Today’s commercial bankruptcy environment favors the creation of special trusts to separate liquidating and litigation assets from operational assets in the hopes of maximizing distribution to creditors and permitting a reorganized debtor to emerge successfully from bankruptcy. The lengthy process of administering assets that have uncertain recoveries, or that may require significant time to handle, begs the use of a vehicle that can be separated from the business operations. Recoveries from those uncertain assets are generally intended to repay creditors whose own claims may be disputed. Significant time may also be required to pursue complex litigation involving multiple parties, insurers, and intercreditor and intercompany disputes among debtors. This is the prime territory of liquidation trusts and litigation trusts, which can separate the liquidation and litigation assets from the main operating assets of the estate.
Each bankruptcy case may involve anywhere from a few to hundreds of disputes, ranging from the mundane to the most materially significant disputes arising in the case. Liquidation and litigation trusts offer a way to separately resolve these matters, which might otherwise overwhelm the main bankruptcy case. In the ordinary course of a business, these matters might be resolved in the normal litigation lifecycle through negotiation or in court. However, in bankruptcy, these matters require stakeholders to place their bets on ways to share in the recoveries that may not be available for a period of many years. Moreover, the costs of pursuing these recoveries may need to be collectively funded and managed through a dedicated centralized mechanism.
ABI’s newly published A Practitioner’s Guide to Liquidation and Litigation Trusts helps the restructuring professional navigate this increasingly important area of bankruptcy practice and instructs how and when these trust vehicles should be used. Specifically, the Practice Guide addresses the context in which liquidation and litigation trusts should be considered in corporate bankruptcy matters, including an overview of basic restructuring options, alternative liquidation vehicles and other post-confirmation vehicles, and recent bankruptcy trends and developments in applying liquidation trusts. The book also provides a general discussion of the legal mechanisms and business issues involved in establishing and operating a liquidation trust, including the benefits and disadvantages of using these trusts, obstacles to taking control of assets and liabilities, and issues involved with winding down a debtor’s business. Additionally, the Practice Guide examines a number of special issues that litigation and liquidation trusts face, including: making distributions across jurisdictional boundaries; management of the trust and the impact of the confirmation date and effective date, the trustee’s authority to act, trust funding, reporting requirements, governing committees and U.S. Trustee reporting requirements; tax matters; retention and preservation of claims; concepts of trustee fiduciary duties and a trustee’s potential liability for actions taken while managing the trust; director and officer litigation (often a critical asset of the liquidation trust); and mass tort litigation and environmental litigation as they relate to liquidation trusts.
The Practice Guide will prove to be a valuable source for lawyers, financial advisors, and other professionals who represent debtors, committees, lenders, individual creditors, and certainly trusts and trustees. It is a soup-to-nuts reference for the use of these trusts (or other similarly structured vehicles) regarding large-scale litigation matters and liquidating other assets to accumulate recoveries and distribute them across multiple claimants. The Practice Guide includes convenient checklists, relevant case citations and detailed references to bankruptcy-related issues, as well as recommended forms of trust agreements and suggested provisions for bankruptcy plans and disclosure statements. It is complete with 275 pages, plus a USB drive containing more than 1,000 additional pages of sample documents from liquidation and litigation trust cases.
Authors of the Practice Guide are seasoned practitioners in the areas of liquidation and litigation trusts. Experts contributing to the book include current committee leadership members David P. Bart of McGladrey LLP (Chicago) and Lucian B. Murley of Saul Ewing LLP (Wilmington, Del.), along with immediate past-chair Kenneth Pasquale of Stroock & Stroock & Lavan LLP (New York), as well as Daniel D. Doyle of Lashly & Baer, P.C. (St. Louis), Ronald E. Gold of Frost Brown Todd (Cincinnati), Grant W. Newton of the Association of Insolvency and Restructuring Advisors (Medford, Ore.), Michael H. Reed of Pepper Hamilton LLP (Philadelphia) and Edward L. Schnitzer of Hahn & Hessen LLP (New York).
The book can be purchased at www.abi.org/bookstore/a-practitioners-guide-to-liquidation-and-litigation-trusts. A podcast about the Practice Guide is also available at www.abi.org/podcasts/examining-issues-surrounding-litigation-and-liquidation-trusts-episode-160.