A litigation trust creates optionality in restructurings by providing a contingent source of recoveries under a Chapter 11 plan for creditors that might be “out of the money” based solely on a company’s enterprise value. The litigation trust can take by assignment the debtor in possession’s (that is, the estate’s) and the direct creditors’ causes of action to be prosecuted for the benefit of the holders of litigation trust interests. The proceeds of successfully prosecuted claims are a form of plan consideration beyond cash or equity in the reorganized company that may be consumed by secured or otherwise senior creditors. Litigation trusts also help bring Chapter 11 cases to a conclusion more quickly. Thus, they serve the debtor’s primary business goal of reorganizing and leaving the past behind. By employing litigation trusts, companies need not await the final adjudication or settlement of the causes of action (the prosecution of which can take years) to emerge from Chapter 11 protection.
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