Judge Voids $2.3 Million GLS Bankruptcy Litigation Funding Deal

A bankruptcy judge voided GLS Capital’s $2.3 million litigation funding agreement, a setback for the investor’s role in the case.

Chief Bankruptcy Judge Stacey G. Jernigan in the Northern District of Texas also called for the replacement of the trustee, David Gonzales, who was being financed by GLS Capital. “The litigation funding agreement was an abuse of discretion” and harmful to creditors and trust beneficiaries, the judge wrote.

GLS Capital disagrees with the ruling and plans to appeal, said David Spiegel, founder and managing director at the company. Gonzales has already appealed and said he disagrees with many of the court’s findings.

The judge’s order last week shows how the nascent litigation funding industry, where investors pay for lawsuits with the hope of sharing in any winnings, lacks acceptance in all facets of law. While bankruptcy cases are a popular target for funders, not all judges in those courts are familiar with the investors’ role.

“There’s still very little true understanding of how funding works,” said Ken Epstein, a litigation finance adviser and broker with a focus on bankruptcies.

Chicago-based GLS Capital has more than $550 million under management and invests $1 million to $50 million per investment, according to Chambers and Partners. The firms invests in commercial litigation and arbitration, patent infringement cases, life sciences litigation and, as the Gonzales matter shows, at least one bankruptcy case.

Gonzales is overseeing 14 restaurant-related entities that filed a Chapter 11 bankruptcy in April 2021. The owners planned to sell the entities to one of their affiliate management companies, but the court denied the sale and instead confirmed a liquidation plan.

The liquidation plan went into effect in January 2022, according to the judge’s order. GLS began funding the trustee in May 2023.

Deal Terms

GLS’ agreement with Gonzales among other things included a return of nearly $7 million, or three times the initial investment, as well as 12% of the difference between the proceeds and $7 million. It also included a $75,000 broker fee. Judge Jernigan in her order calculated how much would go to the funder and creditors with various hypothetical settlement amounts ranging from $10 million to $30 million.

“The court is having trouble seeing how ‘the juice will ever be worth the squeeze’ here,” she wrote. “It would appear that the unapproved litigation funding agreement has ensured that.”

Jernigan said she was surprised that funding was involved in the case since it had not been disclosed and that the liquidating trustee acted improperly by engaging the funder without court approval. She chastised Gonzales for taking on such expensive money.

She wrote in her August 5 order that she “will order that a new liquidating trustee be promptly appointed in substitution of the current liquidating trustee.”

GLS submitted testimony from two experts familiar with litigation funding. Both said they thought the agreement was within the standard range of market terms, but they also acknowledged they hadn’t seen many agreements since they’re not often public.

“It is hard for a judge to determine if something is reasonable or within normal market terms when the experts admit that they have not seen too many,” Jernigan wrote.

The judge also ordered that the parties, including Gonzales and GLS, to engage in global mediation.

Funders’ Role

The litigation funding industry takes part in a number of different types of legal disputes, including bankruptcy. Funders will often finance creditors who have tired of the lengthy proceedings and want an earlier payout. Another common area is funding trustees who oversee bankruptcies.

“It’s kind of a natural fit for the introduction of third-party capital,” Epstein said. “There’s been kind of a growing recognition in our space that funding is a tool that’s available to debtors, creditor committees, trustees—both chapter 7 and 11 trustees, and post confirmation trustees.”

Epstein said that though most litigation finance contracts are confidential, in the bankruptcy context there’s a greater emphasis on transparency and disclosure. This is largely due to the fact that the court needs to approve anything that could impact an estate asset.

In many instances, funders have sought court approval, but it’s dependent on the point in the bankruptcy process that funding was acquired. It’s also common in the post confirmation stage to not seek approval.

“It’s not unusual in my experience if the trust agreement provides the discretion to enter into financing agreements for the trustee and counsel to decide not to disclose it,” Epstein said. “Why would you go and get a third party approval and disclosure if it’s not required?”

The case is: Fresh Acquisitions, LLC and Dayspring Operating Company, LLC, Bankr. N.D. Tex., 21-bk-30721, 8/5/25