The following discussion of changes in net assets and net assets in liquidation should be read in conjunction with "Item 8. Financial Statements and Supplementary Data" of Part II of this Annual Report, and other financial information appearing elsewhere in this Annual Report. This discussion contains "forward-looking statements" within the meaning of the Securities Act and the Exchange Act. All such forward-looking statements are based upon the Trust's current expectations and involve risks and uncertainties which may cause actual results to differ materially from those expressed or implied by the forward-looking statements. See "Cautionary Note About Forward-Looking Statements" included at the beginning of this Annual Report for a description of these risks and uncertainties. The Trust, the Remaining Debtors, the Wind-Down Entity and the Wind-Down Subsidiaries are collectively referred to in this discussion as "the Company."
Overview
Pursuant to the Plan, the Trust was formed onFebruary 15, 2019 to hold, either directly or indirectly through theWind-Down Group , the assets and equity interests formerly owned by the Debtors. Each of the real properties formerly owned by the Debtors was transferred, on the effective date of the Plan, to one of the Wind-Down Subsidiaries. The purpose of theWind-Down Group is to develop (as applicable), market, and sell those properties to generate cash. Assets formerly owned by the Debtors other than real estate assets and certain cash were transferred, on the effective date of the Plan, to the Trust. The purpose of the Trust is to receive remittances of cash from the Wind-Down Entity, to resolve disputed claims, to prosecute the Causes of Action, to pay allowed Unimpaired Claims and, subject to the payment of Trust expenses and the retention of various reserves, to make distributions of cash to Interestholders in accordance with the Plan. The Trust operates pursuant to the Plan and the Trust Agreement. The Trust was formed as aDelaware statutory trust and is administered by the Liquidation Trustee. The Wind-Down Entity, a wholly-owned subsidiary of the Trust, operates pursuant to the Plan and the Wind-Down Entity LLC Agreement. The Wind-Down Entity was formed as aDelaware limited liability company and is administered by itsBoard of Managers , one of which is the Chief Executive Officer.
As of
Number Outstanding as ofSeptember 23, 2022 June 30 ,
2022
Class A Liquidation Trust Interests 11,514,190
11,513,535
Class B Liquidation Trust Interests 675,617
675,617
For each of the classes of Liquidation Trust Interests, the number of Liquidation Trust Interests outstanding will increase to the extent that disputed claims become allowed claims. In addition, the number of Liquidation Trust Interests outstanding will decrease to the extent that disputed claims are settled by cancelling previously issued Liquidation Trust Interests. Since the Plan Effective Date throughJune 30, 2022 , theWind-Down Group has disposed of approximately 145 properties for aggregate net sale proceeds of approximately$549.04 million . As ofJune 30, 2022 , the Company owned five real estate assets (including one single-family home listed for sale) with a gross carrying value of approximately$30.97 million . Therefore, the amount of net proceeds from the sale of real estate assets in the future will be less than the amount realized from the Plan Effective Date throughJune 30, 2022 . In addition, it may take longer to sell the properties than the Company has estimated. The Company expects to complete the liquidation of its real estate assets during the fiscal year endingJune 30, 2024 . 33
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Discussion of the Company's Operations
Year ended
The following is a summary of the Consolidated Statement of Changes in Net
Assets in Liquidation for the year ended
Restricted For Qualifying All Victims Interestholders Total Net Assets in Liquidation as of beginning of year $ 3,167 $ 126,373$ 129,540
Change in assets and liabilities: Restricted for Qualifying Victims - change in carrying value of assets and and liabilities, net
318 -
318
All Interestholders- Change in carrying value of assets and liabilities, net - 47,602 47,602 Distributions (declared) reversed, net - (143,065 ) (143,065 ) Net change in assets and liabilities - (95,463 ) (95,463 ) Net Assets in Liquidation as of end of year $ 3,485 $ 30,910$ 34,395
Net assets in Liquidation - Restricted for Qualifying Victims increased by
approximately
Net assets in liquidation - All Interestholders decreased approximately$95.46 million during the year endedJune 30, 2022 . This decrease was due to an increase in the carrying value of assets and liabilities of$47.60 million , net and distributions declared of approximately$143.06 million , net (distributions declared of$145.04 million , less distributions reversed of$1.98 million for disallowed claims and forfeited distributions). The components of the changes in carrying value of assets and liabilities, net are as follows ($ in thousands): Restricted for All Qualifying Victims Interestholders Total Causes of Action, net (1) : Comerica Bank $ - $ 23,575$ 23,575 Other settlement agreements - 2,004 2,004 Sales proceeds in excess of carrying value 53 20,130 20,183 Remeasurement of assets and liabilities, net 265 1,016 1,281 Other - 877 877 Change in carrying value of assets and liabilities, net $
318 $ 47,602
(1) Net of 5% payable to the Liquidation Trustee of approximately
During the year ended
• Declared three distributions of
which totaled approximately
approximately
• Sold Forfeited Assets for net proceeds of approximately
• Completed construction of two single-family homes (642
Siena). 34
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
• Sold six single-family homes and settled two secured loans for net proceeds of
approximately
• Recorded approximately
against
• Recorded approximately
Action, net of 5% payable to Liquidation Trustee.
• Paid construction costs of approximately
single-family homes under development.
• Paid holding costs of approximately
• Paid general and administrative costs of approximately
including approximately
million of payroll and related costs and approximately
member fees and expenses. Year endedJune 30, 2021
The following is a summary of the Consolidated Statement of Changes in Net
Assets in Liquidation for the year ended
Restricted for All Qualifying Victims Interestholders Total Net assets in liquidation as of beginning of year $ - $ 264,517$ 264,517
Change in assets and liabilities: Restricted for Qualifying Victims - change in carrying value of assets and liabilities, net
3,167 - 3,167 All Interestholders- Change in carrying value of assets and liabilities, net - 644 644 Distributions (declared) reversed, net - (138,788 ) (138,788 ) Net change in assets and liabilities - (138,144 ) (138,144 ) Net assets in liquidation as of end of year $ 3,167 $ 126,373$ 129,540 Net assets in liquidation decreased approximately$138.14 million during the year endedJune 30, 2021 . This decrease was due to a reduction in the carrying value of assets and liabilities of$0.64 million , net and distributions declared of approximately$138.78 million , net (distributions declared of$139.95 million , less distributions reversed of$1.17 million for disallowed claims and cancelled interests). The components of the changes in carrying value of assets and liabilities, net are as follows ($ in thousands): 35
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Restricted for All Qualifying Victims Interestholders Total Recognition of Forfeited Assets $ 3,459 $ -$ 3,459 Settlement recoveries recognized, net (1) - 9,339 9,339 Sales proceeds in excess of carrying value - 5,180 5,180 Remeasurement of assets and liabilities, net (308 ) (12,271 ) (12,579 ) Adjustment to insurance claim receivable - (1,900 ) (1,900 ) Other $ 16 $ 296$ 312 Change in carrying value of assets and liabilities, net $ 3,167 $ 644$ 3,811
(1) Net of 5% payable to the Liquidation Trustee of approximately
During the year ended
• Declared distributions of
which totaled approximately
million and approximately
• Completed construction of two single-family homes (1966
Stradella), both of which were sold prior to construction being completed
during the year ended
it was sold in
complete construction of the property of approximately
• Accrued approximately
costs following management's determination that an additional year would be
needed to resolve the Unresolved Causes of Action and carry out the Company's
liquidating activities. The costs are primarily legal and professional fees,
payroll and payroll-related, directors' and officers' insurance and board fees
and expenses. These costs are included in accrued liquidation costs (Note 6).
• Sold six single-family homes, two lots and eleven other properties for net
proceeds of approximately
• Recognized Forfeited Assets which are restricted for Qualifying Victims of
approximately
• Recorded approximately
Action, net of 5% payable to Liquidation Trustee.
• Paid construction costs of approximately
single-family homes under development.
• Paid holding costs of approximately
• Paid general and administrative costs of approximately
including approximately
million of payroll and related costs and approximately
member fees and expenses. 36
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Liquidity, Capital Resources and Uses of Liquidity
Liquidity
The Company's only sources for meeting its capital requirements are its cash and cash equivalents, proceeds from the sale of its real estate assets, collection of escrow receivables, recoveries on Causes of Action and from the sale of Forfeited Assets1. The Company's primary uses of funds are and will continue to be for distributions, development costs, including accrual for warranty claims, holding costs and general and administrative costs, all of which the Company expects to be able to adequately fund over the next twelve months from its primary sources of capital.
Capital Resources
In addition to consolidated cash and cash equivalents as of
• Sales of Real Estate:
selling its real estate assets, all of which are held for sale. One
single-family home was listed for sale as of
2022, the Company owned a total of five real estate assets with a gross
carrying value of approximately
carrying value is concentrated in one single-family home. During the year ended
loans for net proceeds of approximately
the year ended
on the remaining assets of the Company, future net proceeds will be significantly less. • Escrow Receivables: As ofJune 30, 2022 , theWind-Down Group had escrow
receivables relating to three single-family homes that had been sold and for
which it was completing punch list items and/or awaiting the issuance of a
certificate of occupancy. In
received for one of the single-family homes and$2.5 million of escrow receivable was collected.
• Causes of Action Recoveries: During the year ended
recognized approximately
Action. The recoveries for the year ended
no assurance that the amounts the Company recovers from settling Causes of
Action in the future will be consistent with the amount recovered during the
year endedJune 30, 2022 .
• Forfeited Assets: Forfeited Assets consist of cash and other assets (jewelry,
art, clothing, handbags, shoes, and a car). During the year ended
2022, the Trust sold some of its Forfeited Assets for net proceeds of approximately$0.61 million .
Uses of Liquidity
The primary uses of the Company's liquidity are to pay (a) distributions payable, (b) development costs, including accrual for warranty claims, (c) holding costs, including maintenance and repair costs, and (d) general and administrative costs. As ofJune 30, 2022 , the Company's total liabilities were approximately$103.42 million , which includes distributions payable of approximately$68.77 million . The estimated costs recorded as ofJune 30, 2022 may not be indicative of the costs paid in future periods, which may be significantly higher. -------------------------------------------------------------------------------- 1 The Trust is required to distribute the net sale proceeds from liquidating the Forfeited Assets to the Qualifying Victims. Qualifying Victims are the former holders of Class 3 and Class 5 Claims and their permitted assigns. Former holders of Class 4 Claims are not Qualifying Victims. Because of the requirement to distribute the net sale proceeds of the Forfeited Assets to the Qualifying Victims only, the Forfeited Assets as ofJune 30, 2022 are presented in the consolidated statement of net assets as restricted net assets in liquidation. As ofJune 30, 2022 , 11,436,675 of the 11,515,790 Class A Interests were held by Qualifying Victims. Of the 90,793 Class A Interests relating to unresolved claims as ofJune 30, 2022 , 3,449 would be held by Qualifying Victims. 37
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) Given current cash balances, projected sales, Causes of Action recoveries, distributions declared, and expected cash needs, the Company does not expect a deficiency in liquidity in the next twelve months. Due to the uncertain nature of future net sales proceeds, recoveries and costs to be incurred, it is not possible to be certain that the current liquidity will be adequate to cover all future financial needs of the Company. Creating contingent obligation agreements and/or seeking methods to reduce professional costs, including legal fees, and administrative costs are strategies that could be undertaken to address liquidity issues should they arise. These strategies could impact the Company's ability to maximize recoveries from the settlement of Unresolved Causes of Action.
Distributions
Distributions will be made at the sole discretion of the Liquidation Trustee in accordance with the provisions of the Plan and the Trust Agreement. As ofSeptember 23, 2022 , the Liquidation Trustee has declared ten distributions to the Class A Interestholders. The distributions include a cash distribution on account of the then-allowed claims and a deposit is made into a restricted cash account for amounts that are or may become payable (a) in respect of Class A Interests that may be issued in the future upon the allowance of unresolved bankruptcy claims, (b) in respect of Class A Interests on account of recently allowed claims, (c) for holders of Class A Interests who failed to cash checks mailed in respect of prior distributions, (d) for distributions that were withheld due to pending avoidance actions and (e) for holders of Class A Interests for which the Trust is awaiting further beneficiary information. As claims are resolved, additional Class A Interests may be issued or cancelled (see "Part 1, Item 1. Business, D. Plan Provisions Regarding the Company, 2. Treatment under the Plan of holders of claims against and equity interests in the Debtors and 3. Assets and liabilities of the Company"). Therefore, the total amount of a distribution declared may change between the date declared and the date paid. The Liquidation Trustee will continue to assess the adequacy of funds held and expects to make additional cash distributions on account of Class A Interests, but does not currently know the timing or amount of any such distribution(s). Sections 7.6 and 7.18 of the Plan provide that distributions that have not been cashed within 180 calendar days of their issuance shall be null and void and the holder of the associated Liquidation Trust Interests "shall be deemed to have forfeited its rights to any reserved and future Distributions under the Plan," with such amounts to become "Available Cash" of the Trust for all purposes.
On
February 1, 2022 , the Trust sent letters to the holders of the Class A Interests who had failed to cash distribution checks in respect of prior distributions, which checks were issued more than 180 days prior to the date of the letter. The letter informed each recipient that, unless the Trust was contacted on or beforeFebruary 28, 2022 , such recipient's reserved and future distributions would be deemed forfeited in accordance with the Plan The Trust provided this final notice simply as a one-time courtesy and reserves its rights to strictly enforce the Plan's forfeiture provisions, and any other provision of the Plan, against any person (including any recipient of the final notice) at any time in the future, without further notice. The following tables summarize the distributions declared, distributions paid and the activity in the restricted cash account for the periods fromFebruary 15, 2019 (inception) throughJune 30, 2022 and fromFebruary 15, 2019 throughSeptember 23, 2022 : 38
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) During the Period from During the Period from February 15, 2019 (inception) through February 15, 2019 (inception) through June 30, 2022 ($ in Millions) September 23, 2022 ($ in Millions) Date $ per Restricted Cash Total Restricted Cash Declared Class A Interest Total Declared Paid Account Declared Paid Account Distributions Declared First3/15/2019 $ 3.75 $ 44.70 $ 42.32 $ 2.38$ 44.70 $ 42.32 $ 2.38 Second1/2/2020 4.50 53.43 51.19 2.24 53.43 51.19 2.24 Third3/31/2020 2.12 25.00 24.19 0.81 25.00 24.19 0.81 Fourth7/13/2020 2.56 29.97 29.24 0.73 29.97 29.24 0.73 Fifth10/19/2020 2.56 29.95 29.20 0.75 29.95 29.20 0.75 Sixth1/7/2021 4.28 50.01 48.67 1.34 50.01 48.67 1.34 Seventh (a)5/13/2021 2.58 30.02 29.33 0.69 30.02 29.33 0.69 Eighth10/8/2021 3.44 40.02 39.14 0.88 40.02 39.14 0.88 Ninth2/4/2022 3.44 39.98 39.15 0.83 39.98 39.15 0.83 Tenth (b)6/15/2022 5.63 65.04 - - 65.02 64.19 0.83 Total/Subtotal $ 34.86 $ 408.12 $ 332.43 10.65$ 408.10 $ 396.62 11.48 Distributions Returned / (Reversed) Disallowed (c) (3.64 ) (6.27 ) Returned (d) 0.74 0.74 Forfeited (e) (1.16 ) (1.15 ) Subtotal (4.06 ) (6.68 ) Distributions Paid from Reserve Account (f) (2.86 ) (3.57 ) Distributions Payable: as of 6/30/2022: as of 9/23/2022: Subtotal 3.73 1.23 Tenth distribution 65.04 (b) - Total distributions payable $ 68.77 $ 1.23
(a) The seventh distribution included the cash the Trust received from Fair
Funds.
(b) On
(c) As a result of claims being disallowed or Class A Interests cancelled.
(d) Distribution checks returned or not cashed.
(e) Distributions forfeited as Interestholders did not cash checks that were over
180 days old.
(f) Paid as claims are allowed or resolved.
(g) Included above. Management believes that, since its inception, the Wind-Down Entity has made substantial progress toward completion of its liquidation activities and is nearing the end of the liquidation of its real estate portfolio. Holders of Liquidation Trust Interests are advised that future distributions from the Trust will be limited. Once the Company's remaining real property assets have been liquidated and the net proceeds resulting therefrom, net of reserves, have been distributed, further distribution(s) will be materially reliant on future recoveries from litigation, which are uncertain and the amount and timing of which are difficult to determine.
Contractual Obligations
As of
39
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Critical Accounting Policies and Practices
The Company's consolidated financial statements are prepared in accordance withU.S. GAAP. The accounting policies and practices that the Company believes are the most critical are discussed below. These accounting policies and practices require management to make decisions on subjective and/or complex matters that may inherently be uncertain. Estimates are required to prepare the consolidated financial statements in conformity withU.S. GAAP. Significant estimates, judgments and assumptions are required in a number of areas, including, but not limited to, the sales price of real estate assets, selling costs, development costs, holding costs, potential warranty claims, general and administrative costs to be incurred until the completion of the liquidation of the Company and estimated reserves for contingent liabilities. In many instances, changes in the accounting estimates are likely to occur from period to period. Actual results may differ from the estimates. The Company believes the current assumptions and other considerations used in preparing the consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in the Company's consolidated financial statements, the resulting changes could have a material adverse effect on the Company's net assets in liquidation.
Liquidation Basis of Accounting
Under Liquidation Basis of Accounting, all assets are recorded at their estimated net realizable value or liquidation value, which represents the estimated amount of net cash that will be received upon the disposition of the assets (on an undiscounted basis). Liabilities are measured in accordance withU.S. GAAP that otherwise applies to those liabilities. The Company has not recorded any amount from the future settlement of Unresolved Causes of Action orFair Fund recoveries in the accompanying consolidated financial statements because they cannot be reasonably estimated.
Valuation of Real Estate
The measurement of real estate assets held for sale is based on current contracts (if any), estimates and other indications of sales value, net of estimated selling costs. To determine the value of real estate assets held for sale, the Company considered the three traditional approaches to value (cost, income and sales comparison) commonly used by the real estate appraisal community. The applicability and relevancy of each valuation approach as applied may differ by asset. In most cases, the sales comparison approach was accorded the greatest weight. This approach compares a property to other properties with similar characteristics that have recently sold. To validate management's estimate, the Company also considers opinions from qualified real estate professionals and local real estate brokers and, in some cases, obtained third party appraisals. Accrued Liquidation Costs The estimated costs associated with implementing and completing the Company's plan of liquidation are recorded as accrued liquidation costs. The Company has also recorded the estimated development costs to be incurred to prepare the assets for sale as well as the estimated holding, maintenance and repair costs to be incurred until the projected sale date and the estimated general and administrative costs to be incurred until the completion of the liquidation of the Company, and estimated reserves for contingent liabilities.
Changes in Carrying Value
On a quarterly basis, the Company reviews the estimated net realizable values, liquidation costs and the estimated date of the completion of the liquidation of the Company and records any significant changes. The Company will also revalue an asset when it is under contract for sale and the buyer's contingencies have been removed. During the period that this occurs, the carrying value of the asset and the estimated closing and other costs will be adjusted, if necessary. If the Company has a change in its plan for the disposition of an asset, the carrying value will be adjusted to reflect this change in the period that the change is approved. The change in value may include a change to the accrued liquidation costs related to the asset. Estimates are required to prepare the consolidated financial statements in conformity with US GAAP. Significant estimates, judgments and assumptions are required in a number of areas, including, but not limited to, the sales price of real estate assets, selling costs, development costs, holding costs and general and administrative costs to be incurred until the completion of the liquidation of the Company and estimated reserves for contingent liabilities. In many instances changes in the accounting estimates are likely to occur from period to period. Actual results may differ from the estimates. The Company believes that the current assumptions and other considerations used in the consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in the Company's consolidated financial statements, the resulting changes could have a material adverse effect on the Company's net assets in liquidation. 40
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Part II Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) All changes in the estimated liquidation value of the Company's assets, real estate assets held for sale and other assets, and liabilities are reflected as a change to the Company's net assets in liquidation.
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