Liquidating trusts generally either grant the trustee a high degree of discretion or require the trustee to obtain approval of the committee on any decisions above a certain minimal level of materiality. Even where the agreement grants the trustee wide discretion, are there any actions that require committee approval?Does the trustee need to provide notice in advance of any actions?

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Worse yet is that in defending against the objection it may become clear to the objectors and the court that the author never bothered to consider the importance of the provisions contained in (or omitted from) the agreement.

In this two-part series, I will discuss some of the key terms to look for when you are drafting a liquidating trust agreement or considering whether to accept appointment as liquidation trustee after an agreement has been put in place.

Level of Oversight Does the agreement provide for a committee or other body to be established to oversee the work of the trustee? Is the trustee required to consult with or report to all of the beneficiaries?

Do the beneficiaries have rights to control the trustee’s actions?

Indemnity Issues Here there is an important issue at play, which is the level of responsibility and liability that can be thrust upon the trustee when things go wrong.

In the context of a chapter 11 plan, where most trusts arise, it may be impossible to eliminate future liability, especially where the trustee is grossly negligent.

Indemnity provisions limiting the trustee’s liability (except for those situations where a court of competent jurisdiction issues a final order no longer subject to appeal determining that the trustee was grossly negligent) should be put in place to level the playing field and deter meritless suits.

The establishment of a liquidating trust is becoming a standard provision of most chapter 11 plans.

Although they may have different names and structures, such as creditor, GUC wind down or litigation trust, liquidating LLC and many others, they typically have the same basic purpose — to serve as a vehicle into which certain (generally, non-operating) assets are contributed to be liquidated for the benefit of a specific class or classes or creditors.

Many people consider the liquidating trust agreement to be a boilerplate document requiring nothing more than finding a form used previously and changing the names.

Although this may not always result in disaster, it is nearly certain to result in difficulties down the road — and highly likely to result in objections at plan confirmation.