Litigation funding – generally, debt, equity or other investments in third-party legal cases – can offer absolute and uncorrelated returns. See “In Turbulent Markets, Hedge Fund Managers Turn to Litigation Funding for Absolute, Uncorrelated Returns
,” Hedge Fund Law Report, Vol. 2, No. 25 (Jun. 24, 2009). In a recent example of a successful execution of such a strategy, several hedge funds funded litigation on behalf of a bankrupt bank holding company involving a tax refund dispute with the Federal Deposit Insurance Corporation (FDIC). Those funds are poised to profit handsomely following a decision by the U.S. Bankruptcy Court for the District of Delaware (Court) in favor of the bank holding company. The four hedge funds financed the tax refund litigation on behalf of the bank holding company after the bankruptcy trustee ran out of money to finance continuing litigation. The hedge funds also held notes issued by the bank holding company. At issue was whether a huge tax refund was owned by the bank holding company or by a bank subsidiary. If the bank subsidiary owned the refund, its receiver, the FDIC, would take it all. However, if the bank holding company owned the refund, the FDIC would have to share it with other creditors of the bank holding company, including the hedge funds and other noteholders. This article summarizes the facts of the case, the Court’s legal analysis and the anticipated distribution of the tax refund. This article also identifies an ongoing bankruptcy that is factually similar (i.e., a bank holding company bankruptcy involving a dispute over a sizable tax refund) and may therefore lend itself to a similar litigation funding strategy.