Bankruptcy Court Fires Liquidating Trustee and Orders Litigation Funding Agreement Terminated

Executive Summary
In a case captioned In re Fresh Acquisitions, LLC (the “Debtors”), et al., Case No. 21-30721-sgj-11, pending in the United States Bankruptcy Court for the Northern District of Texas, Dallas Division (the “Court”), the post-confirmation liquidating trustee entered into a litigation funding agreement (the “LFA”) under the broad powers granted to him under a litigation trust agreement (the “Trust Agreement”) that had been approved by the Court.

Two years later, the Court discovered the LFA and demanded to know why the LFA was not disclosed to the public.  The liquidating trustee responded that disclosure was not required under the Trust Agreement and, regardless, the Court had no ability to require such disclosure post-confirmation.

On August 5, 2025, the Court, on its own motion, held that (i) a post-confirmation litigation trust could not enter into a litigation funding agreement without public disclosure and (ii) entry into the LFA was not a reasonable exercise of the liquidating trustee’s business judgment because its terms were not reasonable.  She ordered that the liquidating trustee be replaced and that the liquidating trust was no longer bound by the LFA. 

The liquidating trustee immediately appealed and filed a motion to stay (the “Stay Motion”) the Judge’s ruling.

Background
On December 31, 2021, the Court confirmed the Debtors’ chapter 11 plan of liquidation (the “Plan”).  The Plan went effective on January 4, 2022 and all of the Debtors’ assets, as defined in section 541 of the Bankruptcy Code, including “Causes of Action” (as defined in the Plan), were transferred to and vested in the liquidating trust pursuant to the Plan and the Trust Agreement. The liquidating trustee was granted standing to prosecute the Causes of Action. The Trust Agreement was filed with the Court as part of the “plan supplement” before the Plan was confirmed.

On May 3, 2023, the liquidating trustee entered into the LFA pursuant to Article IV.4(b)(xii)[1] of the Trust Agreement.  The LFA was not disclosed in reliance on Article IV.7 of the Trust Agreement.[2]

On June 5, 2025, the Court inadvertently learned about the LFA at a status conference in pending litigation, demanded to see a copy of the LFA and wanted an explanation as to why the LFA had not been disclosed. On June 16, over the objection of the liquidating trustee, the Court was provided a copy of the LFA and took issue with its name (the LFA was titled “Master Prepaid Forward Purchase Agreement”) as well as with its terms. 

The Court immediately entered an “order to show cause” to determine whether the liquidating trustee’s entry into the LFA was legally proper and also whether entry into the LFA was a valid exercise of the liquidating trustee’s reasonable business judgment.

The Court Terminates the Liquidating Trustee and the LFA
On August 5, 2025, the Court ruled that the liquidating trustee exceeded his authority by entering into the LFA without public disclosure. She also found that the liquidating trustee lacked authority to borrow money under the Trust Agreement and, even if he had authority, that entry into the LFA was not a valid exercise of his business judgment because of the “excessive” returns to the litigation funder.  As a result, she ordered that the United States Trustee replace the liquidating trustee and that the liquidating trust was no longer bound by the LFA.  She also threatened disgorgement of the fees of the liquidating trustee and his counsel. The liquidating trustee immediately appealed and filed the Stay Motion.

The Court relied on sections 105(a) and 1142(b) of the Bankruptcy Code and Bankruptcy Rule 3020(d) in ordering that the liquidating trustee be replaced. In the Stay Motion, the liquidating trustee argues the Trust Agreement (which outlines the procedures to replace the liquidating trustee) governs the replacement of the trustee, not the Bankruptcy Code. On appeal, we anticipate that the liquidating trustee will also argue that:

• While section 105(a) is a “catch all” provision of the Bankruptcy Code that allows a court to provide equitable relief, it cannot be used to contravene other provisions of the Bankruptcy Code. In this case, section 1127(b) prohibits modification of a plan after a plan has been substantially consummated.  The liquidating trustee may argue that the Trust Agreement was approved in connection with the confirmation of the Plan and therefore cannot be modified.
• While section 1142(b) allows a court to direct a debtor to execute or deliver any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan, this section is inapplicable because the Plan was consummated almost 4 years ago.
• Bankruptcy Rule 3020(d) only allows orders to administer the estate.  As the Court itself recognized, “all of the Debtors’ assets, as defined in section 541 of the Bankruptcy Code, including ‘Causes of Action,’ were transferred to and vested in the Liquidating Trust.”  This rule is therefore not applicable because there is no longer an estate to administer.

In the Stay Motion, the liquidating trustee also argues that:

• The Court lacked subject matter jurisdiction to issue her ruling because the Plan had been substantially consummated;
• The Trust Agreement and the Plan, not the Bankruptcy Code, determine whether the LFA had to be disclosed; and
• The United States Trustee does not have the authority to replace the liquidating trustee.[3]

On August 19, 2025, the Court denied the Stay Motion. As of the date of this update, the appeal is pending.

Implications of the Case
The Court was clearly frustrated with the liquidating trustee and created a remedy that may put litigation trustees and funders at risk in other transactions whereby a litigation funder is financing litigation brought by a litigation trust.

We anticipate that other defendants will attempt to use this opinion to disrupt pending litigation, especially in cases where litigation trust agreements do not specifically authorize the litigation trustee to borrow money and/or enter into litigation finance agreements. 

Until all appeals of this case are exhausted, litigation trustees may require disclosure of litigation finance agreements to avoid future challenges (and potential disgorgement of fees).  Likewise, litigation funders may want to ensure that their counterparties are clearly authorized to enter into litigation finance agreements and, if not, require disclosure of the existence of such agreements (notwithstanding the desire to keep the existence of such agreements confidential). Lastly, as to existing cases, litigation funders may want to consider the need for disclosure prior to advancing additional funds.

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[1]  Article IV.4(b)(xii) of the Trust Agreement allows the liquidating trustee to “To enter into and exercise rights under contracts that are necessary or desirable to the administration of the Liquidating Trust and execute any documents or pleadings related to the liquidation of the Liquidating Trust Asset or other matters related to the Liquidating Trust.”

[2]  Article IV.7 of the Trust Agreement provides in relevant part that the “Liquidating Trustee shall not be required to obtain any approvals from the Bankruptcy Court, any court or governmental body and/or provide any notices under any applicable laws to implement the terms of this Liquidating Trust Agreement, including, without limitation, the sale, transfer, disposal or contribution of any Liquidating Trust Assets retained by the Liquidating Trust; the prosecution, settlement or abandonment of any Causes of Action; and the negotiation, resolution or settlement of any Disputed Claims, in each case, other than as expressly required under this Liquidating Trust Agreement.”

[3] On August 14, 2025, the United States Trustee appointed a new liquidating trustee.