Ch. 7 Debtor Cannot Block New Litigation Funding Deal, Appeals Court Says

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(Reuters) – An appeals court on Tuesday ended a Chapter 7 debtor’s challenge to a litigation funding agreement between its trustee and a creditor, finding the agreement had no financial impact on the debtor himself.

A three-judge panel from the 5th U.S. Circuit Court of Appeals held on a five-page filing decision that William Berry Dean III lacked standing to appeal a lower court’s approval of the financing agreement because he failed to show that he would suffer financial harm from the agreement.

“The appellants cannot prove that they have standing to declare bankruptcy when the court order they oppose does not directly affect their portfolio,” wrote Circuit Judge Jacques Wiener Jr. He was joined by Circuit Judges James Graves Jr and James Ho.

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The dispute stems from Dean’s 2019 Chapter 7 bankruptcy in Texas, where the trustee assigned to Dean’s estate, Scott Seidel, reached an agreement with one of Dean’s creditors, Reticulum Management LLC, to fund litigation aimed at raising money that could be used to pay off the Dean’s debts. Reticulum agreed to advance $200,000 in exchange for 30% of any litigation proceeds the trustee was successful in collecting.

Seidel said the litigation funding was necessary because other companies refused to do the work on a contingency fee basis. U.S. Bankruptcy Judge Stacey Jernigan approved the deal in June 2020. In April, U.S. District Judge Brantley Starr said there were “legitimate ethical concerns” about litigation funding agreements, but upheld the Jernigan’s decision.

Dean appealed, arguing that the litigation funding arrangement improperly allowed Reticulum to get ahead of other creditors and potentially collect more than it would otherwise receive in the case. The Court of Appeal did not consider this argument.

Dean’s lawyer, John Lewis Jr of Hayward, told Reuters on Tuesday that continuing litigation funding arrangements like this would set a “very bad precedent” and “lead financially well-heeled creditors to understand how to manipulate the bankruptcy system. , especially in Chapter 7, to actually receive a larger recovery than they normally would by simply using their ability to fund litigation.

The case is Dean v. Seidel, 5th US Circuit Court of Appeals, No. 21-10468.

For Dean: John Lewis Jr of Hayward

For Seidel: Kristian Gluck and Ryan Manns of Norton Rose Fulbright; and Julie Pettit and David Urteago of The Pettit Law Firm

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