March 16, 2014
Liquidation Trusts
Coauthored by Evan T. Miller and Marla H. Norton
Liquidating trusts are organized for the primary purpose of liquidating assets transferred to them for distribution to trust beneficiaries. Liquidating trusts can be effective tools to wind down any business enterprise, including debtors in Chapter 11 bankruptcy cases and entities that dissolve outside of bankruptcy. Whether the trust is the product of a bankruptcy plan or a state law plan of dissolution, certain factors must be considered. To find out more, Lawyer Monthly hears from Ashley B. Stitzer, Evan T. Miller and Marla H. Norton, Attorneys at Bayard, P.A.
The US Bankruptcy Code seeks to promote the effective administration and settlement of a debtor's assets and liabilities within a limited frame of time. To that end, in a Chapter 11 case, a debtor's exclusive right to file a plan is limited to 120 days (subject to extensions for cause), but once a plan is confirmed, the bankruptcy estate ceases to exist and the debtor loses its status as debtor in possession, including its authority to act as a bankruptcy trustee and pursue estate claims. Section 1123(b)(3)(B) of the Bankruptcy Code allows this prospect to be avoided. It states that a plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest. Absent this provision, a debtor would be required to investigate and prosecute all avoidance and other causes of action prior to confirming a plan, which may take years.
Section 1123(b) (3) of the Bankruptcy Code facilitates the use of a liquidating trust for prompt administration of the estate by providing post-confirmation standing to an appointed representative of the estate to enforce claims and interests. By establishing a liquidating trust pursuant to section 1123(b)(3) in a confirmed plan of reorganization or liquidation, a debtor can transfer causes of action and other assets to a trust, for future liquidation and distribution to the debtor's creditors, and avoid delaying plan confirmation. The creditors become the trust beneficiaries and their claims are paid from trust assets by a waterfall established pursuant to the plan.
In conjunction with the other provisions of the Bankruptcy Code that require a disclosure statement and plan to provide "adequate information" for a claim or interest holder to make an informed judgment about the plan, Section 1123(b)(3) effectively provides notice to creditors of retention and prospective enforcement of claims that may enlarge the estate's assets for distribution. A plan must expressly retain claims to preserve a liquidating trust's standing to pursue them after plan confirmation. If the plan fails to sufficiently preserve the claim, the claim may be subject to an attack on the basis of subject matter jurisdiction. The degree of specificity required in identifying preserved claims varies from jurisdiction to jurisdiction. When drafting a plan and liquidating trust agreement, parties should ensure that the applicable jurisdictional prerequisites are met.
If a liquidating trustee's standing to enforce estate claims, as an appointed representative under Section 1123(b)(3)(B), is challenged, the trustee must first demonstrate that he or she has been appointed to enforce the claim. The appointment is generally done in the plan, confirmation order and trust agreement. The liquidating trustee must also demonstrate that he or she qualifies as a representative of the estate. A trustee qualifies as a representative of the estate if a successful recover would benefit, directly or indirectly, the debtor's the creditors that are beneficiaries of the trust.
Trea
Liquidating trusts are organized for the primary purpose of liquidating assets transferred to them for distribution to trust beneficiaries. Liquidating trusts can be effective tools to wind down any business enterprise, including debtors in Chapter 11 bankruptcy cases and entities that dissolve outside of bankruptcy. Whether the trust is the product of a bankruptcy plan or a state law plan of dissolution, certain factors must be considered. To find out more, Lawyer Monthly hears from Ashley B. Stitzer, Evan T. Miller and Marla H. Norton, Attorneys at Bayard, P.A.
The US Bankruptcy Code seeks to promote the effective administration and settlement of a debtor's assets and liabilities within a limited frame of time. To that end, in a Chapter 11 case, a debtor's exclusive right to file a plan is limited to 120 days (subject to extensions for cause), but once a plan is confirmed, the bankruptcy estate ceases to exist and the debtor loses its status as debtor in possession, including its authority to act as a bankruptcy trustee and pursue estate claims. Section 1123(b)(3)(B) of the Bankruptcy Code allows this prospect to be avoided. It states that a plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest. Absent this provision, a debtor would be required to investigate and prosecute all avoidance and other causes of action prior to confirming a plan, which may take years.
Section 1123(b) (3) of the Bankruptcy Code facilitates the use of a liquidating trust for prompt administration of the estate by providing post-confirmation standing to an appointed representative of the estate to enforce claims and interests. By establishing a liquidating trust pursuant to section 1123(b)(3) in a confirmed plan of reorganization or liquidation, a debtor can transfer causes of action and other assets to a trust, for future liquidation and distribution to the debtor's creditors, and avoid delaying plan confirmation. The creditors become the trust beneficiaries and their claims are paid from trust assets by a waterfall established pursuant to the plan.
In conjunction with the other provisions of the Bankruptcy Code that require a disclosure statement and plan to provide "adequate information" for a claim or interest holder to make an informed judgment about the plan, Section 1123(b)(3) effectively provides notice to creditors of retention and prospective enforcement of claims that may enlarge the estate's assets for distribution. A plan must expressly retain claims to preserve a liquidating trust's standing to pursue them after plan confirmation. If the plan fails to sufficiently preserve the claim, the claim may be subject to an attack on the basis of subject matter jurisdiction. The degree of specificity required in identifying preserved claims varies from jurisdiction to jurisdiction. When drafting a plan and liquidating trust agreement, parties should ensure that the applicable jurisdictional prerequisites are met.
If a liquidating trustee's standing to enforce estate claims, as an appointed representative under Section 1123(b)(3)(B), is challenged, the trustee must first demonstrate that he or she has been appointed to enforce the claim. The appointment is generally done in the plan, confirmation order and trust agreement. The liquidating trustee must also demonstrate that he or she qualifies as a representative of the estate. A trustee qualifies as a representative of the estate if a successful recover would benefit, directly or indirectly, the debtor's the creditors that are beneficiaries of the trust.
Trea