2026 ABI Spring Meeting: Workshop – Liquidating Trust Agreements

Presentation by:

Alex D. Moglia
Moglia Advisors
847-884-8282
amoglia@mogliaadvisors.com
1325 Remington Rd Ste H
Schaumburg, IL 60173

 

1. Liquidating Trusts in Chapter 11: Key Structural & Economic Consideration

  • Purpose of Bonding
    • Protects trust assets from fraud, dishonesty, or mismanagement
    • Provides assurance to creditors and the court
    • Reinforces fiduciary accountability
  • When Bonds Are Required
    • Common for liquidating trustees and disbursing agents
    • May be mandated by plan, trust agreement, or court order
    • Sometimes waived in smaller or low-risk cases
  • Determining Bond Amount Based on:
    • Total assets under management
    • Expected cash flows and distributions
    • Size and timing of litigation recoveries
    • Often declines over time as assets are distributed
  • Types of Coverage
    • Fidelity bonds (standard)
    • Errors & omissions (E&O) insurance
    • Trustee liability / D&O-style coverage
  • Cost Considerations
    • Paid as trust administrative expense
    • Annual premiums vs. declining coverage structures
  • Key Negotiation Points
    • Bond amount and duration
    • Scope of covered parties
    • Potential waivers or step-down provisions
  • Practice Tips
    • Engage insurance broker early
    • Align bond with projected distributions
    • Disclose clearly in plan and disclosure statement

 

2. Litigation Funding

  • Overview
    • Third-party, non-recourse financing for litigation claims
    • Funders receive a share of recoveries
  • Why Liquidating Trusts Use It
    • Enables pursuit of claims without upfront capital
    • Preserves liquidity for creditor distributions
    • Transfers downside risk
  • Common Structures
    • Single-claim funding
    • Portfolio funding (bundled claims)
    • Hybrid arrangements
  • Key Economic Terms
    • Return multiples or IRR thresholds
    • Priority in payment waterfall
    • Participation percentage in recoveries
  • Approval & Governance
    • Often requires court approval
    • Must satisfy fiduciary duty and business judgment standards
    • Disclosure to creditors is critical
  • Advantages
    • Risk transfer
    • Access to capital
    • Potential to enhance recoveries
  • Risks
    • High cost of capital
    • Potential funder control or influence
    • Privilege/confidentiality concerns
  • Negotiation Points
    • Control over litigation decisions
    • Settlement approval rights
    • Buyout provisions
    • Caps on funder returns
  • Practice Tips
    • Run competitive process
    • Model multiple recovery scenarios
    • Align funding terms with fiduciary obligations

 

3. Litigation Contingency Fees

  • Role
    • Align counsel incentives with creditor recoveries
    • Reduce upfront administrative costs
  • Typical Structures
    • Pure contingency (25%–40%)
    • Hybrid (hourly + success fee)
    • Tiered structures (increasing percentages)
  • Court Considerations
    • Must be reasonable and disclosed
    • Often approved as part of retention
    • Interaction with litigation funding
    • Coordination of payment waterfall
    • Avoid stacking excessive costs
    • Clarify priority between funder and counsel
  • Advantages
    • Risk-sharing with counsel
    • Lower upfront cost
    • Incentivizes efficiency
  • Risks
    • High fees in large recoveries
    • Settlement timing conflicts
    • Potential disputes at case end
  • Key Negotiation Points
    • Definition of “recovery”
    • Expense treatment
    • Fee caps or step-downs
  • Practice Tips
    • Benchmark market terms
    • Align structure with litigation timeline
    • Clearly define waterfall provisions

 

4. Trust Administration Budgeting

  • Purpose
    • Forecast costs and ensure feasibility
    • Provide transparency to stakeholders
    • Support distribution planning
  • Core Cost Categories
    • Trustee compensation
    • Legal and litigation costs
    • Financial advisors and claims agents
    • Insurance (bonding, E&O, D&O)
    • Tax compliance
    • Administrative overhead
  • Budget Structure
    • Initial 12-month operating budget
    • Multi-year projections for litigation-heavy trusts
    • Key Assumptions
  • Duration of trust
    • Litigation timelines and outcomes
    • Asset liquidation pace
  • Cash Flow Planning
    • Timing mismatches between inflows and expenses
    • Required liquidity reserves
    • Potential funding gaps
  • Governance
    • Trustee discretion vs. oversight committee approval
    • Variance thresholds
    • Periodic reporting
  • Common Pitfalls
    • Underestimating litigation costs
    • Ignoring long-tail expenses
    • Overly optimistic timelines
  • Best Practices
    • Conservative assumptions
    • Contingency reserves
    • Regular updates and reforecasting

 

5. Interim Trust Distributions to Creditors

  • Purpose
    • Provide early recoveries
    • Maintain creditor support
    • Avoid idle cash accumulation
  • When Appropriate
    • Adequate reserves established
    • Reasonable certainty of remaining obligations
  • Reserve Strategy
    • Litigation reserve (largest variable)
    • Administrative reserve
    • Tax reserve
  • Distribution Mechanics
    • Pro rata distributions on allowed claims
    • Holdbacks for disputed claims
    • True-up mechanisms
    • Frequency
    • Periodic (quarterly/semi-annual)
    • Event-driven
  • Risks
    • Over-distribution → clawback risk
    • Under-reserving → insolvency risk
    • Litigation uncertainty
  • Creditor Considerations
    • Transparency in assumptions
    • Clear reporting
    • Predictable timing
  • Best Practices
    • Conservative reserves
    • Document decision-making
    • Coordinate with oversight bodies

 

6. Professional Fee Carveouts

  • Definition
    • Reserved funds set aside to ensure payment of estate professionals
    • Typically established in DIP financing or cash collateral orders
  • Purpose
    • Guarantees professionals are paid
    • Prevents disruption of case administration
    • Supports value maximization
  • Typical Components
    • Pre-petition retainers
    • Allowed but unpaid fees
    • Post-trigger capped fees
    • Sometimes U.S. Trustee fees
  • Trigger Events
    • Default under financing/cash collateral
    • Termination of funding access
    • Conversion or dismissal
    • Post-trigger period often capped (e.g., 2–4 weeks)
    • Interaction with liquidating trust
  • Trust must address:
    • Payment of unpaid administrative claims at effective date
    • Adequate funding for wind-down costs
    • Carveout often transitions into administrative reserve planning
  • Structural Variations
    • Hard carveout (fixed amount)
    • Soft carveout (subject to collateral availability)
    • Rolling carveout (based on accrued fees)
  • Priority in Waterfall
    • Typically senior to creditor recoveries
    • May prime secured creditor liens (by agreement)
  • Key Issues
    • Adequacy at plan effective date
    • Alignment with trust budget
    • Coverage scope and clarity
  • Negotiation Dynamics
    • Lenders: tight caps, narrow scope
    • Debtors/committees: flexibility and sufficient cushion
  • Risks
    • Undersized carveout → unpaid professionals
    • Restrictive triggers → insufficient wind-down
    • Ambiguity → disputes
    • Misalignment with trust funding
  • Best Practices
    • Align with realistic case budget
    • Clearly define scope and timing
    • Coordinate with administrative reserves
    • Stress-test downside scenarios
  • Drafting Tips
    • Precise trigger notice provisions
    • Guaranteed post-trigger funding window
    • Consistency across all documents
    • Avoid overly complex formulas
  • Closing Themes / Key Takeaways
    • Interconnected Economics
    • Litigation funding + contingency fees + distributions must be harmonized
    • Budgeting + bonding + carveouts drive risk management
  • Governance & Transparency
    • Clear disclosure builds creditor trust
    • Oversight structures reduce disputes
  • Fiduciary Focus
    • Balance maximizing recoveries with controlling cost and risk
    • Conservative planning avoids post-confirmation failures

 

Conclusion

  • The success of a liquidating trust is determined less by asset size—and more by:
  • Structure
  • Discipline
  • Alignment of incentives