Chapter 12 Effective Trust Management

• Jurisdiction: United States

Chapter 12 Effective Trust Management

This chapter provides guidance on a number of management issues related to the effective administration of the trust. It focuses on administration, management, tax filing obligations, managing cash, claims administration and other support services, and the retention of professionals.

This chapter provides guidance on a range of important management issues that may affect the effective administration of a trust. Subjects include corporate governance, guidelines for banking and cash investments, retention of former employees of the debtor, insurance, tax filings, claims administration and other support services, and the use of settlement agreements. It also provides an introduction to PACER, trustee websites and virtual data rooms, and concludes with commentary regarding the retention of professionals.

A. Notes on Effective Governance

The liquidation trust and the liquidation trustee are separate legal entities from the post-petition debtor. Under the terms of the plan and trust agreement, the liquidation trustee is appointed to manage and distribute the assets of the trust for the benefit of the debtor's creditors that become the holders of beneficial interests in the trust. In many cases, the trustee will report to a governing or oversight committee as defined in the trust agreement, plan of liquidation and other documents. The committee may be comprised of former members of the official committee of unsecured creditors or other parties who have a stake in the outcome of the trust's activities. For efficiency, the committee may be limited to three to five members to reduce costs and to improve the efficiency of communication and decision-making, while still maintaining a composition that balances the type and scope of beneficiaries.

The trustee is often a third-party professional, independent from the former debtor entities or other constituencies and possibly new to the case. However, in some wind-down situations, a former chief operating officer or former chief financial officer from the debtor may be selected to operate the trust.

In many cases, absent any conflicts or objections, a liquidation trust is represented by the same counsel and other professionals who were retained in the bankruptcy proceedings. Use of former counsel and other professionals can facilitate more effective management of the trust by eliminating the learning curve and enabling the professionals who were involved in the trust's initial design to move forward without interruption. This should enable swift and efficient execution, focused on maximizing value for the beneficiaries of the liquidation trust.

Effective trust management relies on good communication. Regularly scheduled meetings (in person or telephonic) among the governing committee, liquidation trustee, counsel and other professionals serve to foster good working relationships and keep all parties well informed and focused on relevant tasks while providing prompt decision-making. Many trustees also find it helpful to prepare task lists from which to delegate work among the professionals that are employed.

B. Guidelines for Banking and Cash Investments

The requirements for establishing specified bank accounts and the use of cash reserves should be addressed in the trust agreement, plan of liquidation and other governing documents. Typically, the authority for a liquidation trust to invest net proceeds pending their distribution is limited to demand and time deposits in federally insured banks or savings institutions, or other temporary, liquid and federally insured investments such as short-term certificates of deposit or treasury bills.

Although intended for bankruptcy trustees appointed by the Office of the U.S. Trustee, the Handbook for Chapter 7 Trustees can offer guidance on the types of interest-bearing, non-interest-bearing, investment, bond recovery and accounts that are generally acceptable, or prohibited, in bankruptcy matters.¹⁷⁹ The Chapter 11 Trustee Handbook offers another source for guidance. This source refers to Bankruptcy Code § 345(a), stating, "The trustee may make such deposit or investment of the money of the estate for which such trustee serves as will yield the maximum reasonable net return on such money, taking into account the safety of such deposit or investment." ¹⁸⁰

Additional guidance on the types of investments deemed reasonable for trusts can be found in Prudent Practices for Investment Stewards. The scope of this handbook primarily addresses the Employee Retirement Income Security Act of 1974 (ERISA), the Uniform Prudent Investor Act (UPIA), and the Uniform Management of Public Employee Retirement Systems Act (UMPERSA). These laws and their immediate applications and requirements do not necessarily govern bankruptcy trusts; however, the recommendations regarding prudent investment oversight do offer guidance on the types of responsibilities and limitations that can be used in liquidation and litigation trust management. It is critical that the investment fiduciary for the liquidation trust become familiar, and comply, with all federal and state laws applicable to the fiduciary's particular field of practice. These laws may include rules and restrictions imposed by regulatory bodies such as the Securities and Exchange Commission (SEC), General Accounting Office (GAO), Department of Labor and the Internal Revenue Service (IRS).¹⁸¹

Some plans are very specific on the restrictions governing allowable investments and prohibited investments. For example, in Trans World Airlines, the plan limited the plan administrator's investment authority to "only those investments that a liquidation trust, within the meaning of Treasury Regulation Section 301.7701-4(d), may be permitted to hold, pursuant to the Treasury Regulations, or any modification in the IRS guidelines, whether set forth in IRS rulings, other IRS pronouncements or otherwise."¹⁸² In Enron, the plan supplement limited the litigation trustee's investment powers to "such investments that are consistent with the Litigation Trust's status as a liquidation trust within the meaning of Treasury Regulation Section 301.7701-4(d) and in accordance with Rev. Proc. 94-45, 1994-2 C.B. 684."¹⁸³

Whatever guidelines are used, it will be incumbent on the trustee to confer with counsel and any governing or oversight committees regarding the proper banking and investment procedures that will be adopted so that they are in compliance with the trust agreements, relevant regulations and case law.

C. Managing Cash

As in any case involving the management of assets and the controls over disbursements, the use of budgets or budget estimates and regular financial reporting are essential to managing cash. As a practical matter, the trust must be established with sufficient funding to administer the trust properly. Separate bank accounts for operating funds and distributions to beneiciaries are typically established in order to segregate these functions and their funding. Separate reserves to cover estimated operating expenses and professional fees are normally established, whether as formal budgets or as estimates. Requirements for adequate reserves have the benefit of allowing the liquidation trustee, the governing committee and their professionals to avoid surprises and potential shortfalls in available cash. They also affect the costs, timing and acceptable recovery levels from pursuing liquidation activities and legal actions, which must be managed within the very real constraints of the trust's liquidity.

Deining the requirements for regular reporting is a matter of judgment based on the facts and circumstances of each situation. Onerous reporting requirements may only serve to increase the administrative costs of the trust with little benefit. Overly simplistic reporting may not provide sufficient information to enable reasonable oversight.

D. Sales of Assets

Most trust agreements authorize the trustee to liquidate, sell or donate assets below a speciied threshold at the trustee's discretion. Assets with values above the threshold can be monetized through private sales or sales conducted under § 363 of the Bankruptcy Code. Assets sold through § 363 sales can be sold free and clear of liens, and in situations involving environmental claims, the assets can be sold with limited protections from those potential successor liabilities.¹⁸⁴ In complex matters involving contaminated real estate, the Environmental Protection Agency may be involved.

Liquidation trustees who are mandated to market and sell the debtor's assets face the practical problem of defining a market for those assets and finding the right means to solicit and sell the assets into that market. Assets may include entire business operations or divisions; non-core operating assets such as machinery and equipment, rolling stock or real estate; tangible and intangible non-operating assets; securities and investments; real estate and other properties.

Numerous strategies are available for the liquidation of assets. Some can be monetized relatively quickly. Others will require time, resolution of complicating issues and the use of a variety of alternative sales strategies. Most assets will require an appropriate real estate broker, investment banker or other sales agent to market and sell the assets on behalf of the trust.

E. Retention of Former Employees

While the liquidation trustee may be a former employee of the debtor, more often former employees are retained by the trustee in order to preserve, and work with, the debtor's books and records and to monetize the debtor's assets. Former employees are also fact witnesses for possible litigation over the debtor's affairs either during or prior to the bankruptcy. The participation of former employees can help maximize the value of the liquidation trust's assets through their institutional knowledge of the debtor, including its financials, historic governance, documentation...