<\/p>\n One the big winners last week when the 2nd U.S. Circuit Court of Appeals affirmed<\/a>\u00a0a $213 million judgment against billionaire Ira Rennert and The Renco Group was the litigation funder Gerchen Keller, now part of Burford Capital. Last summer, before oral arguments in Rennert\u2019s appeal, Gerchen Keller agreed to pay $26.2 million to acquire a $50 million interest in the judgment from the bankruptcy trustee for Magnesium Corporation of America. Thanks to the 2nd Circuit’s MagCorp affirmance, the litigation funder will end up with nearly double its money from a six-month investment.<\/span><\/p>\n <\/span><\/p>\n The deal between the MagCorp trustee, Lee Buchwald, and Gerchen Keller was apparently the first time a bankruptcy trustee has auctioned off a piece of a litigation judgment via an open proceeding overseen by a federal bankruptcy judge. It should not be the last, according to Buchwald\u2019s lead counsel, Nicholas Kajon<\/strong> of Stevens & Lee<\/strong>. Kajon, whose law firm bio<\/a>\u00a0highlights his expertise in helping clients \u201cassert litigation claims without committing their own capital\u201d said in an interview Tuesday that risk-hedging through deals with litigation funders \u201cshould be in every trustee\u2019s toolkit.\u201d<\/p>\n <\/p>\n Off-loading litigation risk by selling an interest to a litigation funder won\u2019t make sense for every bankruptcy trustee pursuing claims, Kajon said. But as fiduciaries, he said, trustees ought to consider whether the bankruptcy estate is better off monetizing a piece of its potential recovery to assure itself of liquidity to keep litigating and some cash for creditors even if it ends up losing the case.<\/p>\n <\/p>\n \u201cWe think this is an absolutely perfect fit for bankruptcy,\u201d he said.<\/p>\n <\/p>\n It\u2019s easier to understand how these deals would work through the specifics of the MagCorp transaction. In the 1990s, MagCorp was one of North America\u2019s largest producers of magnesium and magnesium alloys. Its parent company was (almost) wholly owned by Rennert and Rennert trusts. MagCorp ran into serious problems with the Environmental Protection Agency, however. According to the bankruptcy trustee, Rennert interests engaged in complicated financial shufflings, including a MagCorp debt offering, that essentially diverted all of the value of the company to them while isolating the environmental exposure. MagCorp entered bankruptcy in 2001.<\/p>\n <\/p>\n After nearly 15 years of litigation, the bankruptcy trustee, Buchwald, won a jury verdict against the Rennert defendants in federal court in Manhattan. U.S. District Judge Alison Nathan<\/strong> entered a judgment of $213.2 million for the trustee in September 2015. Rennert brought in Orrick Herrington & Sutcliffe<\/strong> to appeal to the 2nd Circuit. Buchwald countered with appellate counsel Kellogg Huber Hansen Todd Evans & Figel<\/strong>.<\/p>\n <\/p>\n <\/p>\n Buchwald and his Stevens & Lee lawyers were confident the judgment would stand. But they were also worried about liquidity. MagCorp had less than $1 million in the bank. \u201cThe judgment was the only asset we had,\u201d Kajon said. \u201cIt was the only chance of recovery for the creditors.\u201d If the trustee lost at the 2nd Circuit, Kajon said, creditors might walk away empty-handed. Even if the 2nd Circuit ordered a new trial, Buchwald wasn\u2019t sure the estate could afford it.<\/p>\n <\/p>\n Buchwald and Kajon decided to test the market to find out whether they could lock in about $20 or $25 million in recovery by selling an interest in the judgment. As Buchwald explained in an August 2016 declaration<\/a>\u00a0in bankruptcy court, he wanted to sell the interest before the 2nd Circuit heard oral arguments because that would change assessments of the risk for investors.<\/p>\n <\/p>\n The trustee asked Kajon to reach out to his litigation funding contacts. He reached out to nine prospective bidders, eight litigation financiers and one from another industry Kajon declined to specify. Several reviewed documents, including the Kellogg Huber opening appellate brief, and engaged in negotiations with the trustee. In June 2016, the trustee selected Gerchen Keller as the stalking-horse bidder, proposed an auction process and moved for approval of that process from U.S. Bankruptcy Court Judge Mary Kay Vyskocil<\/strong> of Manhattan.<\/p>\n <\/p>\n <\/p>\n The Rennert defendants opposed the novel sale proposal. So did Jefferies LLC, one of the largest holders of MagCorp notes, which said the trustee hadn\u2019t provided enough information about why it was in creditors\u2019 best interests to rush to sell a piece of the judgment at a late stage in the litigation. Judge Vyskocil nevertheless ordered the auction to take place.<\/p>\n <\/p>\n Rennert tried to submit a bid \u2013 in exchange for the entire judgment, the defendants would pay $45 million if the 2nd Circuit ruled for them and $100 million if the trustee prevailed on appeal \u2013 but the trustee disqualified the offer. (In addition to what he considered an inadequate offer, he said he couldn\u2019t be sure the proposed Rennert vehicle itself was well-financed.) A Rennert lawyer actually showed up for the auction but was asked to leave. The litigation funder Juridica, however, emerged to bid against Gerchen Keller, which revised its stalking-horse bid. It agreed to pay an additional $1 million and to take $3.75 million less.<\/p>\n <\/p>\n In his declaration supporting a motion for Judge Vyskocil to approve the final offer, Buchwald explained why the deal was good for MagCorp and its creditors. \u201cThe sale will hedge the estates\u2019 downside exposure on the appeal and any further proceedings against the defendants at a reasonable price; \u2026 provide much needed liquidity to the debtors\u2019 estates; and guarantee that there will be funds available to pay long-suffering general unsecured creditors irrespective of the outcome of the appeal,\u201d Buchwald wrote. \u201cAll 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.\u201d<\/p>\n
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