Outside Funders Fuel Bankruptcy Lawsuits

livemint.com:

Benefit Street Partners and other unsecured creditors of oil driller Sanchez Energy wrested control of the reorganized company from senior lenders earlier this month. They have had little time to celebrate. After winning a court battle for control of the business, Benefit Street now faces a different fight—to keep the extra payoff it expects to receive for financing the litigation.

The disputed litigation loan could deliver returns of more than 2,000%, according to rival investors that have sued to challenge it. Bankruptcy courts nationwide have seen more such funding deals in recent years, as distressed companies and their creditors sell the rights to pursue lawsuits in exchange for upfront cash. 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, which isn’t involved in the Sanchez case. 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.