Insolvency & Serious Financial Distress

Fulbrook selected three areas in which to specialize by choosing those which: (a) most need and deserve help, as a matter of commercial justice (while also serving civil justice); (b) carry the most profitable financing opportunities; (c) draw on Fulbrook’s superior experience and skill; and (d) are most compatible with each other, and with certain other ancillary areas of interest.

In addition to patent and international arbitration claims, discussed elsewhere under this tab, we chose the Bankruptcy and other Serious Financial Distress area. Bankruptcy is an active dispute area, particularly given recent years of global distress and the long shadow that it casts into the future.

In one form or another, financial support has been in great demand and supply for many years. Typically, a bankrupt company will look to its creditors or other stakeholders to finance commercial claims against those who may have wrongfully contributed to or benefited from the bankruptcy—including those who breached contracts or otherwise hurt the company to drive it into bankruptcy, or who must compensate the bankrupt party because they took fraudulent transfers or received preferential transfers. Some companies have committed huge sums to this area.

As a result of the area’s difficult, specialized requirements, laws were developed to facilitate support for those affected. Laws against “champerty” and “control” of litigation proceedings were mitigated so as to spur others to come in to finance or buy claims. Various entities that generally become trustees or administrators of a bankrupt party – such as accounting firms — established practices to encourage capital flow into the area, and courts encouraged such assistance. In many situations, returns to investors can be attractive proportionate to the difficult situation that they and the bankrupt party typically face.

The investing group has therefore expanded to include the Dispute Finance Industry. A number of financing providers have invested in such claims in the United Kingdom and the Commonwealth, as well as in the U.S. and elsewhere. One recent UK entrant into the industry has dedicated all its time, effort and capital, to finding and investing in such claims. Another dedicated institutional financing provider in a number of areas, and one that is a leader in the industry, has now invested in this specialized bankruptcy financing.

Like all good opportunities, there are a number of complications. One is that the investment is typically under a court’s careful supervision. The fees, methods, and many other aspects of financing are carefully supervised and “regulated” by the Court. The Trustee or Administrator managing the proceeding is generally and understandably very conservative, and requires time-consuming threshold hurdles to be cleared before approving a financing provider and its objectives; it imposes its preferred practices on the financing provider, though they may not be needed in other areas. Such hurdles can cause a financing provider to turn down opportunities that otherwise would be attractive. Since it requires specialized knowledge and extensive experience, the technical and sometimes “arcane” world of bankruptcy or insolvency – especially in the international context – makes the domain difficult to penetrate by the practitioner lacking this necessary background (and fortitude).

But such challenges provide serious opportunities for the right investor with the right capacity and focus. Fulbrook believes that the challenges are a fair “cost” given the “dividends” available to those who know what they are doing. We believe Fulbrook does know what it is doing, and therefore that this area more than justifies Fulbrook’s focus.