A litigation funder entered into a capital provision agreement (the CPA) with several debtors, providing $35 million in funding in exchange for the right to recover from proceeds of anticipated antitrust litigation, which the debtors had brought as plaintiffs. The CPA included a provision that prioritized repayment to the funder and required that any litigation proceeds be routed through a designated payment agent. The CPA also clarified that the funder was merely a funder and not an owner of any of the related claims. The debtors’ secured lenders, through their agent, asserted a perfected security interest in the same litigation proceeds. The funder then filed an adversary proceeding seeking a declaratory judgment that it held a first-priority interest in those proceeds. It argued that the CPA was a subordination agreement and requested enforcement of its alleged priority claims or equitable relief based on trust theories. The debtors, the secured lenders, and the unsecured creditors’ committee moved to dismiss the litigation funder’s complaint under Rule 12(b)(6).
In Blakemore Invs. LLC v. Hamilton Meat, LLC (In re Harvest Sherwood Food Distribs. Inc.), 676 B.R. 748 (Bankr. N.D. Tex. 2025), the court granted the motions and dismissed the adversary proceeding with prejudice. The court held that the funder failed to plausibly allege that it held a valid, first-priority security interest in the litigation proceeds. It rejected the funder’s attempt to characterize the CPA as creating a secured interest, a subordination agreement, or a trust. The court explained that the CPA did not function as a loan, an assignment of proceeds, or a fee-sharing arrangement. It also noted that the funder had not filed any UCC financing statements and that the agreement lacked language sufficient to create or perfect a security interest. The court also held that the CPA did not qualify as a subordination agreement because no secured creditor had agreed to subordinate its rights as a part of the CPA, and there was no binding inter-creditor agreement governing priority. The court further held that the funder’s trust theories also failed, because the complaint did not adequately plead the elements of either an express or constructive trust under applicable law. Applying the Iqbal/Twombly plausibility standard (whether there is a justiciable controversy involving a matter over which the court has authority to grant declaratory relief and which would not interfere with another court’s jurisdiction), the court concluded that the funder’s allegations did not support any entitlement to priority over the secured lenders. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009). At most, the funder held an unsecured interest that was subordinate to the secured lenders’ perfected lien. Accordingly, the court dismissed all claims with prejudice.
By Landon Womack [email protected]
Edited By Kristin Meurer [email protected]
Edited By Olivia Lewis [email protected]
Edited By Taylor O’Brien [email protected]