Ch. 7 Debtors Cannot Block New Litigation Funding Agreement, Appeals Court Says

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(Reuters) – An appeals court on Tuesday ended a Chapter 7 debtor’s challenge to a dispute financing deal between its trustee and a creditor, ruling the deal had no impact financial on the debtor himself.

A three-judge panel of the 5th U.S. Court of Appeals was held in a decision that William Berry Dean III did not have standing to appeal the lower court approval of the funding agreement because he failed to demonstrate that he would suffer financial harm from the agreement.

“Appellants cannot prove that they are bankrupt when the court order they oppose does not directly affect their wallet,” wrote circuit judge Jacques Wiener Jr. He was joined by the 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 Dean’s estate trustee, Scott Seidel, reached an agreement with one of Dean’s creditors, Reticulum Management LLC, to fund a litigation aimed at raising money that could be used to pay off Dean’s Debts. Reticulum has agreed to advance $ 200,000 in exchange for 30% of any litigation proceeds that the trustee has managed to collect.

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

Dean appealed, arguing that the litigation funding deal 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 attorney, John Lewis Jr of Hayward, told Reuters on Tuesday that maintaining litigation finance deals like this would set a “very bad precedent” and “make financially well-off creditors figure out how to manipulate the bankruptcy system, particularly in Chapter 7, to receive a greater recovery than they normally would by simply using their capacity to fund litigation. “

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

For the 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 law firm Pettit

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