Litigation Trust
A Litigation Trust is a post-confirmation trust created under a Chapter 11 plan to hold, investigate, prosecute, settle and monetize specified causes of action or related assets for the benefit of designated creditors or other beneficiaries.
The trust separates litigation from the reorganized operating company
A Reorganized Debtor can emerge focused on the business while a separate trustee handles legacy causes of action.
That separation can reduce management distraction and give creditors a dedicated vehicle for pursuing value.
Section 1123(b)(3) supports preservation and enforcement
The plan can retain causes of action and appoint a representative of the estate to enforce them.
Current 2026 plans expressly designate litigation trusts and trustees as estate representatives for that purpose.
Trust funding matters before recoveries arrive
Litigation can take years and requires lawyers, experts, discovery costs and administration.
Plans therefore can establish expense reserves or contribute cash so the trustee can pursue claims without depending on immediate litigation proceeds.
Beneficiaries receive net recoveries, not headline judgments
Any settlement or judgment can be reduced by professional fees, taxes, trust expenses and higher-ranking obligations.
The value of a trust interest depends on the net distributable amount after those costs.
Litigation Trust interests should be modeled probabilistically
Assume a Litigation Trust holds three major lawsuits.
Case A: potential net recovery of $80 million with a 60% probability. Case B: $40 million with a 30% probability. Case C: $25 million with a 20% probability.
A simple probability-weighted gross value is:
$48 million + $12 million + $5 million = $65 million.
Now subtract expected legal, expert and trust administration costs of $20 million.
The simplified expected net value becomes $45 million before taxes, timing discounts and correlation among cases.
That is far below the $145 million headline maximum recovery.
Litigation claims should therefore be valued using probability, timing, collectability and expense assumptions rather than the damages figures appearing in complaints.
Common mistakes
Treating the trust as a passive escrow It can actively prosecute litigation.
Valuing claims at face amount Litigation outcomes are uncertain.
Ignoring trust expenses and duration Both reduce present economic value.
Example
A plan transfers avoidance actions, director-and-officer claims and litigation recoveries to a trust. General unsecured creditors receive trust interests. The Litigation Trustee investigates claims, settles some cases and distributes net recoveries after expenses to the trust beneficiaries.
Example
A plan transfers avoidance actions, director-and-officer claims and litigation recoveries to a trust. General unsecured creditors receive trust interests. The Litigation Trustee investigates claims, settles some cases and distributes net recoveries after expenses to the trust beneficiaries.
Professional note
A Litigation Trust interest should be valued like a contingent legal asset, not ordinary funded debt. Recovery depends on litigation merits, collectability, defense costs, settlement timing and trust expenses.
Related terms
- Plan of Reorganization
A Plan of Reorganization is the Chapter 11 plan that sets the classification and treatment of claims and interests and establishes the transactions, distributions, governance and other steps through which the debtor will reorganize or otherwise resolve the bankruptcy case.
- Claims Reserve
A Claims Reserve is cash, securities or other plan consideration set aside to protect potential distributions on disputed or unresolved bankruptcy claims until their allowance or disallowance is determined.
- Distribution Agent
A Distribution Agent is the person or entity designated under a Chapter 11 plan to make distributions of cash, securities or other consideration to holders of Allowed Claims or Interests according to the plan's distribution rules.
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