Bankruptcies seen growing more litigious

NEW YORK (Reuters) - The current wave of bankruptcies is likely to be much more litigious, as creditors of bankrupt companies seek to recover money in more innovative ways, a top bankruptcy and restructuring expert predicted on Tuesday.

Lisa Donahue, co-head of the turnaround and restructuring practice at business advisory firm AlixPartners, said a big uptick in litigation over bankrupt companies’ collapses could continue for years.

“There will be a lot of litigation,” said Donahue, who has served as chief financial officer or chief restructuring officer at companies like Calpine Corp and battery maker Exide Technologies.

“The bankruptcies themselves may be faster, but this litigation happens after.”

Litigation trusts for the benefit of company creditors will likely pursue lawsuits that last well beyond the company’s primary bankruptcy proceeding, Donahue said.

Another driver for the surge in lawsuits will likely come from the various tiers of creditors that hold a company’s debt, Donahue explained.

In the past, companies that filed for bankruptcy may have had a more uniform group of creditors, but the debt markets changed in recent years, and now companies have several tiers of secured lenders, each holding different tranches, or levels, of debt.

In bankruptcy there is a hierarchy of which lenders get repaid first, so creditors in lower tiers will look for other ways to make money, Donahue said.

“This wave will be more litigious because so many constituents are out of the money,” Donahue said.

“There are hedge funds all the way down in tranche 5, and there’s no way they are going to get anything from the bankruptcy, so they have an incentive.”

Creditors and even the bankrupt companies themselves may also get more creative in whom they target for lawsuits, pursuing everyone from private equity investors to the bankrupt companies’ trading counterparties, Donahue said.

“Creditors are going to be looking around the room, it’s like eeny-meeny-miney-mo,” Donahue said.

Last month, bankrupt department store chain Mervyn’s Holdings LLC sued its former private equity owners, saying the firms stripped out real estate from the company, then leased it back to Mervyn’s at higher rates, pushing it into bankruptcy.

At Ascendia Brands, which sold its well-known Mr. Bubble children’s bath line and Binaca breath freshener brands out of bankruptcy last week, the official committee of unsecured creditors filed a motion on Friday seeking an extension of the deadline for bringing lawsuits against the company’s lenders.

A lawsuit against the company’s lenders “might provide the only meaningful recovery for unsecured creditors,” in the case, the committee said in the court documents.

And while it may or may not result in a lawsuit, a group of creditors in the Lehman Brothers Holdings Inc LEHMQ.PK bankruptcy are seeking the ability to conduct depositions and access documents from JPMorgan Chase & Co JPM.N related to $17 billion in collateral they claim JPMorgan withheld from Lehman in the days before its bankruptcy.

JPMorgan has said the creditors’ claim is misplaced and that the company actually provided liquidity to Lehman in the days prior to its bankruptcy.

But even if the lawsuits don’t look like they will get very far, creditors could still use them to recover some money through settlements, Donahue said.

“Sometimes there is settlement value to get them to go away,” Donahue said.

Editing by Gary Hill