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Litigation Funder Monetizes Portion of Fraudulent Transfer Judgment in Cutting-Edge Transaction

Gerchen Keller purchases a portion of the interest in proceeds of $213 million fraudulent conveyance judgment in innovative public sale.

An interesting transaction took place on September 8, 2016. The chapter 7 bankruptcy trustee for Magnesium Corporation of America (“MagCorp”) sold a $50 million share of a $213 million judgment it has against fraudulent conveyance transferee, Renco Group Inc. and former MagCorp owner, Ira Rennert. The buyer, Gerchen Keller Capital LLC paid $26.2 million transaction for the interest. Those close to the deal report that this may be the first time a bankruptcy trustee or debtor-in-possession has sold an interest in the right to receive litigation recoveries, enabling the estate to liquidate a portion of a contingent asset and thereby hedge against appellate risk.

The road to this deal was long and twisting. MagCorp filed a petition for chapter 11 bankruptcy in August of 2001, which was later converted to chapter 7. In 2003, bankruptcy trustee, Lee E. Buchwald, initiated fraudulent conveyance litigation against Rennert and Renco on behalf of MagCorp’s creditors, seeking to recover up to $600 million for extracting bond dividends from MagCorp for extravagant personal benefits, essentially bleeding the magnesium mining company dry when it was already in desperate need of funds for its own restoration.

In February 2015, as a result of a four-week trial in the bankruptcy court, a jury found the defendants guilty of defrauding MagCorp and liable to the estate to the tune of $213 million. The decision was based on compelling evidence that, among other things, Rennert used funds from the challenged transfer, in part, to purchase property in the Hamptons for $11 million and build on it a 29-bedroom mansion for a staggering $110 million. The 72,000 square-foot “home” is owned by Renco and had an assessed property value of $248 million in 2015.

The defendants promptly appealed the jury’s verdict to Judge Alison Nathan of the U.S. District Court for the Southern District of New York, requesting a new trial and for the jury’s findings to be overruled. Judge Nathan rejected the $1 million in punitive damages that the jury had awarded, but otherwise upheld the full judgment against Renco and Rennert personally. The parties then filed cross appeals, which are currently pending in the Second Circuit Court of Appeals awaiting a hearing date for argument.

In March 2016, with only $650,000 of cash left in MagCorp’s bankruptcy estate, Buchwald sought out third-party funders to purchase a portion of the judgment against Renco in an effort to assure a guaranteed distribution and hedging against the inherent risk of the pending appeal. Three months later, Gerchen Keller agreed to be the stalking-horse bidder for the interest in the judgment of an auction to be held pursuant to Section 363 of the Bankruptcy Code.

The auction was held on August 11th, at which time Gerchen Keller submitted the highest bid for the interest in the Renco judgment. The sale order was later approved by the bankruptcy court, over the objections of the defendants and certain noteholders to the approved bidding procedures and the sale itself. Those parties then unsuccessfully tried to stay the closing of the sale with an appeal to the District Court.

Pursuant to the sale terms, Gerchen Keller may double its investment, acquiring the first $50 million on any eventual collection under the judgment against Rennert and Renco. On the other hand, in the event Renco is successful on its appeal of the fraudulent conveyance judgment with the U.S. Court of Appeals for the Second Circuit, Gerchen Keller could walk away with nothing and the MagCorp estate will get the full benefit of Gerchen Keller’s $26.2 million bet.

This avante-garde strategy is all about balancing risk exposure and contingent valuation, something with which a sophisticated third party litigation funder such as Gerchen Keller is deeply experienced.

Gerchen Keller was represented by Jonathan Friedland and Elizabeth Vandesteeg of Sugar Felsenthal Grais & Hammer in Chicago. Buchwald was represented by Nicholas Kajon of Stevens & Lee in New York.

Editor’s Notes:  If you found this article useful you may also wish to read 363 Banrkuptcy Sale New Energy Corp, Credit Bid Capped at Amount Paid For Debt, and Assessing Legal Risk, A Practical Guide.  You may also find Buying Distressed Assets & Securities Webinar helpful.

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