Hechinger Liquidation Trust 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

for the quarterly period ended March 31, 2008 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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company 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 MARCH 31, 2008

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	19
Item 4.	Controls and Procedures	19
PART II. OTHER INFORMATION:
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Submission of Matters to a Vote of Security Holders	21
Item 5.	Other Information	21
Item 6.	Exhibits	21
SIGNATURES		22
INDEX TO EXHIBITS		23

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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		As of
	March 31,		September 30,
	2008		2007
Assets
Cash and cash equivalents
Cash designated as available for distribution to holders of impaired claims	$	2,656	$	2,681
Reserved cash		10,160		10,661
Other cash		6,818		6,136
Total cash and cash equivalents		19,634		19,478
Preference receivables (net of costs of recovery of $53 and $53, respectively)		211		210
Other assets		2		2
Total assets		19,847		19,690
Liabilities
Unimpaired and convenience claims payable		1,337		1,337
Uncashed claims checks		435		435
Distributions payable		421		421
Estimated costs of liquidation
Wind-down reserve		856		1,210
Litigation reserve		160		307
Total liabilities		3,209		3,710
Net Assets in Liquidation	$	16,638	$	15,980

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
	March 31, 2008		March 31, 2007
Increase in Net Assets in Liquidation
Interest income	$	165	$	221
Other increases, net		1		2
Net increase in Net Assets in Liquidation before distributions authorized		166		223
Distributions authorized		-		(187	)
Net increase in Net Assets in Liquidation after distributions authorized		166		36
Net Assets in Liquidation at beginning of period		16,472		16,242
Net Assets in Liquidation at end of period	$	16,638	$	16,278

	For the six		For the six
	months ended		months ended
	March 31, 2008		March 31, 2007
Increase in Net Assets in Liquidation
Interest income	$	365	$	455
Other increases, net		293		5
Net increase in Net Assets in Liquidation before distributions authorized		658		460
Distributions authorized		-		(187	)
Net increase in Net Assets in Liquidation after distributions authorized		658		273
Net Assets in Liquidation at beginning of period		15,980		16,005
Net Assets in Liquidation at end of period	$	16,638	$	16,278

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 six		For the six
	months ended		months ended
	March 31, 2008		March 31, 2007
Cash receipts
Preference collections, before costs of recovery	$	-	$	78
Interest income		365		455
Other receipts		295		599
Total cash receipts		660		1,132
Cash disbursements
Costs of liquidation
Operating expenses		206		294
Legal and professional fees
Litigation		148		45
Liquidation Trust operations		147		102
Preference recoveries		3		20
(Voided)/reissued claims checks, net		-		(25	)
Total cash disbursements		504		436
Increase in cash and cash equivalents before distributions paid		156		696
Distributions paid		-		189
Increase in cash and cash equivalents		156		507
Cash and cash equivalents at beginning of period		19,478		18,723
Cash and cash equivalents at end of period	$	19,634	$	19,230

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, 2008, 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 are paid, including Allowed Unimpaired and Convenience Claims (certain small Claims paid at 7.5% of their Allowed amounts in accordance with the Plan), and after 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 March 31, 2008, the Liquidation Trust has authorized cumulative 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”).

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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, if any. 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.

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, 2007 and September 30, 2006, and for the fiscal years ended September 30, 2007, September 30, 2006 and September 30, 2005, and the notes thereto.

The amounts shown in this document are rounded and are therefore approximate. Certain insignificant amounts in the three months ended March 31, 2007 have been reclassified to conform with their presentation for the three months ended March 31, 2008.

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 9).

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 7 and 10).

Available Cash consists of:

($ in thousands)	As of		As of
	March 31, 2008		September 30, 2007
Distributions payable	$	421	$	421
Reserve for remaining disputed impaired claims at 10.2911%		2,235		2,260
Total available cash	$	2,656	$	2,681

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 9 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, net of estimated costs of recovery. As of March 31, 2008 and September 30, 2007, preference receivables consisted mainly of one remaining significant action. During June 2005, the Bankruptcy Court awarded the Liquidation Trust $1.0 million in this action. During March 2006, the District Court upheld the Bankruptcy Court ruling in its entirety. The defendant appealed the affirmation by the District Court to the Court of Appeals. During June 2007, the Court of Appeals remanded the case to the District Court, with instructions to remand to the Bankruptcy Court for specific findings. Pursuant to the Bankruptcy Court’s scheduling order, both parties filed briefings by February 2008. The Bankruptcy Court may decide the case or schedule further proceedings, up to and including a trial, at its discretion. The Liquidation Trust and its counsel intend to vigorously pursue collection of the original judgment. The Liquidation Trust’s current estimate of the fair value of preference receivables is primarily based on the content of the Court of Appeals ruling and on the status of negotiations with the defendant in this action.

The fair value of the preference receivables is reassessed 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.

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5.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 consists of:

($ in thousands)

	As of		As of
	March 31, 2008		September 30, 2007
Allowed unimpaired claims	$	1,335	$	1,335
Convenience claims		2		2
Total	$	1,337	$	1,337
Number of disputed unimpaired claims		3		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 March 31, 2008 and September 30, 2007 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 March 31, 2008 and September 30, 2007. 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 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.

6.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.

7.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 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.

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8.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 2009. 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. The Wind-down Reserve includes provision for costs after the current Court-authorized termination date of October 26, 2008, because the Liquidation Trust believes that certain responsibilities such as filing final tax returns will occur after that date.

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 March 31, 2008 and September 30, 2007 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 11).

The fair value of the estimated costs of liquidation is reassessed 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.

9. Bankruptcy Reserves Required

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

($ in thousands)

	As of		As of
	March 31, 2008		September 30, 2007
Liability reserves
Wind-down	$	856	$	1,210
Litigation		160		307
Unimpaired and convenience claims		1,337		1,337
Uncashed claims checks		435		435
Total liability reserves		2,788		3,289
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	$	10,160	$	10,661

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.

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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.

10.Impaired Claims

The Liquidation Trust’s estimate of Impaired Claims consists of:

($ in thousands)	As of		As of
	March 31, 2008		September 30, 2007
Allowed impaired claims	$	711,770	$	711,770
Estimated fair value of disputed impaired claims		8,334		8,584
Total estimated impaired claims	$	720,104	$	720,354
Asserted value of disputed impaired claims	$	22,669	$	22,669
Number of disputed impaired claims		8		9

Distributions to holders of Allowed Impaired Claims have been authorized, through March 31, 2008, in the cumulative amount of 10.2911% of the Allowed amount of the Impaired Claims. A total of $71.1 million has been paid to holders of Allowed Impaired Claims through March 31, 2008. In conjunction with the authorized Distributions, as of March 31, 2008, the Liquidation Trust held a total of $2.7 million of Available Cash for Distribution to holders of Impaired Claims, including the $2.2 million Disputed Impaired Claims Reserve for Distribution to holders of Disputed Impaired Claims should such Disputed Claims become Allowed, as well as Distributions payable to certain holders of Allowed Impaired Claims (see Notes 3 and 7). 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.

11.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 Third Circuit Court of Appeals (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 (Fleet Retail Finance Inc., formerly BankBoston Retail Finance Inc.) 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.

A March 2006 mediation that was 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 continues to pursue the Committee Action against certain remaining defendants with which it has not reached a settlement. Pursuant to a scheduling order issued by the Court of Appeals during March 2007, briefing in the Committee Action appeal was completed during July 2007. The Court of Appeals heard oral argument during April 2008. A decision is expected in the coming months; however, precisely when is unknown.

The various remaining defendants are vigorously opposing this action. 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 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

The Debtors filed approximately 1,800 preference actions in 2001. As of March 31, 2008, only one significant preference litigation action continued. During March 2006, the District Court upheld the Bankruptcy Court’s award to the Liquidation Trust of $1.0 million in this action. The defendant further appealed the affirmation by the District Court to the Court of Appeals. During June 2007, the Court of Appeals remanded the case to the District Court, with instructions to remand to the Bankruptcy Court for specific findings. Pursuant to the Bankruptcy Court’s scheduling order, both parties filed briefings by February 2008. The Bankruptcy Court may decide the case or schedule further proceedings, up to and including a trial, at its discretion. The Liquidation Trust and its counsel intend to vigorously pursue collection of the original judgment. Prosecution of all other significant preference litigation has been completed.

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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 March 31, 2008, a total of 13 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.

12.Other

During the six months ended March 31, 2008, the Liquidation Trust received a $0.3 million distribution in the liquidation of the former company-owned life insurance policy carrier for one of the Debtors. The Debtors were entitled to these liquidation proceeds solely as a result of the occurrence and particular terms of this insurance carrier’s liquidation. Therefore, no receivable from the carrier had previously been recorded as an asset of the Liquidation Trust. The receipt was included in “Other Increases, net” in the Statement of Changes in Net Assets in Liquidation.

During the six months ended March 31, 2007, the Liquidation Trust collected a settlement with certain former counsel to the Debtors in connection with the 1997 Transactions. This settlement had been reached and recorded as an asset of the Liquidation Trust as of September 30, 2006.

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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 March 31, 2008 and September 30, 2007 and for the three months and the six months ended March 31, 2008 and March 31, 2007, 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, 2007 and September 30, 2006, and for the fiscal years ended September 30, 2007, September 30, 2006 and September 30, 2005, 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 March 31, 2008 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, 2007.

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
	March 31, 2008		March 31, 2007
Distributions authorized	$	-	$	(187	)
Interest income and other increases, net		166		223
Net increase in net assets in liquidation	$	166	$	36

	For the six months ended
	March 31, 2008		March 31, 2007
Distributions authorized	$	-	$	(187	)
Interest income		365		455
Other increases, net		293		5
Net increase in net assets in liquidation	$	658	$	273

A.Distributions Authorized

During the three months and the six months ended March 31, 2008, no new interim Distribution was authorized and no Impaired Claims were newly allowed. No new interim Distribution was authorized during the three months or the six months ended March 31, 2007; however, Distributions at the cumulative rate of 10.2911%, totaling $0.2 million, were authorized during the three months ended March 31, 2007 to holders of $2.0 million of Impaired Claims newly allowed during the period.

B.Interest income

Interest income decreased during the three months and the six months ended March 31, 2008 as compared to the three months and the six months ended March 31, 2007, primarily as a result of declining interest rates.

C.Other increases, net

Other increases, net during the six months ended March 31, 2008 consisted primarily of a $0.3 million distribution in the liquidation of the former company-owned life insurance policy carrier for one of the Debtors. The Debtors were entitled to these liquidation proceeds solely as a result of the occurrence and particular terms of this insurance carrier’s liquidation. Therefore, no receivable from the carrier had previously been recorded as an asset of the Liquidation Trust. During the three months ended March 31, 2008 and during the three months and the six months ended March 31, 2007, other increases, net were not significant.

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III.Cash Receipts and Disbursements

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

($ in thousands)	For the six months ended
	March 31, 2008		March 31, 2007
Cash receipts
Preference collections, before costs of recovery	$	-	$	78
Interest income		365		455
Other receipts		295		599
Total cash receipts		660		1,132
Cash disbursements
Operating expenses		206		294
Legal and professional fees
Litigation		148		45
Liquidation Trust operations		147		102
Preference recoveries		3		20
(Voided)/reissued claims checks, net		-		(25	)
Total cash disbursements		504		436
Distributions paid		-		(189	)
Increase in cash and cash equivalents	$	156	$	507

A. Cash receipts

During the six months ended March 31, 2008, there were no cash receipts from collections of preference receivables. Preference collections during the six months ended March 31, 2007 were nominal, resulting from collections efforts on settled cases and certain default judgments issued. With the exception of one substantial case, discussed under “Net Assets in Liquidation”, Part I, Item 2.IV.A., below, no substantial preference actions remain as of March 31, 2008. Future preference receipts, other than from this one case, are expected to be insignificant.

Cash receipts from interest income decreased during the six months ended March 31, 2008 as compared to the six months ended March 31, 2007, primarily as a result of declining interest rates.

Other receipts during the six months ended March 31, 2008 related primarily to the $0.3 million distribution discussed in “Changes in Net Assets in Liquidation,” Part I, Item 2.II.C., above. Other receipts during the six months ended March 31, 2007 related primarily to collection of a previously recorded settlement with certain former counsel to the Debtors in connection with the 1997 Transactions (as defined in Part II., Item 1., “Legal Proceedings”, below).

B.Operating expenses

A significant portion of operating expenses for the six months ended March 31, 2008 and for the six months ended March 31, 2007 consisted of annual insurance premiums for the Liquidation Trust. Operating expenses during the six months ended March 31, 2008 were significantly lower than those during the six months ended March 31, 2007, primarily due to substantial decreases in the insurance premiums for the Liquidation Trust’s business and liability insurance resulting from a more favorable market for such coverages.

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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 six months ended March 31, 2008 were significantly more than those paid during the six months ended March 31, 2007. Fees paid during the six months ended March 31, 2008 covered over ten months of legal services, primarily related to the Committee Action appeal. Fees paid during the six months ended March 31, 2007, however, related mainly to a settlement with certain prior defendants in the Committee Action, and covered approximately five months of services.

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. During the six months ended March 31, 2008, these fees increased compared to the six months ended March 31, 2007, both because Liquidation Trust counsel assisted in the appeal of the remaining significant preference action, and because costs for the Liquidation Trust’s first year-end audit by its new principal accounting firm increased over the prior year’s audit.

Total preference recovery fees during the six months ended March 31, 2008 were not comparable to such fees during the three months ended March 31, 2007. 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 the six months ended March 31, 2008, no preference recoveries were received, but the Liquidation Trust paid nominal ongoing expenses of preference collection counsel. During the six months ended March 31, 2007, preference recovery fees related to collections on settled cases and certain default judgments issued.

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. No new interim Distribution was authorized or paid during the six months ended March 31, 2008, and no Impaired Claims were newly allowed. No new interim Distribution was authorized or paid during the six months ended March 31, 2007; however, holders of $2.0 million of Allowed Impaired Claims received payments at cumulative Distribution rate of 10.2911%.

IV.Net Assets in Liquidation

A.Assets

1. Cash and cash equivalents

The Liquidation Trust’s cash and cash equivalents balance of $19.6 million as of March 31, 2008 and $19.5 million as of September 30, 2007 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 $2.7 million as of March 31, 2008 was based primarily on the cumulative Distribution rate of 10.2911%, for $22.9 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 required amount of Available Cash of $2.7 million as of September 30, 2007 was based primarily on the cumulative Distribution rate of 10.2911%, for $23.1 million of Disputed Impaired Claims (at their estimated value for reserve purposes), as well as unpaid Distributions to holders of Allowed Impaired Claims. 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.

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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 to a balance of $10.2 million as of March 31, 2008, a change of $0.5 million from September 30, 2007, primarily as a result of disbursements from the Wind-down Reserve and the Litigation Reserve, as discussed below.

2. Preference receivables

As of March 31, 2008 and September 30, 2007, preference receivables consisted mainly of one remaining significant action with estimated fair value of $0.2 million, net of estimated costs of recovery of $0.1 million. During June 2005, the Bankruptcy Court awarded the Liquidation Trust $1.0 million in this action. During March 2006, the District Court upheld the Bankruptcy Court ruling in its entirety. The defendant appealed the affirmation by the District Court to the Court of Appeals. During June 2007, the Court of Appeals remanded the case to the District Court, with instructions to remand to the Bankruptcy Court for specific findings. Pursuant to the Bankruptcy Court’s scheduling order, both parties filed briefings by February 2008. The Bankruptcy Court may decide the case or schedule further proceedings, up to and including a trial, at its discretion. The Liquidation Trust and its counsel intend to vigorously pursue collection of the original judgment. The Liquidation Trust’s current estimate of the fair value of preference receivables is primarily based on the content of the Court of Appeals ruling and on the status of negotiations with the defendant in this action.

B. Liabilities and Reserves

Estimated costs of liquidation decreased by $0.5 million, to a balance of $1.0 million as of March 31, 2008, compared to September 30, 2007. The decrease is due to disbursements totaling $0.4 million from the Wind-down Reserve, and $0.1 million from the Litigation 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.

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.

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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 March 31, 2008.

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 two other part-time 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, 2007.

Federal Court Case

The Liquidation Trust is pursuing an action referred to as the “Committee Action” on behalf of its beneficiaries in the District Court and in 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 (Fleet Retail Finance Inc., formerly BankBoston Retail Finance Inc.) 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 with the Court of Appeals.

A March 2006 mediation that was 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 continues to pursue the Committee Action against certain remaining defendants with which it has not reached a settlement. Pursuant to a scheduling order issued by the Court of Appeals during March 2007, briefing in the appeal was completed during July 2007. The Court of Appeals heard oral argument during April 2008. A decision is expected in the coming months; however, precisely when is unknown.

The various remaining defendants are vigorously opposing this action. 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 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

The Debtors filed approximately 1,800 preference actions in 2001. As of March 31, 2008, one significant preference litigation action continued. During March 2006, the District Court upheld the Bankruptcy Court’s award to the Liquidation Trust of $1.0 million in this action. The defendant further appealed the affirmation by the District Court to the Court of Appeals. During June 2007, the Court of Appeals remanded the case to the District Court, with instructions to remand to the Bankruptcy Court for specific findings.  Pursuant to the Bankruptcy Court’s scheduling order, both parties filed briefings by February 2008. The Bankruptcy Court may decide the case or schedule further proceedings, up to and including a trial, at its discretion. The Liquidation Trust and its counsel intend to vigorously pursue collection of the original judgment. Prosecution of all other significant preference litigation has been completed.

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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 March 31, 2008, a total of 13 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.

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, 2007.

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: May 12, 2008	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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