustee for Magnesium Corp. of America, which litigated the case against Renco for more than a decade.
The terms of the deal, struck in an auction between Gerchen Keller and rival litigation financier Juridica Asset Management Ltd., were approved by a court after a group of bondholders in the case objected to the deal struck between Gerchen Keller and Lee Buchwald, the bankruptcy trustee for MagCorp.
The infusion of cash from the sale served at least two purposes for MagCorp’s trustee: To pay for any continued defense of the judgment and to guarantee some return for creditors who last received a payment on their bonds in 2000. MagCorp’s trustee had $650,000 left to manage the estate when the deal was struck, Kajon said.
“Everyone thought this was a dog and there would be no recovery,” Kajon said. “Now, there’s going to be money for them.”
Travis Lenkner, a managing director at Burford who helped structure the MagCorp agreement at Gerchen Keller, said the deal is representative of the variety of ways litigation funders provide capital to litigants other than simply bankrolling their legal fights.
“We think there is a good amount of opportunity out there for this sort of thing, not only in bankruptcy but in civil litigation,” said Lenkner (pictured right).
Investing in a portion of a judgment in the appellate stage is potentially less risky than investing in a claim that is being litigated in the trial court, Lenkner said. But the wide variety of possibly negative outcomes even in a case like this—the court could have struck down the judgment, sending the case back to trial—mean that it is difficult to say the capital that Burford provided is necessarily less expensive than in other cases. Burford’s return of 91 percent in this case beats out the firm’s average. Burford said last year it made a net return of 70 percent on its invested capital in 42 cases.
“There’s a misconception about litigation finance that the investments we make are binary: Meaning, you win or you lose,” Lenkner said. “The investments we make have decision trees and different outcomes that can be very complex. And they’re anything but binary.”