In this episode of S&C’s Critical Insights, S&C’s Restructuring & Special Situations Group Partners Andy Dietderich, Brian Glueckstein, Ben Beller and Christian Jensen discuss important topics related to planning for and effectively implementing liquidating trusts, focusing on recent rulings in the First Brands and Voyager bankruptcies.
“In a case that is likely to have a litigation trust, planning from the outset about that trust is essential,” said Andy. “Life is much easier to operate as a liquidating trust on the other side of bankruptcy than it is to continue to operate in bankruptcy. It’s cheaper, the lines of authority are clearer and your business flexibility is greater as well.”
Full transcript below.
Ben: Welcome to S&C’s podcast series, “S&C Critical Insights.” I’m Ben Beller, a partner in S&C’s Restructuring & Special Situations Group. I am joined by my partners in the group, Andy Dietderich, Brian Glueckstein and Christian Jensen. Today, we’re going to be talking about two big picture topics relating to liquidating trusts. The first is, “how much money do you need to put in place a liquidating trust?” And then the corollary, “once you have a liquidating trust and you have a trustee who is making decisions, some of which may be controversial or subject to challenge, how do you make sure that that trustee is properly protected?” In recent caselaw, its important to understand on both of these points. We’ll be diving into two recent decisions that relate to this topic. Specifically, we’ll be talking about Judge Chris Lopez’s August 24th, 2026 ruling refusing to confirm the First Brands’ Chapter 11 plan and converting the cases to Chapter 7. And then we’ll talk about Chief Judge Laura Swain’s August 6th, 2026 decision in the Voyagerpost-effective date cases, which vacated a plan exculpation provision that sought to protect parties implementing the plan from future liability.
Let’s start with First Brands, which we’ll be talking about specifically in the context of the Steward Healthcare Chapter 11 cases, which First Brands heavily relied on in seeking approval of their plan. And that’s because Steward had some similar structures, but some key differences that Judge Lopez specifically talked about and relied on in reaching a different outcome. Notably, Judge Lopez was also the Judge in Steward and S&C was involved in both of those cases. So, Christian, can you give us a little bit of the context of the Chapter 11 cases for First Brands, leading up to the debtors’ proposal of this plan, which we’ll talk about, and Judge Lopez’s decision?
Christian: Sure. So, First Brands was a case that was mired in massive fraud, double-pledged collateral, a hugely complex web of overlapping claims on the state assets. The debtors attempted to run a sale process. By early this year, it was clear that that process had mostly failed. They were able to sell some operating assets but the value was extremely low compared to the value of claims. By early this year, it was clear that dip funds were exhausted and the principal asset remaining was litigation, Chapter 5 Claims, state law claims against insiders and third parties. So, the proposed plan was designed to transfer those litigation claims into three trusts, including a litigation trust that would initially be funded with $75 million dollars and option for additional funding. The idea was that these trusts would then prosecute the claims on behalf of the debtor and pursue billions of dollars in recovery.
The critical issue from a Chapter 11 confirmation perspective was that administrative and priority claims could not be paid on confirmation. There was not funding available to do so. So, the plan contemplated that there would not be an effective date until approximately 2028 after the trust had accumulated enough cash to pay all those required claims in full. Under an illustrative waterfall, the admin claims and priority claims wouldn’t receive distributions until the litigation recoveries and distributed proceeds approached somewhere around $2 billion dollars. So, the administrative solvency of the case depended on really substantial litigation recovery in a roughly two-year period.
Ben: Right. And so, just to take a little bit of a step back, the usual course is that you confirm a plan and relatively soon after that, whether its days, weeks, maybe months in some situations for regulatory approvals or whatever it is, you emerge. One of the requirements of emergence, or consummation of the Chapter 11 plan, is that you’ve paid all administrative and priority creditors. In First Brands, they were not able to reach an effective date relatively soon after confirmation because they did not have the money to do that. And this was exactly the situation in Steward, and we’ll talk about some other examples of this. But there were some clear differences that Judge Lopez was focused on in saying, “In Steward, we’re okay with separating out confirmation and effective date by an unknown amount of time.” In Steward, it was at least two years. When, we were in front of Judge Lopez in confirmation, it was clearly not going to be earlier than two-plus years for emergence. And during that time, all the debtors were going to be doing were litigating cases to bring in money into the estate to then have enough to pay those admin and priority creditors. That was effectively what First Brands was trying to do. But why did Judge Lopez in the end say, “this is not going to work here,” even though he had said within the last year, that it worked in Steward?
Christian: That’s right, and it’s not unheard of to have this gap between the confirmation of a plan and effectiveness, even as you say, one that might be multi-years, and one that might be contingent on litigation recovery. We saw it in Steward. It was a key aspect of the plan that was confirmed in Sears. One of the issues that Judge Lopez identified here was simply, the way that the debtors calculated the claims pool was built up in a way that against a projected recovery that was not, the evidence was not before the Court that this was a feasible plan and that these administrative claims eventually would be paid. Because of the nature of the claims in First Brands, the analysis did not include a look at net-substantial payments from the same parties, did not account for setoffs or other defensive claims, did not provide a detailed collectability analysis. So, in the view of the Court, the evidence on the ability to pay administrative claims was simply too speculative to really call the plan feasible.
Ben: Right. And this is such an important, fundamental point, and not all that controversial which is, if you’re asking the Court to do something, you have to provide the Court with an evidentiary basis for why you’re entitled to that relief. In First Brands, they kind of skipped that. They just came in and said, “just trust us, we’re telling you this is all fine,” but there was no actual evidentiary support for the kind of headline news that they were delivering and asking the Court to rely on to do what actually is not that common, and is a little bit of a leap. So, in addition to just how I think about it, there’s this bucket of evidentiary issues, I think there were also these fundamental structural issues, which I think is much more important even though the evidentiary ones were front-and-center in Judge Lopez’s decision, relating to what was being done on confirmation and what was being done on effective date.
Andy: It’s interesting, small cases, you have this problem all the time. And the usual solution is that there is a negotiation between the secured lenders that need to be paid in cash and the professionals that need to be paid in cash. And any number of cases create litigation trusts where a portion of the administrative expenses are voluntarily deferred to avoid exactly the kind of hearing that people had in First Brands. I think First Brands, the nature of the administrative claims and the nature of that case were such that a negotiated solution was itself too hard to come across. The other thing that’s interesting is caselaw says the most important thing about feasibility are the views of the creditors. And the other striking thing about First Brands is there wasn’t a negotiated solution. You had creditors that were challenging exactly this question. So, in most cases there will be a negotiated solution to this problem. And I think one way you could look at Judge Lopez’s opinion, is to say, “you better come up with a negotiated solution in these circumstances because if you don’t, you’re going to need evidence. And we’re really going to look at the question of evidence.”
Ben: And of course, that’s what these judges are always expressly telling parties which is, “if you make me rule, you may not like the way that I rule. So, go figure it out and come back to me when there’s a deal.” And so, in First Brands, the plan, the order that the debtors were seeking from the Court, would have put in place on confirmation, certain structures that could never be undone. Even if at the end of the day there was no money that came into the estate and administrative and priority creditors were paid zero, there were structures that had permanent effect on confirmation. That did not happen in Steward. Everything that was going to be irreparable was happening on the effective date, if and when that happened, which was also going to be when all administrative and priority creditors were being paid. And that to me, is clear line crossing request which is, “let’s put everything that the creditors need and are entitled to on deferral and let’s give company and whoever else is benefitting from it, the dip lenders or whoever else it was, relief today that’s going to benefit them and solidify their position.” So, I think that really, I’m sure, gave Judge Lopez some pause.
Brian: I think that that’s probably one of the biggest issues here, is that it starts to really look like the plan was not going to go effective on the effective date. You had so much happening immediately that you’re not going to be able to unscramble the egg later if they never had any money to the estate. And when you combine that with the fact of all the uncertainty around what the estate proceeds were going to be out of the litigation, combined with the fact that they didn’t even know how much the claims pool was because they hadn’t set the admin bar date. So, it looked like what we’re trying to do is just front run whether or not this plan would be feasible and if it turned out it wasn’t, then the creditors were going to be stuck. And that does seem very different even than what they were doing in Steward, which in and of itself, could be viewed as somewhat aggressive.
Andy: Brian, raises a really important point, which is that this case ends at a liquidation. It started as, “we think there’s a pony in the stable and lets go save the pony.” And so, there’s a due process element to Judge Lopez’s opinion as well because they were operating during the administrative period and real people were shipping product and kept showing up for work and needed to be paid. And these people didn’t have a bar date, their claims weren’t known and some of these guys don’t even have a committee. The Unsecured Creditors Committee represents unsecured creditors. And so, here there is no bar date, administrative claims are, in Judge Lopez’s opinion you need evidence to show they’re going to be paid in full, and yet he’s supposed to green light this.
Ben: So, I guess we can talk about a little bit of practical line between the two cases although, I think we’ve addressed that. But I think that that question is also informed by Sears, which is an older case but Christian, talk a little bit about the similarities and differences that Sears had between Steward and First Brands.
Christian: In many ways, its structurally is, it has a lot of similarities to First Brands at confirmation. There was no funding left in the estate, the operating assets had been sold, they had an administrative claims pool that they were not able to pay. But they did have a proposal how over time the estate through both, concessions in administrative claimants and litigation recoveries, would eventually be able to pay those claims and to emerge. And that was a long period and that case kind of shows the difficulties with putting forward this kind of plan. I think it was a little over three years between confirmation of the Sears plan and the time that they actually emerged for bankruptcy, that they remained in this limbo where they both pursuing litigation recoveries and trying to cut deals with administrative claimants in order to balance both sides of the ledger and be able to emerge. And eventually they were successful. In 2022, there were substantial recoveries in the settlement, the litigation against Eddie Lampert and that allowed them to emerge. But going back to what we talked about at the beginning, this was also premised on having a very clear record that gave the Court comfort that pathway was viable and more importantly, did not have the structural changes that First Brands was seeking to implement on the confirmation date that kind of, irreversibly changed parties’ entitlements in a way that could not be fixed if those recoveries were not eventually there.
Ben: And as you said, that Sears was successful in immersion, in bringing enough proceeds from litigation primarily against Eddie Lampert, but to that immersion and of course the hope is that will happen in Steward, that the creditors will be paid what they’re entitled to be paid and that there will be recoveries for creditors’ privatization basis as well. First Brands, they won’t have a chance to do that although they will be in Chapter 7 and we’ll see where recoveries come out through that process.
Andy: Another example then is Toys. In Toys ‘R Us, the administrative claims court was more advanced. So in Toys ‘R Us, everybody agreed to take a haircut. Administrative creditors got 22 percent of their court recovery on their administrative claims. The plan went effective.
Ben: And perhaps there’s a Toys and Sears and some of these other cases, it’s a little bit more of a historical legacy ability to get consensus and get, among other, professionals to reduce their claims in the interest of confirming a plan and moving the case forward. To my knowledge, I don’t think there were proposals from in either Steward case or in the First Brands case for any real discount on professional fees which one could argue was appropriated in one or both of those cases.
Christian, anything you can tell us about the Ultinon European affiliate of First Brands as well relating to this topic?
Christian: Yeah, so the Ultinon motion is a separate Chapter 11 case, one of First Brands’ European affiliate businesses. It’s also pending in front of Judge Lopez. Coincidentally the confirmation hearing for Ultinon was just a few days before Judge Lopez’s ruling in the First Brands case and Judge Lopez kind of as a counter example confirmed a plan that was premised on, in a very broad manner of speaking, a similar litigation trust strategy and Ultinon the really the only valuable asset remaining. Their litigation claims being placed in a trust for the benefit of all creditors and the hope is that case will emerge from bankruptcy shortly. There are obviously much great complications in the First Brands case, but what said an illustrative example that the rejection of the First Brands plan is not a rejection of litigation trust structures whole cloth, but it’s a warning kind of against making highly speculative litigation recoveries that bridge between confirmation and satisfying the statutory conditions for Chapter 11 plan.
Ben: Great.
Andy: We’ve always taken the view that it’s in everybody’s interest in a case that becomes a liquidation to get to the effective date as quickly as possible. Life is much easier to operate as a liquidating trust on the other side of bankruptcy than it is to continue to operate in bankruptcy. It’s cheaper, the lines of authority are clearer and your business flexibility is greater as well. So, Ultinon’s a good example of this, Christian, and in the interest of disclosure we did represent the main creditor of the European company. We took the view there that we would effectively ask professionals to haircut fees and do whatever we could to have the quickest possible transition to a liquidating trust. Now, we were well past the point where we were trying to save a business. So we knew we were in liquidation. But if you know you’re going to be in a liquidation, get to the liquidating trust as quickly as possible has generally been our approach. That’s the approach we took in FTX for example. As quickly as possible in FTX was still almost two years, but when you think about the nature and the amount of time we spent in Chapter 11 for FTX versus the work we’re still doing now on the other side of it, much of the work on FTX is going to happen post-emergence.
Ben: And to your point, liquidating while in Chapter 11 is a bad place to be. Liquidating once you’ve confirmed a plan is a totally normal, straightforward place to be, and not to starting derailing about FTX, but of course we saw this in 2022 when we were all dealing with a number of cryptocurrency cases and some of those cases filed saying, “Oh, there’s reorganization here, that’s what we’re pursuing, we’re putting all kinds of plans on the table day on,” and we’d all look at it and say, “Well, this is a liquidating case. There’s no reorganization to be done here.” Those cases, some of which we’ll talk about, went much longer, more costly, went astray in totally different ways than FTX did because of the way that we set up FTX to be a liquidation from day one.
Andy: Well yeah, and that goes back to this point about administrative training because Toys, Sears, and to a lesser extent, but certainly Toys and First Brands and many other cases, if you try for reorganization, the cost for trying for reorganization is not just the passage of time, it’s not just dip loans it’s everything else. It’s the occurrence of those administrative claims. And if you’re cash flow positive during an administrative period, that’s great. But if you’re not, be super careful because trying to reorganize could actually prevent your ability to liquidate a Chapter 11 or require deeper haircuts from administrative creditors.
Ben: Right. So, let’s use that as a perfect segue to talk about Voyager, which happened to be a case where they were pursuing reorganization for quite some time in the beginning of the case and then it became clear that that was nonviable. But here, we’re talking about the Voyager decision by the District Court with respect to plan exculpation and the structure that was proposed in Voyager, where the court found that that did not work. So, Brian, can you set the stage a little bit for us about this decision and how it came about?
Brian: This was an appeal of the confirmation decision Voyager and the relevant part Chief Judge Swain’s decision deals with the exculpation provision. Voyager was one of the cryptocurrency platforms that failed in 2022. Their confirmed plan was one of the few that sought and ultimately did actually distribute cryptocurrencies out of the case and in order to do so, they needed to rebalance their portfolio by making purchase and sales of cryptocurrencies. So, an important focus of their exculpation provision was not only to ensure a broad reach in terms of parties that recovered by exculpation, but also to specifically provide that the actions that would be taken post-effectiveness in effectuating and implementing the plan specifically with respect to rebalancing and distribution of cryptocurrencies would be exculpated from fines, penalties and other liabilities. While there were some efforts to preserve some governmental actions, the provision was a broad protection that was contemplated, advanced exculpation in the plan, including against not only government but other potential even criminal liability with respect to these activities with respect to rebalancing and distribution of cryptocurrencies. Ultimately, Chief Judge Swain concluded the bankruptcy code did not authorize that perspective protection. And certainly it’s an interesting decision because the focus really is on the fact that this provision was in the plan itself as opposed to some of the other ways in which the debtor could have gone about trying to provide these protections. But, the ultimate decision here on appeal was that the bankruptcy court went too far in approving this prospective looking exculpation provision.
Ben: Right. And so maybe we can talk a little bit about what those alternatives are. What are the alternatives to accomplishing maybe not entirely the same, but something similar and again, full disclosure, how have we taken different approaches in some of the cases we’ve done?
Brian: So, part of it will come down to this structure of the post-effectiveness liquidating entity, whether it’s a standalone trust as it is in many cases. Certainly, one way that we dealt with this issue in the FTX case was to insure that the trust documents that would be drafted and approved by the trust board to govern the post-effective activities of the trust would provide for an appropriate level of exculpation and that that exculpation be approved by the board and would be governed by nonbankruptcy law, FTX’s case under Delaware law. And so in that situation the bankruptcy judge was asked to authorize, as a matter of corporate governance, the debtor to enter into those agreements post-confirmation but did not approve and did not include in the plan those provisions specifically. There are other ways even within the context of the case to try to get approval and to try to get the judge to agree in advance to authorize certain actions. We did something similar in FTX with respect to needing to buy and sell cryptocurrencies, but it can be done in real time. The problem here was that it was a prospective looking authorization in the plan’s exculpation provision and that’s where the court felt that it went too far.
Andy: It’s one of the themes of the moment the last couple of years is people trying to do things in a plan that they shouldn’t be doing in the plan. One of the most powerful things a plan can do is to authorize the debtor or liquidating trustee to sign contracts. The authorization to sign the contract is in the plan. The contract then becomes binding under applicable law, and we had a lot more success putting things in the contracts that are signed upon emergence than trying to use a broad-based power as if the plan was kind of a dump for everything everybody could possible think of because that creates confirmation risk.
Ben: Let’s talk about the risks and benefits and then sort of the legal questions about doing that. So first question is, what kind of legal risks are you creating or maybe buying by putting into the contract than by putting into the plan, if any?
Andy: Well, in a plan context you’re in, again, we like to try to get to effectiveness as quickly as possible to get out of bankruptcy because bankruptcy is an environment where you have federal duties of a trustee, you’ve got a court, you’ve got all kinds of stakeholders, you have administrative liabilities for the liabilities you create. That should all stop as quickly as you can stop them. So, let’s take this question in Voyager. The issue in Voyager is a real one. And one that people in the crypto cases, not just FTX, but all the crypto cases where they lived in fear of, which is their going to be called upon to sell a highly volatile asset and they’re going to get it wrong. The price is going to change. And it could go up, it could go down, who knows. How do they get protected from lawsuits by parties? During the case, we, and I think some other cases, we have certainly done this when we’ve had volatile assets, we’ve gotten pre-authorized 363 relief where the court tells us, “Run a process to sell these tradable securities under this particular process and in advance I’ll conclude that you’re safe and exculpated if you do so.” The court in Voyager said I’m not going to do that into the future for a litigation trustee correctly, I think, because it’s no longer bankruptcy. But where’s the litigation trustee’s exposure? The litigation trustee doesn’t have the duty necessarily to every creditor anymore. The litigation trustee has a duty to the trust. And so the litigation trustee can sign a contract with a trust where the trust says, “Hey, litigation trustee, I’m going to engage you for this and I recognize it’s risky business. But I am going to agree to protect you against that.” And then if the litigation trustee is accused of selling something too cheap, it’s in a cause of action by the litigation trust, not a cause of action by the initial creditors because the litigation trust agreement also has a broad waiver of third party beneficiary rights, which turns off the creditor focus. So much better to be if you’re running an insolvency or liquidation, it’s much better to be on the other side of bankruptcy and when you’re on the other side of bankruptcy, the happy land of contract, Delaware or New York, can do a lot of things to more or less fully protect you.
Ben: Yeah. And now to the other point you made about the sort of the theme of people putting things in the plan that maybe shouldn’t be in the plan, I don’t know if that’s a reference to Purdue and where that case has gone or what kept that case has done to releases, but of course releases and exculpation have some, are brother and sister or cousins, and it does sort of strike me that putting more into the releases, pushing that or elements of that, courts have now pushed back on that including the Supreme Court. Pushing back on exculpation in this way that there’s a real concern that plans are being used to bind entire creditor body including by the way in Voyager, government entities, for criminal liability and similar stakeholders, in a way that it really is not how it is meant to be, and that is a totally different thing to allow the trust, as a matter of state law, to make a business decision to authorize a representative to take an action.
Andy: It’s focusing internally to people, right? We always say that the answer to a bankruptcy question is 90 percent likely to be a state law, not a federal law, not a bankruptcy question. Corporations make risky decisions as corporations and are protected by Delaware law. Liquidation trusts, if we set them up in Delaware where we set them up, will be protected by corporate law. Those protections are very, very robust. There’s this temporary moment called “bankruptcy” between when you’re protected by the law before you file and when you’re protected by the law after you emerge. Bankruptcy has special rules and needs special protection because of the duties that everybody has to the creditors during the bankruptcy. But there’s a lot of confusion. Once the bankruptcy ends, you don’t need that anymore. You can go back to doing a very good job of corporate law documentation to protect fiduciaries working for stakeholders.
Brian: And I think one of the important lessons from Purdue which has been analyzed by many, many people since it came out, the Purdue decision itself was quite narrow and much of what is relied on, on what it did, and I think that one of the important takeaways from Purdue is that the Supreme Court was saying what many courts have said over the years, which is you have to have a real source of authority in the bankruptcy code if you’re going to invoke federal bankruptcy law. You can’t just say Section 105 of the Bankruptcy Code on a standalone basis can allow the bankruptcy courts to do whatever the debtor might need it to do. And if you have that basis and can construct an argument you can pursue that theory in a plan, but to Andy’s point, a lot of times the easier answer and the safer answer is to rely on a non-bankruptcy law basis that can be enforced through a bankruptcy order or otherwise, but that provides an independent basis for the relief that you’re seeking. Bankruptcy should only do what federal law needs to do. And I think courts are correctly pushing back on its use of it to do more.
Ben: Well before we end, any close or takeaways for themes or flag them for our listeners before we close things out.
Christian: To start, going back to the First Brands case, it’s a clear theme that if your plan is dependent on speculative litigation recoveries, that recovery case really needs to be built from the claims up in a clear way that’s backed up by the evidence. Verse transfer volume isn’t a substitute for evaluating merits, defenses, timing and collectability and courts are really going to pay attention to this. This might be a signal that we’re in a different world than when the Sears plan was confirmed and judges might look at it differently in light of Judge Lopez’s decision in First Brands. So your administrative claims pool needs to have comparable discipline.
Ben: Great.
Andy: Well I think the other thing is we called this “Tough Times for Litigation Trusts.” It’s not really tough times for litigation trusts. I think my takeaway is that in a case that is likely to have a litigation trust, planning from the outset about that trust is essential. You can’t look at it as something that debtor lawyers and the dip lenders and other stakeholders don’t care about. that will be left to the committee. Because litigation trusts are immensely valuable. The absence of a litigation trust in First Brands is, in my view, destructive of value and the lack of protections in Voyager, if they can’t be recreated by an appropriate contract, is destructive of value. Litigation trusts have a very important job to play in the world, but cases should recognize that you need to start with the end in mind. If you’re going to have a litigation trust, there’s going to be a substantial portion of your distribution to creditors. Designing that should be one of the very first things you think about in a case and you should have a sense of, “OK if we’re going to have a litigation trust, how much admin expense can we really bear before we can hit the bid and make it happen?” And if you’re going to have a litigation trust full of volatile assets, think about who’s going to be the trustee and how are we going to protect it at the very beginning of the case.
Ben: Very fun conversation. As always, thank you to everybody for listening to S&C Critical Insights. For more information about our practice please visit us on our website at sullcrom.com.