From bankruptcy practice to claims trading

Larry Ribstein —  26 May 2011

Am Law Daily reports (HT Dealbook) that a top Weil Gotshal bankruptcy partner left to join Claims Recovery Group LLC, which trades distressed claims against bankrupt entities. 

CRG’s website says that it

offers creditors holding claims against bankrupt entities an opportunity to receive cash for their claims without the time and expense associated with a lengthy bankruptcy proceeding. Chapter 7 and Chapter 11 bankruptcy cases can take years to conclude and the amount of creditor recovery is uncertain. Even if the case itself is not long, it could still take months or years to receive payment, which is often less than the claim amount.

CRG specializes in taking the guess work and expense out of the bankruptcy process. We offer creditors a way to get a sum certain amount in a matter of days. CRG purchases claims in large and small bankruptcies, and in both Chapter 7 liquidations and Chapter 11 restructurings. Our professionals have vast experience in the bankruptcy process and can turn the unpleasant task of dealing with an unpaid receivable into a hassle free cash-flow positive experience.

This is just a part of a shift in the law business from representing clients to creating and trading legal information described in Kobayashi and my Law’s Information Revolution.  These new businesses can take many forms.  Here’s some excerpts from our paper describing capital markets aspects of this business (footnotes omitted):

Firms specialize in investing in pending litigation.  These investments might take the form of loans to law firms or litigants secured by the litigation.  Litigation also might be financed in part by selling short the defendant’s stock in advance of the suit. Litigation financiers draw on legal specialists to evaluate potential litigation outcomes.  Financing litigation thus provides opportunities for market use of legal information. 

A related business model for litigation finance is intellectual property-trolling, a particularly important outlet for legal expertise on intellectual property laws given large law firms’ potential conflicts in representing patent holders against corporate clients. * * *

Law-related matters generate many types of information which can have significant market value because of the potentially high stakes of legal outcomes. In particular, litigation significantly affects asset values.  * * * The capital markets could, therefore, become an important outlet for legal expertise.  * * *

Some of the firms using this information might be consulting firms. At least one firm specializes in analyzing loan covenants. Also, as with litigation finance, hedge-fund-type firms employing legal experts as well as financial analysts and forensic accountants could bundle legal information with trading.

It seems this business is getting lucrative enough to be able to outbid even top Wall Street law firms for the best talent.  While conventional law jobs are downsizing, new markets for legal talent are opening up.  Something for entering and graduating law students to consider.

Larry Ribstein

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Professor of Law, University of Illinois College of Law

One response to From bankruptcy practice to claims trading

  1. 

    Great post Larry. I very much agree. The foundation of the traditional model is under significant stress. At the same time, new markets for legal talent are indeed opening. In this vein — let me just offer my two cents. This is the era of “Big Data” and in my view advances in quantitative legal prediction are going to be a source for arbitrage in the growing market.