Claims Trading Warps the Bankruptcy System

A New York Times article published in October discusses how litigation financing may warp the legal system. The author posits that litigation finance gives rise to a litigation arms race, with speculative money aggravating the already-high costs of the American legal system. The article says: “It’s hard to imagine how billions in outside capital won’t end up changing the justice system. The only question is how.”

In the world of bankruptcy, there has evolved a vibrant market for trading unsecured claims. Trade creditors often are almost as desperate for cash as their customer in chapter 11. They may not understand the extra value of priority claims. They usually do not have a feel for the dividend that the case likely will yield. Their experience probably is that it takes too long to see a dividend, making fast money attractive....