In many Chapter 11 cases, a liquidating trust is formed through a confirmed plan to administer assets set aside for the benefit of creditors. Oftentimes, the only assets in the trust will be litigation claims, such as preference actions transferred to it by the debtor, that must be pursued to create a distribution pool. The outcome of such litigation typically results in a cash recovery, but sometimes there is other consideration that is obtained. In a recent decision, the U.S. District Court for the District of Delaware upheld a bankruptcy court’s ruling that a liquidating trust had the authority to pursue not only estate causes of action, but also third-party claims held by preference defendants and turned over to the trust as part of preference claim settlement consideration. See In re Cred, Case No. 1:23-cv-00211-MN (D. Del. Mar. 29, 2024).

In Cred, the trustee of the liquidating trust filed a motion seeking approval of proposed procedures that would grant the trust omnibus authority to take assignment of direct claims of creditors against litigation targets that the trust otherwise did not have standing to assert and an incentive for those parties who transferred their claims in accordance with the procedures proposed (the “assignment procedures motion”). Specifically, through the assignment procedures motion the trustee sought to solicit creditors en masse, use an internet portal for such solicitation, and increase the allowed claim by 10% for any settling creditor who agreed to assign their claim. The Bankruptcy Court denied the assignment procedures motion finding that it could not approve the online portal procedures for soliciting the claims, nor could it approve the 10% increase as incentive for transferring claims because it was not disclosed in the plan.