GENERAL
The Crown Paper Liquidating Trust (“Trust”) was formed pursuant to and created on the Effective Date, March 1, 2002, of the Second Amended Liquidating Plan of Reorganization (“Plan”) of Crown Vantage, Inc. and its wholly owned subsidiary, Crown Paper Company (“Crown Entities”) filed in their chapter 11 cases. The Plan was confirmed by order dated November 19, 2001 (“Order”) of the United States Bankruptcy Court for the Northern District of California (“Court”). The Crown Paper Liquidating Trust Agreement approved as part of the Plan (“Trust Agreement”), the Plan and the Order collectively define the rights, interests and responsibilities of the Trust. The Trust is the successor to all property interests and assumed responsibility for certain obligations of the Crown Entities as of March 1, 2002. Jeffrey H. Beck of J Beck & Associates, Inc. was appointed trustee of the Trust upon its inception. The members of the Trust Committee for the Trust are: Peg A. Sibbet of American Express Financial Corporation, Thomas Thompson of Chanin Capital Partners and Stephanie Parker of JPMorgan Chase. The Trustee and Trust Committee adopted a technical amendment to the Trust Agreement as follows: to provide the official name of the Trust as "Crown Paper Liquidating Trust" and to amend Section 3.2(a) of the Trust Agreement to provide that the commencement of litigation proceedings would not require approval of the Trust Committee.
CAUSES OF ACTION AND OTHER ASSETS TRANSFERRED TO THE TRUST
The property interests which vested in the Trust consisted primarily of two categories of litigation causes of action: claims for avoidance of pre-bankruptcy payments and other transfers believed to be preferential or fraudulent under applicable bankruptcy law (“Preference Claims”); and claims against various parties arising out of the creation and/or separation of the Crown Entities from their previous ownership and their subsequent operation, accounting and other activities (“Spin-off Claims”). The other assets of a relatively insignificant value were cash, a parcel of real property adjacent to the former plant in St. Francisville, Louisiana, an interest in mineral rights on a parcel in the Baton Rouge, Louisiana area, a small reserve of natural gas that had been purchased by the Crown Entities and refund claims on deposits of various sorts (“Miscellaneous Assets”).
OBLIGATIONS ASSUMED BY THE TRUST
The obligations assumed by the Trust include: the payment (from reserves established on the Effective Date) or settlement of disputed unpaid chapter 11 administrative and other priority claims against the Crown Entities (“Disputed Priority Claims”); the payment (for which there are no reserves) or settlement of certain unpaid chapter 11 administrative claims against the Crown Entities and post confirmation, pre-Effective Date fees and expenses of professionals of the Crown Entities, which are anticipated to exceed $4 million (“Deferred Administrative Expenses”); the payment of remaining installments or in lump sum of certain tax obligations of the Crown Entities that were to be paid after the Effective Date pursuant to the Plan which were estimated to be between $1 million and $2 million (“Tax Claims”); the sharing of asset liquidation and litigation proceeds with certain banks and other lenders pursuant to agreements between the Crown Entities and such lenders in a formula approved by the Court and incorporated in the Plan (“Lenders’ Share”); and operating, litigation and professional expenses of the Trust (“Trust Expenses”). The Lenders' Share is a formula of proceeds of most assets transferred into the Trust. The formula provides that the following share will be paid to the Lenders of proceeds of asset disposition or recovery: 100% of the first $2.3 million of net recoveries of Spin-off Claims; 0% of the first $2.3 million of gross recoveries from miscellaneous assets and Preference Claims; 50% of the recoveries over the first $2.3 million of such recoveries in both categories up to an aggregate of $27.3 million of proceeds; 30% of the recoveries over such $27.3 million of proceeds up to an aggregate of $67.3 million of proceeds; and 10% of all further recoveries over such $67.3 million of proceeds.
THE BENEFICIARIES OF THE TRUST (PRE-BANKRUPTCY CREDITORS/SHAREHOLDERS)
The beneficiaries of the Trust consist of the former pre-bankruptcy bondholders and other creditors and the former shareholders of the Crown Entities. The claims and interests of these persons were converted into beneficial interests in the Trust as of March 1, 2002 (“Beneficial Interests”). Such Beneficial Interests are not transferable and will not be evidenced by a certificate. The Trust has engaged a registrar, which will, when feasible, record in the Trust’s register the Beneficial Interest of each holder. The former publicly traded shares and bonds of Crown Vantage, Inc. were extinguished as of March 1, 2002 and must be surrendered in order for the Beneficial Interest of the former holders of such securities to be recorded. No transfers after March 1, 2002 will be recognized.
PROSPECTS FOR DISTRIBUTION TO TRUST BENEFICIARIES
The holders of Beneficial Interests are entitled to receive a distribution of remaining cash after the payment of or setting aside of a reserve for the Trust's obligations, including the Deferred Administrative Expenses, the Tax Claims, the Lenders’ Share and the Trust Expenses described as defined and described above (“Available Cash”). Pursuant to the Plan, the holders of Beneficial Interests arising from shares are not entitled to receive any distributions until holders of Beneficial Interests arising from pre-bankruptcy creditor claims, including the publicly traded bonds, are paid in full. The Crown Entities did, during their chapter 11 cases, file and resolve objections to certain claims as to which priority or secured status was asserted. However, the Crown Entities did not file or resolve objections with respect to pre-bankruptcy, non-priority claims of creditors. The Plan provides that the filing of objections to such claims is only required to take place upon the Trust having over $1 million of available cash to be distributed to holders of Beneficial Interests in the Trust. The existing obligations of the Trust as described above must be satisfied prior to the making of any distributions to Trust Beneficiaries. Therefore, it is estimated as of January 31, 2003, that the Trust must generate more than $18 million in recoveries on Preference Claims and/or Spin-off Claims before there will be $1 million of Available Cash to trigger the claims review process and a potential distribution to holders of Beneficial Interests in the Trust.
STATUS OF PREFERENCE CLAIMS AND SPIN-OFF CLAIMS
The Trust has commenced several hundred suits on Preference Claims. The Trust believes that the trials of those Preference Claims that are not settled will conclude during 2003. The exhaustion of any appeals of any judgments obtained on Preference Claims could require an additional one to two years. The Trust has commenced several suits on Spin-off claims. The Trust cannot predict at this time when the trial or trials of Spin-off Claims may occur. Motions to dismiss have been or, in all probability, will be filed by all defendants and will not be heard or ruled upon for some time. As of January 1, 2003, settlements had been negotiated and notice issued as to an aggregate of $1.5 million of settlement proceeds of Preference Claims. It is not possible to predict the outcome of the remaining Preference Claims or the Spin-off Claims or the range of any ultimate recoveries.
PENSION PLAN REVERSION LITIGATION
At the date of the creation of the trust, litigation was pending involving the reversion of funds from one of the Crown Entities several retirement plans. This particular plan had funds in excess of those needed when Crown determined to terminate the plan and purchase a commercial annuity policy to provide required benefits to the retirement plan beneficiaries. The Court had determined that Crown officials had breached their fiduciary duties in connection with the determination to terminate and purchase the annuity. As a result, the Court ordered that the retirement plan be amended to distribute any excess funds to beneficiaries of the retirement plan, rather than allow such funds to revert to Crown. The Trust has prosecuted an appeal of this order to the United States District Court for the Northern District of California. The appeal has been briefed and oral argument has been conducted. By order dated January 10, 2003, the District Court affirmed that decision. The Trust will, in all likelihood, take an appeal of the decision to the United States Court of Appeals for the Ninth Circuit.
VALUATION OF BENEFICIAL INTERESTS IN THE TRUST
The Trust is required to undertake, for tax purposes, a good faith effort to provide a valuation of assets and inform the holders of Beneficial Interests in the Trust of what value was given each such holder in exchange for that holder’s pre-bankruptcy creditor’s claim (including that arising from the publicly traded bonds) or shareholder interest as of the date of the exchange, the date of creation of the Trust, March 1, 2002. Because there is no reasonable basis to determine the value of the Preference Claims and the Spin-off Claims, the primary assets of the Trust, and because the Miscellaneous Assets have inconsequential value, the Trust has determined that, for tax purposes, the Beneficial Interests have no value. The Trust will issue a notice to those who may be holders of Beneficial Interests to provide notice of that determination.
GOING FORWARD
In due course, the Trust will provide reports and notices of significant events to the holders of Beneficial Interests. In the meantime, the Trust asks for the patience of the holders pending the outcome of the litigation matters and the completion of other Trust responsibilities. It is not anticipated at this time that any significant events will occur prior to the end of 2003, if then, that could alter the present situation in which there is no current prospect of a distribution available for holders of Beneficial Interests in the Trust.