Why Priority and Perfection Matter in Litigation Funding
In litigation funding, priority is often assumed rather than examined. When insolvency enters the picture, that assumption can be costly.
March 3, 2026
By John Hanley (Partner, Invenio LLP) & Timothy Bennett (General Counsel, Fulcrum Capital)
In commercial litigation funding, security interests and perfection mechanics are typically addressed in definitive documentation even where term sheets are silent. UCC filings are generally understood as routine infrastructure and are rarely controversial.
In consumer litigation funding, practice has been less uniform. That divergence has not been driven by cost or complexity, but by legacy norms and concerns about optics. As consumer portfolios scale and repeat advances aggregate exposure, the same priority principles apply with equal force.
Priority, Not Contract, Governs in Insolvency
A prudent funder ordinarily undertakes due diligence on a potential borrower. This may include steps such as “KYC,” creditworthiness assessment, lien and judgement searches, and, for commercial transactions, a review of existing credit documentation to uncover any required consents from senior lenders.
Funding documentation varies widely depending on the size, type, and scope of the deal and parties, but there are certain market standard provisions which are typical, including a “granting” clause whereby the borrower (debtor) specifically grants a security interest in and to the collateral to the funder (secured party). In addition, assignment language, attorney acknowledgments, and payment instructions are important. But, they do not substitute for a perfected security interest under Article 9 of the Uniform Commercial Code.
Absent perfection, a funder risks being treated as a general unsecured creditor in a bankruptcy of a funded party, regardless of deal economics or intent. When that occurs, losses reflect a mismatch between assumed priority and actual legal priority rather than mispricing or aggressive underwriting.
UCC filings address this structural risk directly.
What a UCC Filing Does and Does Not Do
A UCC financing statement serves a narrow function. It provides public notice of an interest in specified collateral, establishes priority relative to other creditors, and preserves that priority in insolvency.
Consistent with market practice, UCC filings do not alter litigation control, which reputable funders already disclaim by contract and which remains solely with the funded party and its counsel. The filing does not convert a non-recourse investment into recourse debt, does not disclose pricing or returns, and does not interfere with attorney independence or ethical obligations.
The filing is about priority and notice, not control.
UCC filings must identify the borrower and describe the collateral with specificity in order to be effective. Because they are public records, a UCC filing is easily accessible by third parties simply by ordering a search in the relevant jurisdiction. Funders who wish to maintain confidentiality can designate a law firm or other agent for notices and communications.
UCC Filings Do Not Risk Characterization of a Transaction as Debt
Although UCC filings are commonly associated with lending, the filing of a financing statement does not, by itself, introduce a meaningful risk that a non-recourse litigation funding transaction will be characterized as debt.
Article 9 governs notice and priority, not economic substance. Courts and bankruptcy tribunals look to the actual rights and obligations of the parties, not the existence of a filing.
For that reason, UCC filings are routinely used in non-debt and contingent commercial arrangements, including sales of receivables and payment intangibles, factoring transactions, royalty and revenue participations, earn-out and contingent purchase price structures, and structured settlement payment rights.
Litigation funding fits squarely within this category. The filing protects priority in a contingent asset. It does not transform the transaction into a loan.
Cost and Process Are Not Barriers
UCC filings are inexpensive and ministerial. Filing fees are nominal, filings are completed online in minutes, and Article 9 does not require a financing statement to be prepared or submitted by an attorney.
Where consumer funders historically have not filed, the explanation lies in legacy practice and perceived optics rather than cost or operational burden.
Filing Location: Consumer and Commercial Distinction
In consumer litigation funding, perfection is typically achieved through a single UCC filing in the state where the funded individual is domiciled. The filing follows the debtor, not the lawsuit, defendant, or forum. If the funded party later changes domicile, Article 9 provides a grace period to maintain continuous perfection.
In commercial litigation funding, filing analysis may require additional attention. For entity debtors, filing is generally made in the state of formation, but additional filings or perfection steps may be appropriate depending on debtor structure, collateral type, deposit accounts, or cross-border considerations. While commercial transactions may require more analysis, perfection remains routine and manageable.
In both contexts, the effort required to perfect is modest relative to the downside risk of remaining unsecured.
Model Consumer Funding Clause
The following reflects market-standard consumer funding language and may be adapted to transaction-specific needs:
UCC Filing and Security Interest
To protect its interest in the proceeds of the funded claim, the funder may file a Uniform Commercial Code financing statement in the state where the funded party is domiciled. This filing is for notice and priority purposes only. It does not create a loan, does not impose personal liability, and does not require repayment unless there is a recovery. The filing does not give the funder any right to control the litigation or settlement decisions, all of which remain with the funded party and counsel.
Transaction-specific considerations, including repeat advances or changes in domicile, may warrant tailored treatment.
Closing Perspective
It is worth noting that this article focuses exclusively on transactions in the United States. Foreign jurisdictions have their own rules and regulations regarding perfection and priority for security interests. UCC filings are not a signal of mistrust, control, or debt financing. They are routine infrastructure in a maturing litigation funding market. Properly structured, they protect funders, impose no meaningful burden on funded parties, and ensure that agreed economics hold in circumstances the parties cannot control.
Have questions about the practical implementation of UCCs? Click here to contact John Hanley.
