July 11 (Reuters) - In a novel legal version of "put up or shut up," a Delaware judge solved the problem of plaintiffs who oppose a settlement struck on their behalf: Let them keep a lawsuit alive if they provide money to ensure other plaintiffs get the payout they're expecting.

The ruling by Judge Travis Laster of Delaware Chancery Court in a little-noticed case could have broader reach in the realm of shareholder and investor litigation. Corporate defendants often choose to settle lawsuits to get certainty and move on, but they could face additional legal headaches if small groups of plaintiffs find creative ways to press ahead with cases even after an accord with a larger group has been reached.

Laster's ruling was on a case involving accusations that an investment fund created by Canadian Imperial Bank of Commerce was run improperly and used as a dumping ground for dud investments by the bank. A 2005 lawsuit against the general partner, the investment adviser, the special limited partner and CIBC sought to recover millions in losses suffered by the fund. About 490 senior CIBC employees had invested in the fund as limited partners.

The lawsuit was a derivative action, meaning any judgment or settlement would be paid into the fund, rather than directly to the limited partners. A week before trial last year, the plaintiffs struck a $13.25 million settlement that included $10.25 million in cash for the fund.

A group of 57 limited partners objected to the pact, including the named plaintiffs who turned against the settlement. They argued the defendants could be held liable for tens of millions of dollars more in potential damages, outweighing the risks of abandoning the settlement.

In his ruling at the business-focused Chancery Court, Laster said the settlement was fair, but if opponents believed they could do better, they could take control of the case, toss out the accord and continue the litigation.

However, there was a caveat: The objecting plaintiffs had to come up with money to cover the settlement through a bond. If they ended up with a smaller settlement or judgment at trial, the bond would be tapped to preserve the value of the original settlement that they had opposed.

To the surprise of many lawyers who followed the case, the objectors said in court documents last week they had found the money to keep the case going. They said they would post a $13.25 million bond funded in part by a unit of UK litigation finance firm Burford Capital.

"I've heard judges saying 'put up or shut up,' but I don't think anyone has put up before," said Adam Savett, the founder of TXT Capital, an adviser to institutional investors on securities litigation that's based in Beachwood, Ohio.

Laster, in his May 9 ruling, proposed his solution as a way to address the problem of diverging interests between plaintiffs' lawyers and their clients. After having invested heavily in a case, a lawyer might feel "subconscious pressure" to accept a settlement on the eve of trial, when the lawyer is "confronting the specter of an adverse result," Laster wrote.

"If the objectors believe the claims are worth more, they can act on their belief, put real money on the table, and outbid the defendants."

Laster, a former litigator in Wilmington, Delaware, has earned a reputation during his three years on the bench as a critic of plaintiffs' attorneys who he believes have done a poor job. In 2010, for example, he took the unusual step of replacing the plaintiffs' attorneys in a case involving Revlon Inc.

Laster's chambers said the judge had no comment beyond his ruling.

CIBC declined to comment on the decision, while Herbert Milstein, an attorney who negotiated the settlement for the plaintiffs, called Laster's approach "very unusual." Milstein, of law firm Cohen Milstein Sellers & Toll, said a court hearing is likely for later this month to decide how to proceed with the case.

ON THE BLOCK

In his opinion, Laster noted that several academics have suggested one way to align the interest of lawyers and clients would be an open auction of plaintiffs' claims at the outset of a case. Under that concept, someone who thinks the case has merit could buy the claims and agree to pay plaintiffs in exchange for taking control of the case.

By selling their claims, the plaintiffs would quickly get a payout. The winner of the auction would pursue the litigation and keep the entire settlement or judgment for themselves. The defendants could also participate in the auction, and if they were the high bidder the case would essentially be settled.

The judge based his ruling in part on the writing of New York University law professor Geoffrey Miller, who has promoted such a system for years and has discussed ways to establish minimum bids and the hiring of bankers to round up bidders.

Miller told Reuters he thought that Laster's ruling was the first time that such an approach had been used. He called it a potentially valuable resource for judges who face objections to settlements, provided there are firms willing to provide the financing.

There seems to be little legal precedent for the approach blessed by Laster, though related issues have come up in different cases. In 2001 a Chapter 7 trustee for a bankrupt company, Three Rivers Woods Inc, suggested a creditor who opposed a settlement of a fraudulent conveyance claim post a bond if the creditor wanted to continue to litigate. The creditor refused and the settlement was approved by a judge in U.S. Bankruptcy Court for the Eastern District of Virginia.

Laster's ruling could have broader reach, said Larry Hamermesh, a professor at Widener University School of Law in Wilmington. His approach could be appealing to courts because it takes the matter and "puts it in the hands of some kind of market," he said.

Not everyone agrees. Companies that provide directors and officers liability insurance, which often funds securities class action settlements, will not be pleased to see settlements potentially undermined by objectors, said Joseph Monteleone, an attorney with law firm Tressler, which represents insurers.

"Usually you don't worry about the objectors," he said.

Burford, the litigation finance firm, clearly hopes Laster's idea catches on. The firm said in court papers it was providing the money in the CIBC case because it wanted to support the arrangement even though it considered the potential return inadequate for the risk involved in the lawsuit.

The case is James Forsythe et al v. ESC Fund Management Co (U.S.) Inc et al, Delaware Court of Chancery, No. 1091.

For the plaintiffs: Seth Rigrodsky, Brian Long, Gina Serra of Rigrodsky & Long; Herbert Milstein, Joshua Devore, Joshua Kolsky of Cohen Milstein Sellers & Toll.

For the defendants: Stephen Norman, Kevin Shannon, Timothy Dudderar, Daniel Mason of Potter Anderson & Corroon; Kenneth Nachbar, Megan Cascio, Kevin Coen of Morris, Nichols, Arsht & Tunnell.

For objectors: Richard Renck, Ashby & Geddes; Steven Mintz, Mintz & Gold.

(Reporting By Tom Hals)

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