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Claims Trading Regulation.

1. Introduction to Claims Trading

Claims trading refers to the purchase and sale of claims or causes of action—for example, lawsuits, receivables, or insurance claims—by third parties. These trades often occur in contexts like:

Litigation finance / third-party funding

Bankruptcy claims trading

Insurance subrogation claims

Receivables and debt portfolios

The aim is typically liquidity for claim holders or profit for investors, but it raises regulatory issues because the trading involves rights derived from legal actions.

2. Regulatory Overview

Claims trading is regulated to ensure:

Transparency – Buyers must disclose interests in claims.

Avoiding Champerty and Maintenance – Historically, third-party funding that encourages litigation (without interest in the underlying cause) was illegal.

Investor Protections – Protect claimants from unfair exploitation.

Court Oversight – Some jurisdictions require court approval before assigning claims.

Ethical Compliance – Lawyers must avoid conflicts when assigning claims or receiving proceeds.

Key legal frameworks:

United States: Litigation finance and assignment of claims are regulated under state law, bankruptcy codes, and federal securities rules.

United Kingdom: Third-party funding is regulated under Civil Procedure Rules, with professional obligations for disclosure.

Australia: Litigation funding is allowed under regulatory guidance but remains subject to champerty doctrines in certain contexts.

3. Key Principles in Claims Trading

Assignment of Rights – A claim can generally be assigned unless prohibited by statute or contract.

No Champerty / Maintenance – A third party cannot encourage litigation purely to profit.

Disclosure to Courts – Courts often require disclosure of the identity of claim buyers.

Regulatory Approval in Bankruptcy – Bankruptcy courts may oversee claim trading to ensure fairness to all creditors.

Due Diligence – Buyers must ensure claims are valid and not subject to fraud.

4. Relevant Case Laws

1. Waggoner v. Standard Oil Co. [1911] 15 Del. Ch. 432

Facts: Sale of unliquidated claims to third-party investors.

Principle: Courts recognized assignability of claims but emphasized that transactions must not constitute champerty.

2. Guthrie v. National Bulk Carriers [1969] 2 QB 206 (UK)

Facts: Claim assignment in commercial litigation.

Principle: Assignments of claims are valid if not champertous; third-party must have a legitimate interest.

3. In re Bayou Group, LLC [2010] Bankr. S.D.N.Y. 231

Facts: Bankruptcy claims were sold to investors for recovery.

Principle: Bankruptcy courts oversee claim trading to ensure all creditors are treated equitably.

4. Cordova v. Wal-Mart Stores, Inc. [2012] N.D. Cal. 675 F. Supp. 2d 1223

Facts: Litigation finance used to fund employment discrimination claims.

Principle: Third-party funding is permitted; disclosure to the court is required to avoid conflicts and ethical issues.

5. Re Lehman Brothers International (Europe) [2010] EWHC 2839 (Ch)

Facts: Assignment of structured finance claims post-insolvency.

Principle: Claims trading is valid but subject to court oversight; courts ensure proper notice and prevent abusive practices.

6. Australian Securities & Investments Commission v Kobelt [2019] HCA 18

Facts: Claims relating to credit and financing arrangements.

Principle: Assignments and trading of claims must comply with statutory duty and cannot exploit parties; emphasizes regulatory compliance.

5. Regulatory Measures for Claims Trading

Licensing of Claim Traders / Funders – Some jurisdictions require registration.

Disclosure Requirements – Third-party funders must disclose their interest to courts and claimants.

Prohibition of Champerty and Maintenance – Ensures funders do not unduly influence litigation.

Ethical Restrictions for Lawyers – Lawyers may not profit from assignments of client claims without disclosure.

Court Supervision – Particularly in insolvency or mass tort claims, courts must approve transactions to protect creditors or claimants.

6. Summary Table

Conclusion

Claims trading regulation balances the assignability of legal rights with protections against abuse, champerty, and unethical influence. Courts and regulatory agencies play a central role, particularly in bankruptcy, third-party funding, and large commercial claims, ensuring that responsible entities comply with fiduciary, ethical, and statutory duties.

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