Over the past 10 years, the cost of complex litigation has exploded, and companies increasingly look to third parties to fund and assume some of the risk of success of litigation. This sector, known as litigation funding, has become a sophisticated big business. These funders expect substantial return for funding litigation costs up front and taking on the risk of low or no recovery. But how should such agreements be structured? If it is structured as a loan, state usury laws may apply. If structured as an assignment of tort claims, longstanding state champerty laws could affect the enforcement of the agreement. Finally, what happens when the plaintiff beneficiary of the litigation funding files a bankruptcy case before the litigation is completed? In a recent decision in In re Harvest Sherwood Food (Case No. 25-08008 (SGJ)), the U.S. Bankruptcy Court for the Northern District of Texas addressed all of these issues, and held a litigation funder that advanced $35 million to prosecute anti-trust claims prior to the bankruptcy filing held no interest in the litigation recovery, and merely held a general unsecured claim for breach of contract like any other contract creditor in the bankruptcy case.
Litigation Funder Provided $35 Million to Prosecute Antitrust Claims
According to the opinion, the debtors had been the largest independent wholesale food distributor in the United States, generating $4 billion of annual revenue. Prior to filing a Chapter 11 bankruptcy case, certain of the debtors filed various antitrust and price-fixing lawsuits against various pork, chicken, and beef producers, alleging over $1.1 billion in damages, exclusive of treble damages.
In December 2022, the plaintiff debtors obtained litigation funding pursuant to a “capital provision agreement” (CPA) from a well-known litigation funder (funder). Prior to the bankruptcy filing, the funder provided $35 million to prosecute the claims. In June 2022, prior to the CPA, the debtors obtained conventional asset-based revolving loans from certain lenders, secured by most of the debtors’ assets but expressly did not include commercial tort claims, including collateral that secured the antitrust claims. However, subsequent amendments to the ABL loan agreement entered after the CPA added the antitrust claims to the collateral that secured the ABL loans. The debtors filed a bankruptcy case in May 2025. The Bankruptcy Court approved an additional $105 million in debtor-in-possession financing loans to the debtors from the ABL lenders.
The funder then filed an adversary proceeding that sought a declaratory judgment regarding the validity, priority, and extent of its interests in the antitrust claims and their proceeds, naming the debtors and lenders as defendants. The Official Committee of Unsecured Creditors intervened in the action. The debtors, lenders, and committee all filed motions to dismiss the adversary proceeding, which the funder opposed. The Bankruptcy Court issued its opinion on Nov. 13, 2025.
Litigation Funder Held a General Unsecured Claims
The court began its analysis by stating the standards for a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). Federal case law provides that to defeat such a motion, the plaintiff must plead enough facts to state a claim for relief that is plausible on its face. In considering the motion, a court may consider certain documents outside of the pleadings if, among other things, they are incorporated into the complaint by reference or referred to in the complaint and attached to the motion and central to the plaintiff’s claim.
The court stated that in order to survive the motions to dismiss, the funder must plead that a plausible legal interpretation of the litigation funding agreement granted the funder an interest senior to the ABL lenders’ or plead facts and circumstances that could plausibly establish a trust for the litigation proceeds in favor of the funder. The funder asserted three positions with respect to the CPA: it granted the funder an interest in the proceeds of the antitrust claims, it was a subordination agreement, and it established an express trust in favor of the funder. Separately, the funder asserted that it was entitled to a constructive trust or equitable lien due to the debtors’ inequitable misconduct in seeking to impair the funder’s rights under the CPA. The court found the complaint failed to allege sufficiently a basis for any of those theories.
The court first considered whether the funder held a valid, first-priority interest in the antitrust claims or their proceeds. To resolve that question, the court examined the nature of the relationship between the funder and the debtors under the CPA. The court noted the CPA did not create a loan, observing that the effective 110% interest rate return to the funder from the proceeds under the CPA “might be a problem under usury laws.” Also, there was no security agreement and no UCC filing statements were filed of record. In fact, the funder did not even take the position in the adversary proceeding that it was in fact a lender. The CPA itself disclaimed any “lender-borrower” relationship between the parties.
The court next examined whether the CPA transferred or assigned the antitrust claims or their proceeds to the funder. The opinion recites that the CPA by its own terms provided the funder did not become an owner of the claims or any portion thereof, or a party to the litigations. The court observed that if the CPA constituted a sale or assignment of the claims, it “might be vulnerable to attack under New York champerty laws.” Champerty laws generally prohibit the sale of tort claims except in limited circumstances. Moreover, if the CPA constituted a sale or assignment of the claim proceeds, the sale or assignment would be cut off by the debtors’ bankruptcy filing because a lien in a future asset is junior to the rights of a bankruptcy trustee. The court also concluded the CPA could not be a fee sharing agreement because it was not worded as such and in any event the lawyers prosecuting the antitrust claims were not parties to the CPA.
The funder’s primary argument was that the CPA was a subordination agreement. Specifically, the funder alleged the CPA effectively subordinated the debtors’ (and as a result all their creditors’) interests in the proceeds of the antitrust claims to the funder’s interests. The court reasoned a subordination agreement is an agreement whereby a junior creditor agrees the claims of specified senior creditors must be paid in full before any payment on the junior creditor’s subordinated debt. Unless the specific terms of the contract provide otherwise, the contract’s effects run between the creditors. Here, the CPA was not titled as a subordination agreement or intercreditor agreement, and no creditor of the debtors signed the CPA. The CPA also expressly provided that “an all-assets lien of the debtors’ property pursuant to any bank loan agreement or similar credit facility” was a “permitted lien.”
The court concluded that the debtors were free to enter the ABL facility without subordinating the rights of the ABL lenders to the funder.
The funder argued that it was the debtors who subordinated their rights in the claims and proceeds to the rights of the funder. The court rejected that position because there was no public lien, no UCC financing statement, and “no other public filing that might put the universe on notice of this.” The funder further argued that the CPA constituted a grant of an equitable lien on the proceeds such that when received, if not paid according to the CPA, they would be subject to an express trust, or at least a constructive trust. The xourt interpreted this position as an attempt to carve the claim proceeds out of the sebtors’ bankruptcy estates. Although the court acknowledged the CPA expressly provided for specific payment instructions and priorities, it concluded these provisions were merely promises and did not create a trust immune from the Bankruptcy Code provisions on what constitutes property of the estate.
The court held the CPA did not create an express trust because the agreement expressly disclaimed any fiduciary relationship. Moreover, under New York law, a trust requires a designated trustee who is not a beneficiary. The funder argued the debtors would be considered a trustee upon receipt of any claim proceeds but the court rejected this argument, noting that the debtors would, in certain scenarios, be entitled to a portion of the proceeds, and therefore would also be beneficiaries. Further, New York law also requires an “actual delivery of the trust res with the intent of vesting legal title as trustee.” The court found that the claim proceeds had not been delivered, and could not be delivered by the funder, the alleged settlor of the trust.
The court also rejected the argument that if the CPA did not create an express trust, a constructive trust still could be imposed because the funding agreement “forged a relationship of trust and confidence between the parties concerning the claims in other respects.” The funder argued that the funding agreement created a confidential relationship between the parties, the debtors promised the funder a “first dollar return” and would not impair the funder’s rights, in reliance on the debtors’ promises the funder had delivered $35 million to the debtors, and the debtors would be unjustly enriched at the funder’s expense if they were allowed to make other use of the claim proceeds.
The court stated that constructive trusts in bankruptcy are “highly disfavored” because they are “antithetical to the priority scheme underlying the Bankruptcy Code.” In any event, the court reasoned a constructive trust is not a standalone claim, but a remedy sought in conjunction with an unjust enrichment claim. Here, the complaint failed to state a claim for unjust enrichment, so the request for a constructive trust was dismissed. The court also noted a timing problem, because a constructive trust arises when disputed funds are transferred, and in this case any transfer of the proceeds of the antitrust claims would occur after the ABL lenders had perfected their interests in the claims.
The opinion went further and stated an unjust enrichment claim would be precluded in this case under New York law because of the existence of a written contract between the parties. Given the filing of the bankruptcy case, the funder would be required to demonstrate that the debtors’ creditors would be unjustly enriched, and the complaint failed to do so. Finally, the court found that the funder and debtors did not have a fiduciary relationship, as required for a constructive trust under New York law. The CPA even expressly disclaimed such a relationship by its terms. The CPA did not elevate the relationship beyond an arm’s length, commercial transaction.
The court ultimately concluded that the funder “entered into an agreement that carried material credit risk and took no precautions to perfect or otherwise elevate its purported interest.” In the end, the decision held the CPA merely was an agreement to provide the debtors with funds in exchange for a promise that future proceeds of litigation would be remitted to the funder. Like other contracts breached by the debtors, the debtors breached the CPA, and the result in bankruptcy is the funder held a general unsecured contract claim.
Conclusion: The Uphill Battle
The lengthy decision in this case required the Bankruptcy Court to examine the legal structuring and relationship of a litigation funding agreement between the funder and the recipient, and how such an agreement can be enforced against third parties in a bankruptcy case. Given that litigation funding is now an important source of capital to fund major litigation, the funders, recipients, lenders, and others will need to address how to reconcile bankruptcy law, state law, and the funder-recipient relationship. The court in this case repeatedly questioned the nature of the parties’ legal relationship and the funder’s interest in the claims and their proceeds given that the CPA was clear that the funder was not a lender, assignee, equity holder, or fiduciary. The question the court had in the end was what is the funder and why should it take priority over other unsecured creditors just because it advanced $35 million to the debtors? The court observed that there is nothing extraordinary about the possibility the funder may recover less than it bargained for under the CPA saying, “In the words of the Second Circuit, this is not injustice, it is bankruptcy.”
Andrew C. Kassner is co-chair of Faegre Drinker Biddle & Reath and a member of the firm's board. He can be reached at andrew.kassner@faegredrinker.com or 215-988-2554.
Joseph N. Argentina Jr. is counsel in the firm's corporate restructuring practice group in the Philadelphia and Wilmington, Delaware, offices. He can be reached at joseph.argentina@faegredrinker.com or 215-988-2541.
Dec 1
Deal Summary
