reorganization, disclosure statement,
LTA, and other useful documents.
for the benefit of
Filed or scheduled
claimants are relatively
easy to identify. However,
bondholders, who in many
cases represent the overwhelming
dollar amount of claims, can be
difficult to identify. Bondholders are
usually represented in a bankruptcy
by indenture trustees that file claims
on behalf of all bondholders.
Using a Web site saves significant
amounts of money for the trust,
particularly when it has a large
number of beneficiaries. This may
be the case for a company with a
large number of former employees
with severance claims. In most
cases, the only communications
requiring regular mail are requests
for tax identification numbers (TINs),
annual grantor trust letters indicating
each beneficiary’s reportable tax
information, and, hopefully, checks
for distributions from the trust.
Should a board member desire
information, he or she can contact the
trustee informally. While it is unlikely
that all three board members would
resign or cease to serve without being
replaced, it would be helpful for the
LTA to provide for such a situation. For
example, one possibility if that were to
happen would be for the board to be
dissolved and for the trustee to have
no further obligations to the board.
Financial Reporting. In some federal
judicial circuits, such as the 3rd, which
includes U.S. Bankruptcy Court for the
District of Delaware, liquidating trusts
are required to file quarterly financial
statements with the office of the U.S.
Trustee. These reports must also be filed
with the court. To provide ready access
to trust beneficiaries, these reports
can be posted to a trust’s Web site.
Insurance. Two key risk areas for
which trusts should strongly consider
obtaining insurance coverage are, first,
to protect the assets of the trustee, the
trust advisory board, and the trust in
case third-party claims are made against
them and, second, to protect the assets of
the trust from theft or misappropriation.
Because publicly traded bonds are
held in street name, there is no easy
way to independently identify the
holders. Consequently, the liquidating
trustee should make a concerted
effort to work with the other parties
in the case to obtain the holder
information before the effective date
of the plan of reorganization.
Without holder information, a trustee
could be stuck with the herculean task
of tracking down holder information
after a trust is established. Bondholders
that cannot be located will not be able
to reap the benefits of the trust. One
way to solve this problem is to arrange
for the indenture trustee to continue
to represent the bondholders. While
this requires a trust to pay additional
fees, there are significant benefits in
terms of efficiency for the trust and
recoveries to bondholder beneficiaries.
Regardless of whether such quarterly
reports are required, LTAs typically
require an independent accounting firm
to prepare at least an annual financial
statement for the beneficiaries. Some
LTAs require semiannual financial
statements. However, it is unlikely
that the information provided in the
additional financial statement would
be worth the additional cost. In any
event, the appropriate form of report
is a compilation. It is not typically
necessary to incur the cost of a full audit.
The LTA should provide appropriate
indemnification to both the trustee
and the trust advisory board members.
However, if the trust does not have
sufficient assets to satisfy the contractual
indemnity obligations of the LTA, then
the indemnification is of little value.
Furthermore, it is possible that allegations
made by a plaintiff are not indemnifiable
for any number of reasons.
Therefore, to provide adequate
protection, it is highly recommended
that a management liability insurance
policy, also known as an errors and
omissions (E&O) policy, be obtained.
A properly written policy protects
the trust, the trustee, and the trust
advisory board members from such
claims and covers both defense
costs incurred and any judgment or
settlement reached with a plaintiff.
Web Site. The LTA should provide
for establishment of a Web site
for disseminating information to
beneficiaries, such as notices, financial
information, reports required by the
LTA and plan of reorganization, and
the trustee’s and trust professionals’
contact information. The site can also
provide ready access to the plan of
Advisory Board. Typically, a three-member advisory board oversees the
trustee. When developing the LTA,
this board should give some thought
to the decision-making latitude it will
give to the trustee. Presumably, the
selected trustee is appointed for the
person’s experience, knowledge, and
trustworthiness, and it is inefficient and
costly for the trustee to require approvals
for relatively small transactions. For that
matter, the board members themselves
may not want to be consulted on a
regular basis. Consequently, the LTA
should set reasonable hurdles for board
approvals required by the trustee.
There are two effective ways to protect
trust assets from theft, embezzlement,
or other misappropriation. The first
is a surety bond, which is similar to
the type of bond that a builder might
post to protect a property owner in
case the builder did not perform to
specifications. It is also the same type
of bond that the U.S. Trustee requires
of Chapter 11 and Chapter 7 trustees.
The bond compensates the trust if the
trustee does not perform as promised.
The second option is a fidelity bond,
which is also known as “crime
insurance.” Although it is called a “bond,”
Similarly, the trustee should not have
onerous board-reporting requirements.