A battle for control of collapsed investment firm 777 Partners escalated late Monday as a federal judge allowed a fraud lawsuit against its main financial backer to move forward while rival lenders clashed over a bankruptcy loan.

U.S. District Judge John G. Koeltl in New York ruled Monday that creditor Leadenhall Capital Partners can move ahead with its lawsuit against 777 Partners' longtime financial backer Advantage Capital Holdings.

In May 2024, London-based Leadenhall filed a lawsuit against 777 Partners, its co-founders and A-CAP, alleging the firm pledged the same assets as collateral to multiple lenders simultaneously. The lawsuit, filed before 777 Partners' bankruptcy, also claimed that insurance firm A-CAP knew of 777 Partners' alleged fraud and continued to fund the investment firm.

A-CAP denied the allegations and asked the judge to dismiss the lawsuit in August 2024. 777 Partners also sought to dismiss the litigation, but the judge stayed the claims against the firm following its bankruptcy filing.

Miami-based 777 Partners, which managed $10 billion at its peak, filed for bankruptcy in August under fraud allegations.

777's settlement business, SuttonPark Capital, buys structured legal settlements and lottery payouts at a discount to securitize and sell to institutional investors. Federal prosecutors alleged that profits from SuttonPark funded 777's acquisitions of soccer clubs, budget airlines and film companies. When cash dried up, co-founder Josh Wander allegedly ordered staff to use restricted funds for acquisitions and pledge the same structured settlements as collateral to multiple lenders.

Separately, A-CAP filed an objection in bankruptcy court late Monday against 777 Partners' selection of Leadenhall as its debtor-in-possession lender. A-CAP claimed that Leadenhall's proposed $10 million financing unfairly shields it from litigation. Leadenhall has said its financing offer doesn't include such releases.

"A-CAP's objection is unsurprising given its desire to control the chapter 11 case, and we expect it will be overruled by the court in light of the clear benefits of Leadenhall's winning DIP proposal," legal counsel for Leadenhall said. "We look forward to supporting this process, including facilitating the estate's ability to investigate and pursue all claims."

Leadenhall's debt is junior to A-CAP's in 777 Partners' capital structure. Providing the bankruptcy loan would give Leadenhall super-priority status and control over the estate's wind-down.

The two financial entities had engaged in a bidding war to fund the bankruptcy. 777 Partners selected Leadenhall's zero-interest loan last week, which includes up to an additional $3 million for wind-down costs.

According to A-CAP's objection filed Monday, the loan includes a provision that would release Leadenhall from legal liability. A-CAP argued in court papers that Leadenhall should face litigation over its acquisition of three 777 businesses for credit bids of just $1 each despite a valuation exceeding $170 million.

A-CAP is asking the bankruptcy judge to reject Leadenhall's loan, saying its competing $9.12 million financing offer remains available.