Reserve Account

A cash account established and funded as part of a structured legal-asset facility to cover specific anticipated costs or shortfalls — commonly servicing fees, interest payments during periods of low portfolio cash generation, or a buffer against expected near-term expenses such as case costs on funded matters — separate from the general waterfall of portfolio proceeds. Reserve accounts are typically funded at closing from initial proceeds or built up gradually from early cash flows, and their required minimum balance is specified in the transaction documents, with a shortfall in the reserve triggering a cash-trapping mechanism similar to an overcollateralization test. Because legal-asset portfolios generate cash unevenly, with long stretches of no recoveries followed by lumpy settlement inflows, reserve accounts serve a liquidity-smoothing function distinct from the loss-absorption role that subordination and overcollateralization play.

A properly sized reserve account protects senior investors against a timing mismatch — not a credit loss — since even a portfolio that will ultimately perform as underwritten can experience a period with no cash recoveries at all, and without a reserve, that gap could otherwise cause a technical payment default on scheduled interest. Structurers size the reserve based on modeled worst-case gaps between recovery events across the specific case types in the pool, since mass tort and commercial litigation portfolios can have very different cash-timing profiles even at similar overall risk levels.