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Can the Claims of Individual Creditors Be Assigned to a Litigation Trust?

By Russell C. Silberglied and Cory D. Kandestin

Consider this familiar fact pattern: A small group of bondholders believe that they were misled by a debtor's management about the company's financial situation shortly before the company filed for bankruptcy, and no class action has yet been filed for securities fraud or related claims. The debtor quickly sells its assets and agrees with the creditors committee to file a plan that creates a litigation trust to litigate possible causes of action for the benefit of the creditors. Can the plan provide that the securities claims ' which are not estate causes of action because they belong to the bondholders individually, not to the company ' will be assigned to the trust so that the trust can efficiently litigate these claims and distribute the proceeds thereof to the bondholders?

Until recently, the answer certainly would have been “no”; several cases have held that a plan can not vest a litigation trust with the claims of individual creditors and instead is limited to litigating and collecting claims that belong to the estate. However, recent decisions from the Second and Fourth Circuits as well as dicta in a recent opinion from the Third Circuit suggest that the answer now is “maybe.” This article explores the history, the more recent case law and the open issues, which could be important in structuring a plan in future cases.

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