Financing Litigation Trust Claims in Bankruptcy

How a Chapter 11 litigation trust holds and pursues claims for creditors, and how third-party capital fits into that structure.

What is a litigation trust, and can its claims be financed? A litigation trust is a vehicle created under a confirmed Chapter 11 plan of reorganization to hold and pursue claims on behalf of a debtor's creditors — typically claims against former officers and directors, professionals, or other third parties — and because these claims are often valuable but require capital and time to prosecute, they are a natural, if specialized, candidate for third-party litigation funding.

Section 1123(b)(3)(B) of the Bankruptcy Code authorizes a Chapter 11 plan to provide for the retention and enforcement of claims belonging to the estate, whether by the reorganized debtor or by a representative appointed for that purpose, which is the statutory basis for creating a litigation trust and appointing a trustee to pursue estate claims after the plan is confirmed and the underlying company has emerged from bankruptcy or been liquidated.

Litigation trust claims carry a distinctive underwriting profile. The trustee frequently has limited independent capital, since the trust's corpus was carved out of a debtor's already-distressed estate specifically because there was not enough value to pay creditors in full, making external financing particularly valuable to actually prosecute the claims to a meaningful recovery rather than settling early for less than they may be worth. At the same time, the claims themselves often involve well-documented conduct — arising from the same investigation and discovery record developed during the bankruptcy case itself — which can meaningfully reduce liability-development costs relative to a claim built from scratch outside of bankruptcy.

Funders evaluating litigation trust claims examine the same core factors as any commercial claim — liability, damages, and defendant collectability — with particular attention to the target defendants' insurance coverage, since directors and officers liability insurance is frequently the primary, and sometimes only, source of actual recovery on claims against former management, making D&O policy limits and coverage disputes a central part of the underwriting analysis.

Trust governance adds a layer of complexity beyond a standard commercial funding relationship: the trust agreement and any trust oversight committee established under the plan typically govern how the trustee can enter into a funding arrangement, and funders must structure their agreements to respect that governance framework and the trustee's fiduciary duties to trust beneficiaries, rather than treating the trustee as an ordinary commercial counterparty.

A trustee exploring financing for litigation trust claims typically needs board or oversight-committee authorization before entering substantive negotiations with a funder, since the trust agreement establishing the trustee's authority frequently requires committee approval for any financing arrangement above a defined threshold or involving a material change to how trust assets are managed. Trustees are well served by reviewing the trust agreement's specific provisions on this point early, rather than negotiating substantially complete terms with a funder only to discover the oversight committee's approval process introduces delay or additional conditions the trustee had not anticipated. Building the oversight committee's review into the financing timeline from the outset, rather than treating it as a final formality, tends to produce a smoother path to closing.

The D&O insurance diligence that dominates underwriting for these claims typically requires the trustee to obtain and review the actual policies in force during the relevant conduct period, not just confirmation that coverage exists, since policy limits, exclusions, and any pending coverage disputes between the insurer and the individual defendants materially affect the claim's realistic recovery ceiling regardless of how strong the underlying liability case is. Trustees should expect a funder to ask pointed questions about whether the insurer has reserved rights or otherwise signaled an intent to dispute coverage, since a policy that is nominally in force but actively contested by the insurer presents a meaningfully different underwriting picture than an undisputed policy of the same stated limits.

Because litigation trust claims often arise from the same investigation record developed during the underlying bankruptcy case, trustees preparing to approach a funder can accelerate underwriting meaningfully by organizing that existing record — examiner reports, committee investigation findings, deposition transcripts already taken during the case — into a coherent package before initial discussions begin, rather than requiring the funder to reconstruct the factual history from the broader bankruptcy docket itself. Trustees who can point a funder directly to the specific findings supporting the claims against former officers, directors, or professionals typically move through underwriting faster than trustees who present the claims at a more general level and leave the underlying factual development to be located independently.

Because a litigation trust's beneficiaries are the creditors who received trust interests under the confirmed plan, a trustee entering into a financing arrangement typically owes those beneficiaries some level of disclosure or reporting about the arrangement's terms, consistent with the trustee's fiduciary duties under the trust agreement, even where the trust agreement does not require prior beneficiary approval of the specific transaction. Trustees should expect a funder to ask how the trust agreement handles this disclosure obligation, since a financing structure that later draws beneficiary objection over inadequate transparency can complicate the trustee's ongoing administration of the trust regardless of how favorable the underlying financing terms were.

Coordination with insurer's coverage counsel is a related but distinct workstream from the trust's own litigation counsel, since the D&O insurer defending or evaluating coverage for the individual defendants is a separate party from the trust pursuing the claim, and a funder financing the claim typically wants visibility into both the trust's litigation strategy and the current state of any coverage dispute, since a favorable liability outcome against defendants whose insurer successfully disputes coverage can leave the trust with a judgment but no practical source of recovery.

Sources: 11 U.S.C. § 1123(b)(3)(B) (retention and enforcement of estate claims under a plan of reorganization).

Criterica Capital evaluates litigation trust claims with attention to the underlying bankruptcy record, target defendants' insurance coverage, and the specific governance framework established under the confirming plan. Trustees and creditor representatives can contact our institutional team to discuss financing structures for litigation trust claims.

Discuss your matter with our institutional team.