July 22, 2005
VIA REGULAR US MAIL
AND AS FILED ON EDGAR
Division of Corporation Finance
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Mail Stop: 6010
Attention: Jim B. Rosenberg
Re: LitFunding Corp.
Form 10-KSB for the fiscal year ended December 31, 2004 Filed
March 21, 2005
File No. 0-49679
Dear Mr. Rosenberg:
On behalf of LitFunding Corp., a Nevada corporation ("we" or the "Company"),
please be informed that the undersigned has received and read your letter dated
July 5, 2005, regarding the Company's Form 10-KSB ("Form 10-KSB") filed with the
Securities and Exchange Commission ("Commission") on March 21, 2005.
The purpose of this letter is to respond, in writing, to the questions, comments
and requests for information specified in that letter. The headings and
provisions of this letter, which are numbered, are intended to correspond and
respond to the headings and order of the paragraphs in your letter.
Securities and Exchange Commission
Mr. Jim B. Rosenberg
July 22, 2005
Page 2
CONSOLIDATED FINANCIAL STATEMENTS, PAGE 16
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2004
AND 2003, PAGE 22
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3. Bankruptcy Petition and Reorganization, page 27 Amendment No. 2 Form SB-2
Comment No. 1:
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Please note the attached letter from our bankruptcy counsel regarding the legal
basis for the transfer of the obligations and the related transfer of assets.
We believe that through the order stipulated by the bankruptcy court, the
arrangement with the creditors meets the criteria in paragraphs 16 a) and 16 b)
of SFAS No. 140. Please note that the IEP distribution agent has taken
possession of the contingent advance contracts, enforces the contracts, and
collects and distributes the funds to the creditors. The Company has no back-end
interest in the contracts. This transfer of control effectively relieves us of
our obligations to the IEP Claimants as stipulated in the bankruptcy plan.
The original IEP Claim of $26,700,000 was initially recorded as a liability
because this was the amount of the total potential claim granted the IEP
Claimants under the bankruptcy plan. However, the amount ultimately payable to
the creditors holding this claim, with the exception of a $1.5 million dollar
note, was limited to the amount actually collected from a defined pool of
contingent advance contracts. As a part of the stipulation entered into with the
IEP Claimants, the $1.5 million dollar recourse obligation was waived, leaving
only a nonrecourse claim. Since the IEP Claimants now have complete control over
the contract pool from which their claim will be paid, and since the claim
itself is now completely nonrecourse, it was management's assessment that the
asset had been transferred and the liability extinguished.
Comment No. 2:
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As noted above, the attached correspondence from our bankruptcy counsel and the
stipulation from the bankruptcy court reflecting the December 2004, agreement
between us and the IEP claimants, provides evidence that the obligations have
been relieved and the assets have been transferred. The bankruptcy court
stipulation prescribes the method of transfer of control of the Contract Pool.
Specifically, par. 2.1 of that stipulation states that the agent has complete
control of the Contract Pool with certain requirements to provide payments to
other bankruptcy creditors depending on the volume of cash collections. We
believe that this agreement meets the criteria outlined in paragraphs 9a), 9b)
and 9c) of SFAS No. 140.
The Company herewith also acknowledges the following:
o that it is responsible for the adequacy and accuracy of the disclosure
in the filings
o staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action in regard to the
filing; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under federal
securities laws of the United States.
Securities and Exchange Commission
Mr. Jim B. Rosenberg
July 22, 2005
Page 3
Hopefully, this response letter adequately addresses the issues raised in your
comment letter dated July 5, 2005. Of course, if you should require any
additional information or clarification, please do not hesitate to contact the
undersigned at 702.317.1610. Your assistance in this matter is greatly
appreciated. Thank you.
Sincerely,
LITFUNDING CORP.
/s/ Morton Reed
Morton Reed, President
Enclosure
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==========================
Paul J. Couchot Sean A. OKeefe
WINTHROP Richard H. Golubow Robert E. Opera
COUCHOT Garrick Hollander William J. Wall
Professional Corporation Peter W. Lianides Marc J. Winthrop
==========================
660 Newport Center Drive, Ste. 400 o Newport Beach o California o 92660
o Tel: (949) 720-4100 o Fax: (949) 720-4111
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July 6, 2005
VIA FAX
Mr. Donald Abbot
Senior Staff Accountant
Securities & Exchange Commission
100 F. Street N.E.
Washington, D.C. 20549-8010
RE: LITFUNDING CORP/RELY TO LETTER OF JULY 5, 2005
Dear Mr. Abbot:
I am a partner with Winthrop Couchot, P.C. I represented Litfunding Corp., a
Nevada corporation, and its wholly owned subsidiary, California Litfunding, a
Nevada corporation (together the "Litfunding Companies") in their joint Chapter
11 proceeding. Since the facts that bear upon the issues raised in your letter
of July 5, 2005 (the "Inquiry Letter") occurred within the Chapter 11
proceeding, and since these facts were set forth in a court order, the
Litfunding Companies have requested that I provide a response to your office.
Attached hereto is a stipulation that was approved by the United States
Bankruptcy Court in the Litfunding Companies' Chapter 11 proceeding (the
"Stipulation"). The facts relative to the Stipulation can be summarized as
follows. Prior to the initiation of their Chapter 11 proceeding, the Litfunding
Companies advanced approximately $19.0 million dollars to lawyers and law firms,
and in some instances plaintiffs, pursuant to "Settlement Agreements". Pursuant
to the terms of these Settlement Agreements, the law firms/lawyers (or
plaintiffs) agreed to use these funds to pay the costs associated with the
pursuit of an identified lawsuit. The parties that received these funds further
agreed that if funds were collected on account of the funded lawsuits, the funds
advanced would be repaid, plus a fee, out of the funds collected from the
lawsuits.
After the Litfunding Companies filed Chapter 11, a group of creditors (the "IEP
Claimants") who held the largest body of claims demanded that the Litfunding
Companies plan of reorganization incorporate an involved collection system.
Pursuant to this collection system, substantially all funds collected from all
outstanding settlement agreements (the "Contract Pool") would be turned over to
the IEP Claimants, and applied against the balance owed on a $26.0 million
dollar promissory note made by the Litfunding Companies in favor of the IEP
Claimants as part of the Plan (the "IEP Plan Note"). By its terms the IEP Plan
Note was recourse only to the collections from the Contract Pool.
The Plan further provided that the Litfunding Companies would execute a second
recourse note in favor of the IEP Claimants, in the amount of $1.5 million
dollars (the "Administrative Note"). This latter sum reflected the overhead
charge that the Litfunding Companies were authorized to deduct from collections
generated from the Contract Pool over a period of approximately one year. If the
IEP Plan Note was paid off, the Administrative Note obligation would be waived,
and all future collections from the Contract Pool would be retained by the
Litfunding Companies. The Plan was confirmed by an order of the United States
Bankruptcy Court in June of 2004.
In December of 2004, six months after the Plan was confirmed, the IEP Claimants
and the Litfunding Companies entered into an agreement regarding the turnover of
control over Contract Pool. This agreement was set forth in the Stipulation
between Reorganized Debtor and IEP Claimants (Class 6) re Appointment of Agent
to Control Collection of Receivables (the "Stipulation") attached hereto. In
summary the Stipulation provided that the IEP Claimants would waive the
obligations in the IEP Plan Note and in the Administrative Note. In
consideration for this waiver, an agent appointed by the IEP Claimant would take
complete control over the Contract Pool, and in particular the collection of all
funds due under the terms of these contracts, and such agent would distribute
the funds to the IEP Claimants. The Stipulation further provided that the
Litfunding Companies would waive their "back end" interest in the Contract Pool.
The net effect of the provisions in the Stipulation was the following. The
liabilities provided for in the IEP Plan Note and in the Administrative Note
were removed from the Litfunding Companies balance sheet. Together these
liabilities were approximately $27.0 million dollars. At the same time, the
Litfunding Companies "back end" interest in all collections from the Contract
Pool was waived, removing this "asset" from the Litfunding Companies balance
sheet.
Whether the factual picture recited above falls within the particular accounting
regulations cited in the Inquiry Letter is an issue for the accounting
professionals. This letter was merely intended to explain the factual basis
underlying the characterizations that appear in the 10-k.
Sincerely,
Sean A. OKeefe
/s/ Sean A. O'Keefe