Creditor Trusts Maximizing Creditor Recoveries

<p>The role of a post-confirmation creditor trust for the benefit of creditors has
expanded beyond its former usage as a vehicle primarily for litigation and/or
preference actions. Today, many of the activities formerly handled during the
chapter 11 proceeding are being done after the emergence of the debtor from
the bankruptcy proceeding and shifted into creditor trusts. These trusts now
resolve a myriad of asset-recovery and claim issues.
</p><p>Essentially, the debtor is being partitioned between the Newco and the "mop-up"
activities of the old company through the use of a creditor trust. To a large
extent, this trend is being driven by the high administrative costs of remaining
in chapter 11, combined with the desire to bring any surviving business entities
out of the bankruptcy proceeding and allow them to operate without the reporting
and financial burden and cost of the chapter 11 process.
</p><p><b>Re-fashioning <i>Spiegel</i></b>
</p><p>The <i>Spiegel</i> case, still pending, is a good example of the various roles
and activities that can involve a creditor trust. During the pendency of the
chapter 11, Spiegel shed and sold off the Spiegel and Newport News catalog operations,
and a decision was made by the creditors to confirm a stand-alone plan around
the Eddie Bauer operation. The case was confirmed, and the creditors received
cash in the amount of 46¢ on the dollar plus shares in the reorganized
Eddie Bauer valued at 45¢ for each dollar in allowed claim. In addition,
each creditor received an undivided beneficial interest in the trust formed
by the plan.
</p><p>Upon confirmation, the remaining assets of Spiegel – consisting primarily
of its ownership interests in a cash fund to administer the trust, the captive
bank, First Consumers National Bank, the private credit card securitization
trust, the bank card securitization trust and the various litigation actions,
as well as the disputed creditor claims reserves and disputed tax claims reserves
– were transferred to the creditor trust. Ownership interest in approximately
50 subsidiary corporations was also assigned to the creditor trust.
</p><p>The trustee was charged with winding down the operations of the bank and surrendering
its charter to its federal regulator, the Office of the Comptroller of the Currency
(OCC). The trustee also had to file the necessary state forms to close down
subsidiary corporations, as well as file the final tax filings with the various
state taxing authorities. The disputed claims process continues, as well as
determining the best methodology for pursuing the litigation actions and the
credit card securitization trust pools for the benefit of the beneficiaries
of the trust. This activity will continue for some time.

</p><p><b>When Does the Trustee Get Involved?</b>
</p><p> The trustee, once chosen by the creditors' committee, ideally should get involved
in the final reorganization plan drafting process to ensure that the plan and
the trust formation documents give the trustee the appropriate authority and
liability protection. This may require that the trustee retain counsel separately
from the creditors' committee counsel. Critical issues, from the potential trustee's
perspective, are limits on the discretion of the trustee to act and whether
an errors and omissions insurance policy will be made available to the trustee
at the expense of the trust. While the trustee is normally indemnified by the
assets of the trust, once these assets have been distributed to the beneficiaries,
nothing is left to protect the trustee; thus, errors and omission and tail policies
are needed. The fees of counsel for conducting this review are reimbursed by
the trust.
</p><p><b>Role of an Oversight Committee</b>
</p><p>Usually where an oversight committee is appointed to oversee the trustee, it
consists of former members of the creditors' committee that continue to have
an economic interest in the maximization of trust assets. In a simple matter—where
the trustee is basically a plan administrator who has little discretion and
receives and disburses funds pursuant to the reorganizaion plan—an oversight
committee may not be necessary. However, when there are significant recoveries
to be pursued and assets to be realized and significant discretion accorded
the trustee to make economic decisions, an oversight committee is of great assistance
to the trustee in acting both as a sounding board and to provide guidance to
the trustee. The oversight committee also provides the trustee significant protection
against frivolous lawsuits for alleged abuse of his/her discretion.
</p><p><b>Benefits of a Creditor Trust</b>
</p><p>Formation of a creditor trust provides a cost-effective and administratively
effective vehicle for creditors. Where there is a surviving entity, it allows
that entity to emerge from the bankruptcy process and get down to business without
the time demands, image problems and economic burdens of the bankruptcy process.
Where there is a §363 sale of the bulk of the assets, it provides a vehicle
to house the remaining assets of the debtor. In both these situations, the trust
allows the employment of just one set of professionals to continue the wind-down
of the remaining assets of the debtor as well as provide a vehicle for creditor
distributions and resolution of disputed claims. The mere consolidation of professionals
from three or more groups down to one, operating largely independent from the
bankruptcy court, provides a huge savings in administrative costs.
</p><p>There are other ways to wind down the affairs through a debtor—with a
plan administrator, responsible party, etc.—but creditor trusts seems
to increasingly be the methodology of choice.
</p><p><b>Continuing Involvement of the Bankruptcy Court</b>
</p><p>Forming a creditor trust pursuant to a reorganization plan provides the best
of all possible worlds. The continued access to the court to resolve disputed
claims if needed provides an expeditious forum familiar with the proceeding
for resolving disputes rather than being relegated to a state court that may
be less familiar with the bankruptcy process.
</p><p>As the creditor trust is an entity independent of the debtor estate, bankruptcy
court approval is not required for many of the business decisions that the trust
may have to make. It operates much like a normal business. Likewise, there is
no requirement for filing notice to all creditors, and many of the reporting
requirements to the U.S. Trustee's Office are eliminated.
</p><p><b>What Does the Future Hold?</b>

</p><p> The recent Bankruptcy Code amendments will shorten the life of many chapter
11 cases, and some predict an increase in the frequency of the use of pre-packs
and §363 sales. It's important to note, however, that while the life of
the chapter 11 may be shorter, the time required to finally resolve all of the
issues will not be magically shortened. Creditor trusts will increasingly provide
a cost-efficient vehicle for dealing with remaining issues and their usage will
increase as the bankruptcy community becomes more familiar with them.