Hechinger Liquidation Trust 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Check one

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended December 31, 2006 or

o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 000-50160

HECHINGER LIQUIDATION TRUST

(Exact name of Registrant as specified in its charter)

Delaware	52-7230151
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

405 East Gude Drive, Suite 206, Rockville, Maryland	20850
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (301) 838-4311

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer oAccelerated filer oNon-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No x

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes x No o

HECHINGER LIQUIDATION TRUST

INDEX TO FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006

Description		Page
PART I. FINANCIAL INFORMATION:
Item 1.	Financial Statements
	Unaudited Statements of Net Assets in Liquidation	3
	Unaudited Statements of Changes in Net Assets in Liquidation	4
	Unaudited Statements of Cash Receipts and Disbursements	5
	Notes to Unaudited Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and
	Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
PART II. OTHER INFORMATION:
Item 1.	Legal Proceedings	18
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	20
Item 6.	Exhibits	20
SIGNATURES		21
INDEX TO EXHIBITS		22

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Hechinger Liquidation Trust

Unaudited Statements of Net Assets in Liquidation

($ in thousands)

	As of December 31, 2006		As of September 30, 2006
Assets
Cash and cash equivalents
Cash designated as available for distribution
to holders of impaired claims	$	2,872	$	2,872
Reserved cash		10,850		11,193
Other cash		4,957		4,658
Total cash and cash equivalents		18,679		18,723
Preference receivables (net of costs of
recovery of $135 and $147,
respectively)		867		853
Other assets		598		674
Total assets		20,144		20,250
Liabilities
Unimpaired and convenience claims payable		1,337		1,337
Uncashed claims checks		431		431
Distributions payable		424		424
Estimated costs of liquidation
Wind-down reserve		1,383		1,682
Litigation reserve		327		371
Total liabilities		3,902		4,245
Net Assets in Liquidation	$	16,242	$	16,005

See accompanying notes to unaudited financial statements.

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Hechinger Liquidation Trust

Unaudited Statements of Changes in Net Assets in Liquidation

($ in thousands)

	For the three		For the three
	months ended		months ended
	December 31, 2006		December 31, 2005
Increase/(decrease) in Net Assets in Liquidation
Increase/(decrease) in estimated fair value
of preference receivables, net	$	1	$	(31	)
Interest income		235		234
Other increases		1		8
Net increase in Net Assets in Liquidation
before distributions authorized		237		211
Distributions authorized		-		(6,626	)
Net increase/(decrease) in Net Assets in Liquidation
after distributions authorized		237		(6,415	)
Net Assets in Liquidation at beginning of period		16,005		26,865
Net Assets in Liquidation at end of period	$	16,242	$	20,450

See accompanying notes to unaudited financial statements.

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Hechinger Liquidation Trust

Unaudited Statements of Cash Receipts and Disbursements

($ in thousands)

	For the three			For the three
	months ended			months ended
	December 31, 2006			December 31, 2005
Cash receipts
Collection of committee action settlement	$	-		$	7,000
Preference collections, before
costs of recovery		77			115
Interest income		235			234
Other receipts		1			8
Total cash receipts		313			7,357
Cash disbursements
Costs of liquidation
Operating expenses		247			324
Legal and professional fees
Litigation		45			167
Preference recoveries		13			26
Liquidation Trust operations		52			85
Voided claims checks, net of reissues		-			2
Total cash disbursements		357			604
(Decrease)/increase in cash and cash equivalents
before distributions paid		(44	)		6,753
Distributions paid		-			6,426
(Decrease)/increase in cash and cash equivalents		(44	)		327
Cash and cash equivalents
at beginning of period		18,723			26,649
Cash and cash equivalents
at end of period	$	18,679		$	26,976

See accompanying notes to unaudited financial statements.

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Hechinger Liquidation Trust

Notes to Unaudited Financial Statements

1.Background and Basis of Presentation

Background

Hechinger Liquidation Trust (the “Liquidation Trust”) was established effective October 26, 2001 (the “Effective Date”) in accordance with the Revised First Amended Consolidated Plan of Liquidation (the “Plan”) for Hechinger Investment Company of Delaware, Inc. and affiliates (the “Debtors”), confirmed by the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) by an order dated October 5, 2001.

The Liquidation Trust has no authority to engage in any trade or business. The purpose of the Liquidation Trust is to (i) liquidate any and all remaining assets of the Debtors; (ii) pursue causes of action assigned to the Liquidation Trust, including preference, fraudulent conveyance and other avoidance actions; (iii) resolve, either consensually or through litigation, all disputed claims asserted against the Debtors (“Disputed Claims”), pursuant to the Plan; and (iv) make all distributions required under the Plan (“Distributions”), and payments to holders of claims allowed under the terms of the Plan (“Allowed Claims” and, together with the Disputed Claims, the “Claims”). The Liquidation Trust will terminate upon the earlier of (a) the fulfillment of its purpose by the liquidation of all of its assets and the distribution of the proceeds of the liquidation thereof in accordance with the Plan, or (b) by October 26, 2007, unless the Bankruptcy Court approves a further extension of the term.

Pursuant to the Bankruptcy Code, certain types of Allowed Claims will be paid in full under the Plan. Such Claims are therefore referred to as “Unimpaired Claims.” The Plan defines which types of Claims are paid in full.

The Liquidation Trust exists primarily for the benefit of the majority of claimants who will not be repaid in full for the amounts the Debtors owed them as of the bankruptcy filing. These Claims are referred to as “Impaired Claims” because the rights of the claimants have been impaired by the Debtors’ bankruptcy. Each holder of an Allowed Claim in the Plan’s Class 4A (Senior Unsecured Claims), Class 4B (General Unsecured Claims), and Class 5 (Subordinated Debentures Claims) (each a “Class”) is deemed to hold a pro rata beneficial interest (the “Beneficial Interests”) in the Liquidation Trust based upon the amount of their Allowed Impaired Claim as compared to the total amount of all Impaired Claims ultimately Allowed. When and to the extent Disputed Impaired Claims become Allowed Impaired Claims, holders of such Claims become holders of Beneficial Interests in accordance with the Plan.

The holders of Beneficial Interests receive all remaining net proceeds of the Liquidation Trust, if any, after the expenses and all creditors of the Liquidation Trust, including Allowed Unimpaired and Convenience Claims (certain small Claims to be paid at 7.5% of their Allowed amounts in accordance with the Plan) are paid, and all contingencies are resolved. Holders of each Class of Beneficial Interests (i.e., each Class of Impaired Claims) have the same rights, except with respect to payment of Distributions.

Through December 31, 2006, the Liquidation Trust has authorized Distributions to holders of Beneficial Interests (i.e., to holders of Allowed Impaired Claims) of 10.2911% of the Allowed amount of the Impaired Claims, and established a reserve of 10.2911% of the estimated amount of Disputed Impaired Claims, based on the estimated amount of such Claims approved by the Bankruptcy Court for reserve purposes (the “Disputed Impaired Claims Reserve”).

Basis of Presentation

The Liquidation Trust’s financial statements have been prepared using the liquidation basis of accounting. Under this method of accounting, the Statements of Net Assets in Liquidation reflect all assets and liabilities, including the projected total cost of liquidating the assets and winding down the affairs of the Liquidation Trust, at estimated fair value. Unimpaired Claims, to be paid in full, are reflected in the Statements of Net Assets in Liquidation as liabilities at estimated aggregate settlement amounts. The unpaid amount of the authorized Distributions to holders of Allowed Impaired Claims is also reflected as a liability. In addition, liabilities include loss contingency accruals for losses considered probable and estimable. The Statements of Changes in Net Assets in Liquidation primarily reflect authorized Distributions to holders of Beneficial Interests and changes in the estimated fair value of the Liquidation Trust’s assets and liabilities, including changes resulting from significant events in, or the resolution of, litigation pursued by the Liquidation Trust. The Liquidation Trust’s fiscal year ends on September 30.

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The accompanying unaudited financial statements reflect all adjustments, consisting only of normal recurring adjustments that are, in the opinion of the Liquidation Trustee, necessary for a fair statement of the results for the interim periods presented. Such financial statements and these notes thereto should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, 2006 and September 30, 2005, and for the fiscal years ended September 30, 2006, September 30, 2005 and September 30, 2004, and the notes thereto.

The amounts shown in this document are rounded and are therefore approximate.

2. Significant Accounting Policies

Use of Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires the Liquidation Trustee to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results are likely to differ from those estimates and those differences may be significant.

Cash and Cash Equivalents

The Liquidation Trust considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Liquidation Trust holds substantially all cash balances in operating and investment accounts in excess of federally insured limits. Cash is classified as: Designated as Available for Distribution to Holders of Impaired Claims, Reserved Cash and Other Cash (see Note 3).

Taxes

The Liquidation Trust is intended to qualify as a liquidating trust for federal income tax purposes, and therefore should be taxable as a grantor trust. The holders of Beneficial Interests are treated as grantors; accordingly, their pro rata share of all items of income, gain, loss, deduction and credit is included in the income tax returns of the holders of Beneficial Interests.

The Liquidation Trust pays applicable taxes on the taxable net income and gain allocable to holders of Disputed Impaired Claims on behalf of such holders. When such Disputed Claims are ultimately resolved, holders whose Disputed Claims were determined to be Allowed Claims receive Distributions from the Liquidation Trust net of taxes, if any, which the Liquidation Trust previously paid on their behalf.

The Liquidation Trust incurs no taxable income or gain on its own behalf; therefore, no tax provision is recorded in the financial statements of the Liquidation Trust.

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3.Cash and Cash Equivalents

Cash is invested in highly liquid investments with a maturity of three months or less, and in accordance with Section 345 of the Bankruptcy Code or as otherwise permitted by order of the Bankruptcy Court. Under the terms of the Plan, the Liquidation Trust is not required to segregate funds for reserves (see Note 10).

Cash Designated as Available for Distribution to Holders of Impaired Claims (“Available Cash”) is designated solely to assure the availability of funds for payment to holders of Impaired Claims who have not received their Distributions (see Notes 8 and 11).

Available Cash as of December 31, 2006 and as of September 30, 2006 consists of:

($ in thousands)
Distributions payable	$	424
Reserve for remaining disputed impaired
claims at 10.2911%		2,448
Total available cash	$	2,872

Reserved Cash is held by the Liquidation Trust to assure payment of the Liquidation Trust’s obligations in accordance with the Plan. Under the terms of the Plan, Reserved Cash is intended to provide for (a) operating expenses of the Liquidation Trust, (b) estimated payments to holders of Allowed Unimpaired and Convenience Claims in accordance with the Plan, and (c) payments which may become necessary if and as Disputed Unimpaired Claims become Allowed, or if certain specific contingencies should occur. See Note 10 for details of specific reserves and their related amounts.

Other Cash is cash and cash equivalents not designated to a specific reserve or fund.

4.Preference Receivables

The Liquidation Trust’s preference receivables are reflected in the accompanying Statements of Net Assets in Liquidation at their estimated fair value of $0.9 million, net of estimated costs of recovery of $0.1 million, as of December 31, 2006 and as of September 30, 2006. Most of the value of preference receivables consists of the sole remaining preference recovery action being actively pursued. During June 2005, following the February 2005 trial of this action, the Bankruptcy Court awarded the Liquidation Trust $1.0 million. During March 2006, the District Court upheld the Bankruptcy Court ruling in its entirety. Although the defendant has appealed the affirmation by the District Court to the Court of Appeals, the Liquidation Trust believes that ultimate collection of the full award is likely.

The fair value of Liquidation Trust assets is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. The eventual net realizable value of preference receivables is likely to differ from their estimated net fair value and these differences may be significant.

5.Other Assets

Other assets consist of receivables from various former vendors, service providers, and others. As of December 31, 2006 and as of September 30, 2006, other assets included a $0.6 million settlement receivable from certain former counsel to the Debtors, which was collected subsequent to December 31, 2006. In addition, as of September 30, 2006, other assets included $0.1 million of stock (received in partial settlement of a preference claim) accounted for at its market value and sold shortly after year-end.

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Other assets are reported at estimated net fair value, based on either the amount paid or the estimated recoverable amount, whichever is more determinable. The eventual net realizable value of these assets is likely to differ from their estimated net fair value and these differences may be significant.

6.Unimpaired and Convenience Claims Payable

Unimpaired Claims payable represents the estimated aggregate settlement amount of Unimpaired Claims against the Debtors prior to the Effective Date of the Plan, which will be paid out at 100% of their Allowed amount. Such Claims are valued at the Liquidation Trust’s best estimate of the amount that will ultimately be allowed. Convenience Claims, also included in this classification, are not significant.

Unimpaired and Convenience Claims payable as of December 31, 2006 and as of September 30, 2006 consists of:

($ in thousands)

Allowed unimpaired claims	$	1,335
Estimated fair value of disputed unimpaired claims		-
Convenience claims		2
Total	$	1,337
Number of disputed unimpaired claims		3

Pursuant to the Plan, certain fees and expenses which Kmart Corporation (“Kmart”) incurred in connection with the Debtors’ bankruptcy filing were allowed as an Unimpaired Claim. Allowed Unimpaired Claims as of December 31, 2006 and September 30, 2006 include this Claim, which has not yet been substantiated by Kmart as required by the Plan, at its estimated amount of $1.3 million.

The amount asserted by the holders of the remaining Disputed Unimpaired Claims is insignificant as of December 31, 2006 and September 30, 2006. The Liquidation Trust believes that the likelihood of paying any of these Claims is remote and anticipates that each of these Claims will be expunged or waived; accordingly, no liability has been recorded with respect to the remaining Disputed Unimpaired Claims.

Unimpaired Claims are valued by reviewing the facts available to the Liquidation Trust, including the Debtors’ records and information submitted by the claimants, and estimating the ultimate settlement value of the Claims. The fair value of Unimpaired Claims payable is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. However, no assurance can be given as to the ultimate allowance, disallowance or settlement of the remaining Disputed Unimpaired Claims, individually or in the aggregate.

7.Uncashed Claims Checks

Pursuant to the Plan, any Claims payments and Distributions which remain uncashed for 90 days following their issuance date are forfeited to the Liquidation Trust for distribution to other holders of Allowed Claims. Pending a final order from the Bankruptcy Court, the Liquidation Trust has treated such items as a liability. Such checks currently may be reissued upon timely request of the payee, subject to applicable fees.

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8.Distributions Payable

Distributions payable represents the amount of authorized Distributions which the Liquidation Trust has been unable to pay to holders of Allowed Impaired Claims. A number of holders of such Allowed Claims, while otherwise eligible for Distributions, have either not yet provided all information necessary for payment; were subject to an offsetting claim by the Liquidation Trust which had not yet been resolved; or, because they had not cashed a previous Distribution check, were not paid any subsequent Distributions. Until all such issues are resolved, the holder of an Allowed Claim may not receive a Distribution.

9.Estimated Costs of Liquidation

The Wind-down Reserve and Litigation Reserve described below together constitute the estimated costs of liquidation in the accompanying Statements of Net Assets in Liquidation.

Under the Plan, the Liquidation Trust was required to establish and fund a reserve to pay administration costs and costs of holding and liquidating the Liquidation Trust’s assets (the “Wind-down Reserve”). Substantially all of the day-to-day operations of the Liquidation Trust were terminated during June 2005; however, provision has been made for necessary management oversight and administrative, legal and accounting processes to continue through the current estimated termination date of February 2008. These final items include resolution of the remaining Disputed Claims and all litigation (excluding the costs provided for in the Litigation Reserve), a final Distribution, if applicable, and filings with regulatory authorities and with the Bankruptcy Court.

Pursuant to the Plan, the Liquidation Trust also established and funded a reserve to pay the costs of pursuing certain actions, including the case referred to as the “Committee Action” (the “Litigation Reserve”). The amount of the Litigation Reserve as of December 31, 2006 and September 30, 2006 is intended to fund the appeal of the District Court’s Summary Judgment Decision and related judgment with respect to the Committee Action in the Court of Appeals (see Note 12).

The fair value of the estimated costs of liquidation is reassessed at least quarterly and adjustments to estimated fair values are reflected in the period in which they become known. Actual costs are likely to differ from the estimated costs and these differences may be significant.

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10. Bankruptcy Reserves Required

The reserves for which Reserved Cash is maintained consist of the following:

($ in thousands)
	As of		As of
	December 31, 2006		September 30, 2006
Liability reserves
Wind-down	$	1,383	$	1,682
Litigation		327		371
Unimpaired and convenience claims		1,337		1,337
Uncashed claims checks		431		431
Total liability reserves		3,478		3,821
Contingency reserves
Litigation appeals provision		4,000		4,000
Excess disputed unimpaired claims		300		300
Preference settlement claims		72	��	72
Minimum reserve		3,000		3,000
Total contingency reserves		7,372		7,372
Total reserves	$	10,850	$	11,193

The litigation appeals provision represents cash held in reserve to allow the Liquidation Trust to pursue or defend a future trial and appeals of the Committee Action. The Liquidation Trustee designated this contingency reserve after concluding that future cash receipts of the Liquidation Trust might not be sufficient to fund such actions prospectively. No liability has been accrued in connection with such possible future actions because the Liquidation Trust has not determined that any such action required will necessitate additional funding of the Litigation Reserve.

The minimum reserve, established pursuant to the Plan and intended to assure adequate liquidity for the Liquidation Trust, is to be maintained, subject to reduction by an order of the Bankruptcy Court, until the Liquidation Trust makes a final Distribution, if any, or is otherwise terminated.

11.Impaired Claims

The Liquidation Trust’s estimate of Impaired Claims as of December 31, 2006 and as of September 30, 2006 consists of:

($ in thousands)
Allowed impaired claims	$	709,770
Estimated fair value of disputed impaired claims		10,584
Total estimated impaired claims	$	720,354
Asserted value of disputed impaired claims	$	48,682
Number of disputed impaired claims		12

Subsequent to December 31, 2006, the Bankruptcy Court approved a stipulation settling two Disputed Impaired Claims, asserted in the total amount of $26.0 million, at their estimated fair value of $2.0 million as of December 31, 2006 and September 30, 2006.

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Distributions to holders of Allowed Impaired Claims have been authorized, through December 31, 2006, in the cumulative amount of 10.2911% of the Allowed amount of the Impaired Claims. A total of $70.9 million has been paid to holders of Allowed Impaired Claims through December 31, 2006. In conjunction with the authorized Distributions, as of December 31, 2006, the Liquidation Trust held a total of $2.9 million of Available Cash for Distribution to holders of Impaired Claims, including the $2.4 million Disputed Impaired Claims Reserve for Distribution to holders of Disputed Impaired Claims should such Disputed Claims become Allowed, and $0.4 million in Distributions payable to holders of Allowed Impaired Claims (see Notes 3 and 8). The Disputed Impaired Claims Reserve is determined based on the cumulative Distribution rate and on the estimated amount, approved by the Bankruptcy Court for reserve purposes, of each remaining Disputed Impaired Claim.

No assurance can be given as to the ultimate allowance, disallowance or settlement of the remaining Disputed Impaired Claims, individually or in the aggregate.

12.Contingencies

Litigation and Other Proceedings on behalf of the Liquidation Trust

Federal Court Case

The Liquidation Trust is pursuing an action referred to as the “Committee Action” on behalf of its beneficiaries in the United States District Court for the District of Delaware (the “District Court”), and in the United States Court of Appeals for the Third Circuit (the “Court of Appeals”). This action arose from a business combination among the Debtors during 1997 and the related financing (the “1997 Transactions”), and was filed against certain parties that arranged, approved, or financed the 1997 Transactions. The 1997 Transactions were arranged and/or approved by Leonard Green & Partners, L.P. and related entities and the controlling shareholders and directors of the Debtors (including the “Officer and Director Defendants”) (collectively, the “Insiders”). The 1997 Transactions were financed by a series of secured credit agreements, under which the Chase Manhattan Bank and Fleet Retail Finance Inc., formerly BankBoston Retail Finance Inc. (“Fleet”) served as agent for the pre-petition lender group (the “Pre-petition Lenders”).

An amended complaint with respect to the Committee Action was filed in the United States Bankruptcy Court for the District of Delaware on April 3, 2001, as Civil Action No. 00-840-RRM and was styled “The Official Committee of Unsecured Creditors of Hechinger Investment Company of Delaware, Inc., etal., Plaintiff, v. Fleet Retail Finance Group, The Chase Manhattan Bank, Back Bay Capital Funding, LLC, each individually and as agent for various parties to credit agreements described herein, Leonard Green & Partners, L. P., Green Equity Investors II, L. P., John W. Hechinger, Jr., John W. Hechinger, S. Ross Hechinger, Ann D. Jordan, Robert S. Parker, Melvin A. Wilmore, Alan J. Zakon, Kenneth J. Cort, W. Clark McClelland, June R. Hechinger, Nancy Hechinger Lowe, Sally Hechinger Rudoy, Catherine S. England, Richard England, Jr., June L. P., and Jarsan Associates L. P., Defendants.”

The Committee Action, initially filed by the Official Committee of Unsecured Creditors appointed for the Debtors, and assigned to the Liquidation Trust pursuant to the Plan, alleges that the defendants carried out the 1997 Transactions despite their knowledge that Hechinger was insolvent at the time, and asserts fraudulent conveyance and/or breach of fiduciary duty claims against the Insiders, seeking recovery of at least $127 million in damages. It also asserts fraudulent conveyance claims against the Pre-petition Lenders and challenges the repayment of the Pre-petition Lenders using the proceeds of a post-petition loan.

During July 2005, the District Court issued a memorandum opinion and order on pending summary judgment motions (collectively, the “Summary Judgment Decision”), dismissing the Liquidation Trust’s claims against Fleet, General Electric Credit Corp. (“GECC”), and certain other defendants in the Committee Action. During August 2005, the District Court substantively denied the Liquidation Trust’s motion for reconsideration of the Summary Judgment Decision. During December 2005, the Liquidation Trust filed its notice of appeal from the Summary Judgment Decision and related judgment in the Committee Action with the Court of Appeals.

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During September 2005, the Liquidation Trust reached a settlement agreement with the Officer and Director Defendants. Under the terms of the agreement, the $7.0 million settlement amount was paid to the Liquidation Trust during October 2005, and the Liquidation Trust dismissed the Committee Action as against the Officer and Director Defendants.

A March 2006 mediation ordered and conducted by the Court of Appeals did not result in a settlement among the remaining parties to the Committee Action. The Liquidation Trust continued to negotiate with some of the remaining parties, reaching an agreement with both Fleet and GECC during August 2006. Under the terms of the Fleet Settlement and upon the Bankruptcy Court’s approval of the related stipulation, the Liquidation Trust paid Fleet $8.3 million of the $11.0 million Fleet Reserve, Fleet and GECC released any claim to the balance of the Fleet Reserve, and the Liquidation Trust, Fleet and GECC released each other from all further claims.

In accordance with the procedures set forth in the Plan, approval of each settlement was obtained from the Committee that represents the interests of the beneficiaries of the Liquidation Trust. These settlements have no effect on the Liquidation Trust's claims against any other defendant in the Committee Action.

The various remaining defendants are vigorously opposing this action, for which the Court of Appeals has not yet issued a scheduling order. There is no assurance that the Liquidation Trust will prevail on appeal. While the Liquidation Trust is vigorously pursuing this litigation with the intent to obtain a very substantial recovery, the Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

Bankruptcy Court Case

As of December 31, 2006, only one significant preference litigation action continued - of approximately 1,800 preference litigation actions filed by the Debtors in 2001. During March 2006, the District Court upheld the Bankruptcy Court’s award to the Liquidation Trust of $1.0 million. The defendant has further appealed the District Court affirmation to the Court of Appeals. A June 2006 mediation ordered and conducted by the Court of Appeals did not result in a settlement, and the appeal process continued as of December 31, 2006. Oral argument is scheduled for April 2007 and a Court of Appeals decision in this case is expected in late 2007. Prosecution of all other significant preference litigation has been completed.

Litigation and Other Proceedings Against the Liquidation Trust

Settling Claims filed with the Bankruptcy Court is the ordinary course of business for the Liquidation Trust. As of December 31, 2006, a total of 17 Disputed Claims remained unresolved. None of these Disputed Claims, if resolved in favor of the claimant, would have a material effect on the financial condition of the Liquidation Trust.  

Other than as described herein, the Liquidation Trust is not a defendant in any action or proceeding which, if the Liquidation Trust were to be found liable in such action or proceeding, would materially adversely impact the Liquidation Trust’s financial condition.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Reference is made to the unaudited financial statements of the Liquidation Trust as of December 31, 2006 and September 30, 2006 and for the three months ended December 31, 2006 and the three months ended December 31, 2005, and the notes thereto (the “Unaudited Liquidation Trust Financial Statements”), included as Item 1. of this Form 10-Q. The following information concerning the Liquidation Trust’s financial performance and condition should be read in conjunction with the audited Liquidation Trust financial statements as of September 30, 2006 and September 30, 2005, and for the fiscal years ended September 30, 2006, September 30, 2005 and September 30, 2004, and the notes thereto.

The Unaudited Liquidation Trust Financial Statements have been prepared on the same basis as the audited Liquidation Trust financial statements, using the liquidation basis of accounting, and, in the opinion of the Liquidation Trustee, contain all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of the Liquidation Trust’s results for such periods. The Liquidation Trust’s results for the three months ended December 31, 2006 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. All amounts are rounded and are therefore approximate.

I.  Accounting Policies and Estimates

The following discussion and analysis of the Liquidation Trust’s changes in net assets in liquidation, cash receipts and disbursements, and net assets in liquidation is based on the Unaudited Liquidation Trust Financial Statements which have been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the liquidation basis of accounting. During preparation of these financial statements, the Liquidation Trustee is required to make certain estimates and assumptions which affect the reported amounts of assets and liabilities in liquidation at estimated fair value, including estimates and assumptions concerning resolution of disputed claims, resolution of current and potential litigation, and the fair value, and related disclosure, of contingent assets and liabilities. On an ongoing basis, the Liquidation Trustee evaluates and updates these estimates and assumptions based on historical experience and on various other assumptions the Liquidation Trustee believes are reasonable under the circumstances. Actual results may differ from these estimates and different assumptions would lead to different estimates.

The Liquidation Trust’s critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Liquidation Trust’s annual report on Form 10-K for the year ended September 30, 2006.

II.Changes in Net Assets in Liquidation

Net assets in liquidation are subject to material change when either (a) Distributions to holders of Allowed Impaired Claims are authorized, or (b) estimates of the fair value of the Liquidation Trust’s assets and/or liabilities change, including as a result of significant events in, or the resolution of, litigation pursued by the Liquidation Trust. Both the authorization of Distributions and changes in estimates are non-cash changes. These changes are shown in the Liquidation Trust’s Statements of Changes in Net Assets in Liquidation and are discussed below.

Most cash transactions, on the other hand, such as collection of receivables and payments of liabilities and Distributions, cause offsetting changes in the associated components of assets and liabilities, but do not change net assets in liquidation. The Liquidation Trust’s Statements of Cash Receipts and Disbursements show the results of these transactions, which are also discussed later under the heading “Cash Receipts and Disbursements.”

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The following table summarizes the significant changes in net assets in liquidation for the periods as indicated:

($ in thousands)	For the three months ended
	December 31, 2006		December 31, 2005
Distributions authorized	$	-	$	(6,626	)
Interest income and net other increases		237		211
Net increase/(decrease) in net assets in liquidation	$	237	$	(6,415	)

A.Distributions authorized

No new interim Distribution was authorized during the three months ended December 31, 2006.

During November 2005, the Liquidation Trust authorized a Distribution of 1.1911% of the Allowed amount to holders of Allowed Impaired Claims, totaling $6.6 million, which was paid during December 2005. Because this Distribution resulted from the $7.0 million cash proceeds of the Committee Action settlement (discussed below under “Legal Proceedings”), pursuant to the Plan, Kmart’s $150.0 million General Unsecured Claim was excluded from the Distribution.

B.Interest income and net other increases

Interest income and net other increases during the three months ended December 31, 2006 and the three months ended December 31, 2005 consisted primarily of interest income from the Liquidation Trust’s cash and cash equivalents.

III.Cash Receipts and Disbursements

The following table summarizes the cash receipts and disbursements for the periods as indicated:

($ in thousands)	For the three months ended
	December 31, 2006			December 31, 2005
Cash receipts
Collection of
committee action settlement	$	-		$	7,000
Preference collections, before
costs of recovery		77			115
Other receipts		236			242
Total cash receipts		313			7,357
Cash disbursements
Operating expenses		247			324
Legal and professional fees
Litigation		45			167
Preference recoveries		13			26
Liquidation Trust operations		52			85
Voided claims checks, net of reissues		-			2
Total cash disbursements		357			604
Distributions paid		-			(6,426	)
(Decrease)/increase in cash and cash equivalents	$	(44	)	$	327

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A.  Cash receipts

During September 2005, the Liquidation Trust reached a settlement with certain former officers and directors of Hechinger Company (the “Officer and Director Defendants”) with respect to the Committee Action. Under the terms of the agreement, $7.0 million in cash was paid to the Liquidation Trust during October 2005.

Cash receipts from collections of preference receivables have been ongoing since the preference actions were filed in mid-2001. Preference collections during the three months ended December 31, 2006 and the three months ended December 31, 2005 were nominal, resulting from collections efforts on recently settled cases and certain default judgments issued. With the exception of one substantial case, no preference actions remain to be litigated as of December 31, 2006. In the one remaining case, the Bankruptcy Court awarded the Liquidation Trust $1.0 million, a judgment affirmed in its entirety by the District Court. Although the defendant has further appealed the decision and award to the Court of Appeals, the Liquidation Trust believes that ultimate collection of the full award is likely. Future preference receipts, other than from this one case, are expected to be insignificant.

Other receipts resulted mainly from interest income.

B.Operating expenses

Operating expenses during the three months ended December 31, 2006 were somewhat lower than those during the three months ended December 31, 2005, primarily due to the Liquidation Trust’s declining level of operations. The Liquidation Trust requires only part-time employees; accordingly, payroll expense varies with the level of activity. A significant portion of operating expenses for the three months ended December 31, 2006 and for the three months ended December 31, 2005 consisted of annual insurance premiums for the Liquidation Trust, in amounts comparable to payments during the preceding years.

C.Legal and professional fees

Legal and professional fees reflect the activity level in various areas of the Liquidation Trust’s responsibilities.

The litigation fees paid for the Committee Action during the three months ended December 31, 2006 were significantly less than those paid during the three months ended December 31, 2005. Fees paid during the three months ended December 31, 2005 primarily related to initial appeals matters in the Committee Action. During the three months ended December 31, 2006, however, fees related mainly to the Fleet settlement.

Total preference recovery fees during the three months ended December 31, 2006 were 17 percent of preference collections, as compared to 23 percent of preference collections during the three months ended December 31, 2005. The collection fees for most preference settlements are contingent, and are set at a declining rate (generally ranging from 35% to 7% of collections) for larger cases. In addition, preference recovery fees include expenses incurred in support of preference collections and associated litigation. During both the three months ended December 31, 2006 and the three months ended December 31, 2005, preference recovery fees related to preference collections received during the period (collection of a number of recently settled cases and certain default judgments issued), with the variation in preference fees caused mainly by the amount collected in each case.

Legal and professional fees for Liquidation Trust operations include all legal, accounting, and other support services except for the expenses of prosecuting the Committee Action, and expenses related to preference collections pursued on a contingency-fee basis. The operations of the Liquidation Trust, including the legal and professional fees, continue to diminish because most assets have been liquidated and most Claims have been resolved.

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D.Distributions paid

Distributions paid depend primarily on the amount of Allowed Impaired Claims, including Claims newly allowed, and on the Distributions authorized from time to time. During November 2005, the Liquidation Trust authorized a Distribution of 1.1911% of the Allowed amount to holders of Allowed Impaired Claims, totaling $6.6 million, of which $6.4 million was paid during December 2005. Because this Distribution resulted from the $7.0 million proceeds of the Committee Action settlement, pursuant to the Plan, Kmart’s $150.0 million General Unsecured Claim was excluded from the Distribution.

No additional interim Distribution was authorized or paid during the three months ended December 31, 2006.

IV.Net Assets in Liquidation

A.Assets

The Liquidation Trust’s cash and cash equivalents balance of $18.7 million as of December 31, 2006 and as of September 30, 2005 is classified as either (a) cash designated as available for distribution to holders of Impaired Claims (“Available Cash”), (b) Reserved Cash or (c) Other Cash.

Available Cash is designated to assure the availability of funds for payment to holders of Impaired Claims who have not received authorized Distributions. The required amount of Available Cash of $2.9 million as of December 31, 2006 and as of September 30, 2006 was based primarily on the cumulative Distribution rate of 10.2911%, for $25.2 million of Disputed Impaired Claims (at their estimated value for reserve purposes), as well as unpaid Distributions to holders of Allowed Impaired Claims who have not met all the requirements for a Distribution, or have not cashed a Distribution check and therefore have not been paid subsequent Distributions, in accordance with the Plan. The value of Disputed Claims, for the purpose of establishing adequate reserves, was estimated by the Liquidation Trust and approved by the Bankruptcy Court in an order establishing the amounts of Disputed Claims Reserves.

Reserved cash is held by the Liquidation Trust to assure payment of the Liquidation Trust’s obligations. Under the terms of the Plan, reserved cash is intended to provide for (a) operating expenses of the Liquidation Trust, (b) estimated payments to holders of Allowed Unimpaired and Convenience Claims in accordance with the Plan, and (c) payments which may become necessary if and as Disputed Unimpaired Claims become allowed, or if certain specific contingencies should occur. Reserved cash decreased by $0.3 million from September 30, 2006 to December 31, 2006, to a balance of $10.9 million, primarily as a result of disbursements from the Wind-down Reserve, as discussed below.

B.  Liabilities and Reserves

Estimated costs of liquidation decreased by $0.3 million, to a balance of $1.7 million as of December 31, 2006, compared to September 30, 2006. The decrease is primarily due to disbursements totaling $0.3 million from the Wind-down Reserve.

V.Contingencies

The Liquidation Trust is pursuing litigation against various parties, in particular the “Committee Action,” as described in “Legal Proceedings,” below. The Liquidation Trust cannot predict with any certainty the ultimate outcome of the remaining litigation or the amount or range of potential recoveries.

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VI.Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements about the business, financial condition and prospects of the Liquidation Trust. The actual results of the Liquidation Trust could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including, without limitation, the Liquidation Trust’s success in securing claims settlements on the terms currently contemplated in ongoing negotiations and in other estimates of settlement value, the effect of substantial delays in settling contingent assets and liabilities, resulting in a prolonged period of liquidation, economic conditions, changes in tax and other government rules and regulations applicable to the Liquidation Trust and other risks. These risks are beyond the ability of the Liquidation Trust to control, and in many cases, the Liquidation Trust cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by any forward-looking statements included in this Form 10-Q. When used in this quarterly report, the words “believes,” “estimates,” “plans,” “expects,” “anticipates” and other similar expressions as they relate to the Liquidation Trust or the Liquidation Trustee are intended to identify forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Liquidation Trust does not hold any market risk sensitive instruments.

Item 4.Controls and Procedures

The Liquidation Trust has designed and maintains disclosure controls and procedures to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and regulations. These controls and procedures are also designed to ensure that such information is communicated to the Liquidation Trustee, to allow him to make timely decisions about required disclosures.

The Liquidation Trust, including the Liquidation Trustee, has conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15. Based on that evaluation, the Liquidation Trustee concluded that the Liquidation Trust’s disclosure controls and procedures are effective as of December 31, 2006.

There has been no change in the Liquidation Trust’s internal control over financial reporting that occurred during the Liquidation Trust’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Liquidation Trust’s internal control over financial reporting.

The remaining responsibilities of the Liquidation Trust no longer require the full-time attention of the Liquidation Trustee or of Liquidation Trust employees. The Liquidation Trustee and one other employee are performing necessary management oversight and administrative, legal and accounting processes on a part-time basis, with periodic assistance from other former employees. While the Liquidation Trustee believes that these individuals will consistently make themselves available as needed to perform their assigned responsibilities, including functions related to internal control over financial reporting, there can be no assurance that this availability will continue. As a result, there may be future deficiencies in internal accounting controls related to a lack of segregation of duties.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Further background information about the following cases is disclosed in Part I, Item 3., “Legal Proceedings,” of the Liquidation Trust’s Form 10-K for the fiscal year ended September 30, 2006.

Federal Court Case

The Liquidation Trust is pursuing an action referred to as the “Committee Action” on behalf of its beneficiaries in the United States District Court for the District of Delaware (the “District Court”), and in the United States Court of Appeals for the Third Circuit (the “Court of Appeals”). This action arose from a business combination among the Debtors during 1997 and the related financing (the “1997 Transactions”), and was filed against certain parties that arranged, approved, or financed the 1997 Transactions. The 1997 Transactions were arranged and/or approved by Leonard Green & Partners, L.P. and related entities and the controlling shareholders and directors of the Debtors (including the “Officer and Director Defendants”) (collectively, the “Insiders”). The 1997 Transactions were financed by a series of secured credit agreements, under which the Chase Manhattan Bank and Fleet Retail Finance Inc., formerly BankBoston Retail Finance Inc. (“Fleet”) served as agent for the pre-petition lender group (the “Pre-petition Lenders”).

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An amended complaint with respect to the Committee Action was filed in the United States Bankruptcy Court for the District of Delaware on April 3, 2001, as Civil Action No. 00-840-RRM and was styled “The Official Committee of Unsecured Creditors of Hechinger Investment Company of Delaware, Inc., etal., Plaintiff, v. Fleet Retail Finance Group, The Chase Manhattan Bank, Back Bay Capital Funding, LLC, each individually and as agent for various parties to credit agreements described herein, Leonard Green & Partners, L. P., Green Equity Investors II, L. P., John W. Hechinger, Jr., John W. Hechinger, S. Ross Hechinger, Ann D. Jordan, Robert S. Parker, Melvin A. Wilmore, Alan J. Zakon, Kenneth J. Cort, W. Clark McClelland, June R. Hechinger, Nancy Hechinger Lowe, Sally Hechinger Rudoy, Catherine S. England, Richard England, Jr., June L. P., and Jarsan Associates L. P., Defendants.”

The Committee Action, initially filed by the Official Committee of Unsecured Creditors appointed for the Debtors, and assigned to the Liquidation Trust pursuant to the Plan, alleges that the defendants carried out the 1997 Transactions despite their knowledge that Hechinger was insolvent at the time, and asserts fraudulent conveyance and/or breach of fiduciary duty claims against the Insiders, seeking recovery of at least $127 million in damages. It also asserts fraudulent conveyance claims against the Pre-petition Lenders and challenges the repayment of the Pre-petition Lenders using the proceeds of a post-petition loan.

During July 2005, the District Court issued a memorandum opinion and order on pending summary judgment motions (collectively, the “Summary Judgment Decision”), dismissing the Liquidation Trust’s claims against Fleet, General Electric Credit Corp. (“GECC”), and certain other defendants in the Committee Action. During August 2005, the District Court substantively denied the Liquidation Trust’s motion for reconsideration of the Summary Judgment Decision. During December 2005, the Liquidation Trust filed its notice of appeal from the Summary Judgment Decision and related judgment in the Committee Action with the Court of Appeals.

During September 2005, the Liquidation Trust reached a settlement agreement with the Officer and Director Defendants. Under the terms of the agreement, the $7.0 million settlement amount was paid to the Liquidation Trust during October 2005, and the Liquidation Trust dismissed the Committee Action as against the Officer and Director Defendants.

A March 2006 mediation ordered and conducted by the Court of Appeals did not result in a settlement among the remaining parties to the Committee Action. The Liquidation Trust continued to negotiate with some of the remaining parties, reaching an agreement with both Fleet and GECC during August 2006. Under the terms of the Fleet Settlement and upon the Bankruptcy Court’s approval of the related stipulation, the Liquidation Trust paid Fleet $8.3 million of the $11.0 million Fleet Reserve, Fleet and GECC released any claim to the balance of the Fleet Reserve, and the Liquidation Trust, Fleet and GECC released each other from all further claims.

In accordance with the procedures set forth in the Plan, approval of each settlement was obtained from the Committee that represents the interests of the beneficiaries of the Liquidation Trust. These settlements have no effect on the Liquidation Trust's claims against any other defendant in the Committee Action.

The various remaining defendants are vigorously opposing this action, for which the Court of Appeals has not yet issued a scheduling order. There is no assurance that the Liquidation Trust will prevail on appeal. While the Liquidation Trust is vigorously pursuing this litigation with the intent to obtain a very substantial recovery, the Liquidation Trust cannot predict with any certainty the outcome of the litigation or the amount or range of potential recoveries.

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Bankruptcy Court Case

As of December 31, 2006, only one significant preference litigation action continued - of approximately 1,800 preference litigation actions filed by the Debtors in 2001. During March 2006, the District Court upheld the Bankruptcy Court’s award to the Liquidation Trust of $1.0 million. The defendant has further appealed the District Court affirmation to the Court of Appeals. A June 2006 mediation ordered and conducted by the Court of Appeals did not result in a settlement, and the appeal process continued as of December 31, 2006. Oral argument is scheduled for April 2007 and a Court of Appeals decision in this case is expected in late 2007. Prosecution of all other significant preference litigation has been completed.

Item 1A.Risk Factors

There are no material changes in risk factors as previously disclosed in the Liquidation Trust’s annual report on Form 10-K for the year ended September 30, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit
Number	Document
31.1	Certification by Liquidation Trustee
32.1	Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HECHINGER LIQUIDATION TRUST
Date: February 12, 2007	By:	/s/ Conrad F. Hocking
		Name: Conrad F. Hocking
		Title: Liquidation Trustee

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INDEX TO EXHIBITS

FORM 10-Q

Exhibit No.

31.1 Certification by Liquidation Trustee

32.1 Liquidation Trustee’s Certification Pursuant to 18 U.S.C. Section 1350

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