FTX’s stunning implosion last month has left the world in awe. Beginning with a cryptocurrency bank run, followed by an unprecedented and abrupt free fall into a chapter 11 bankruptcy filing, people can’t keep their eyes away from the wreckage.  While FTX and its advisors scramble to sort out the balance sheet, and the Securities and Exchange Commission and the Justice Department swoop in, FTX customers who cannot access their accounts are left wondering whether they will ever see any recoveries.

FTX’s collapse is a remarkable example of a lack of corporate control and a high level of corporate wrongdoing that ultimately resulted in a chapter 11 bankruptcy filing. It is at the extreme end of the spectrum: John J. Ray III, the new Chief Executive Officer of FTX, stated he has “[n]ever in [his] career…seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”[1]

But it is not unique in form. Corporate wrongdoing and mismanagement by former directors and officers also occurs on a smaller scale, and may or may not result in a regulatory investigation or criminal indictment.

Creditors injured by these acts, such as customers who lost their investments, may wish to hold wrongdoers to account after the company has filed for bankruptcy protection and management has been replaced. Bankruptcy court should not frustrate these goals. Creditors may elect to pursue litigation against these wrongdoers as part of the bankruptcy process, in or out of bankruptcy court itself.

In situations like this, Woodsford provides capital for fees and costs to pursue litigation against former management and directors in exchange for a share of the eventual recovery. The funding is passive—meaning the funder has no decision-making authority in the litigation or bankruptcy case—and non-recourse—meaning the funder receives its deployed capital and return only if the litigation results in a recovery.

Funding for these claims can take many forms, including providing financial support to a litigation trust. In such a structure, instead of using funds from the estate, a funder like Woodsford provides capital to cover the fees and costs of the litigation trust. When the trust successfully pursues its claims, the funder receives its deployed capital along with a pre-negotiated portion of the recovery. If the trust is unsuccessful, the trust owes the funder nothing.

With in-house expertise in bankruptcy, Woodsford is always looking ahead to how developments in the bankruptcy world might result in novel funding opportunities for parties litigating in bankruptcy court. If you have any questions about bankruptcy litigation funding or if you have any claims that you would like us to finance, please contact the author directly.

For further information, read our whitepaper, Litigation Finance in US Bankruptcy.

About the author

Deborah Mazer is an Investment Officer for Woodsford, based in New York. She is a U.S. lawyer and former litigator with a broad range of trial and appellate experience.  Her expertise includes bankruptcy, complex commercial, mass tort, securities, tax controversy, and IP litigation.

Deborah has represented both creditors and debtors in several high-profile bankruptcy proceedings in New York and Delaware. She has also represented both plaintiffs and defendants in federal and state courts, the U.S. Court of Appeals for the Second and Third Circuits, and the United States Tax Court.

Before joining Woodsford, Deborah worked at Davis Polk & Wardwell in New York, and clerked for the Ontario Court of Appeals in Toronto, Canada.

Deborah received her J.D. from Yale Law School, where she was a co-director of the Palliative Care Medical Legal Partnership.  She holds a B.A., with high distinction, from the University of Toronto.

Deborah can be contacted directly at dmazer@woodsford.com

[1] See Declaration of John J. Ray III in Support of Chapter 11 Petitions and First Day Pleadings, In re FTX Trading Ltd., Case No. 22-11068 (Bankr. D. Del. Nov. 17, 2022) at ¶ 5.