How long ago was this and how many years did you file a capital loss? The real problem is that you never should have claimed any capital loss until the case was finally settled and the final recovery amount was determined.
As far as I know, a taxable recovery (return of a previous deduction) is always taxed as ordinary income. To treat this as a capital situation, you would have to file amended returns for all the previous years where you deducted the capital losses to remove the original loss deduction and the carry forward years. You will owe back taxes and interest, but if you were only able to deduct $3000 per year, that should be less than $800 per year that you owe. Then, the 1099 would not be taxable at all this year since is a partial return of capital (it would reduce your basis in the original investment). You wait for the case to close so there is no more possibility of additional recoveries and deduct the remaining loss then.
(You also may have had the option of taking a theft loss, if this occurred before 2018. But I don't think the theft loss treatment was mandatory.)
