Chapter 9 Legally Defining Management of the Liquidation Trust

• Jurisdiction: United States

Chapter 9 Legally Defining Management of the Liquidation Trust

This chapter provides an introduction to a number of key points involved with legal requirements for establishing the management of the trust. Important issues will involve the segregation of funds, the use of governing committees, management of information and reporting, authorizing the trustee to act, and reporting issues involving the U.S. Trustee. Issues regarding the retention and prosecution of claims and jurisdiction are addressed in Chapter 11.

Management of the liquidation trust is helped or hindered by key provisions in the governing documents. The trust agreement, disclosure statement, plan and any side agreements are critical to outlining financial and regulatory reporting requirements, authority of the trustee to make and execute decisions (both for dealing with assets as well as settling liabilities), and for keeping a governing committee informed about major decisions and the financial progress of the trust. Well-defined documents allow the trustee to act, as well as protect the trustee from adverse actions brought by opposing parties or disgruntled participants in the trust.

A. Confirmation Date and Effective Date

Several key dates must be defined by the bankruptcy plan and confirmation order to establish the legal commencement of the liquidation trust. The "confirmation date" is the date when the bankruptcy court approves the plan and enters its confirmation order indicating that the plan has fulfilled the requirements of § 1129. The "confirmation order" authorizes the debtor to consummate the transactions contemplated in the plan.

Although the "effective date" is not a defined term, it appears in multiple places within the Bankruptcy Code. It is generally agreed that the "'effective date' of a plan is the date on which the provisions of such plan become effective and binding on the parties."⁸¹ It is the date on which the various transactions contemplated by the plan occur and when the plan becomes "substantially consummated."⁸² In particular, the financial requirements of the plan and the legal transfers of authority occur on the effective date, including the commencement of the liquidation trust. Therefore, the effective date is typically specified in chapter 11 plans and in liquidation trust agreements as occurring after a defined period of time following the bankruptcy court's confirmation of the plan through a final confirmation order. Courts have invalidated effective dates that were distant, indefinite or that otherwise violated provisions of the Bankruptcy Code.⁸³ Other courts have approved effective dates keyed to when substantial consummation of the plan occurs, rather than when the confirmation order is entered or becomes final.⁸⁴ In complex chapter 11 cases, there may be preceding conditions that must be satisfied prior to the occurrence of the effective date.⁸⁵

Critically, the effective date is the point at which the debtor emerges from chapter 11, the official committee of unsecured creditors dissolves, and DIP lenders are repaid or the DIP loans are refinanced as exit financing. After the effective date, the reorganized debtor is no longer subject to bankruptcy court oversight, and the rights and duties of the liquidation trustee as specified in the plan commence.

B. Authority to Wind Up the Debtor in Possession⁸⁶

Although the liquidation trust normally handles affairs regarding the post-confirmation trust's assets and its beneficiaries, liquidation trustees are often tasked with winding up the debtor in possession and the bankruptcy estate. Tasks may include updating books and records, paying allowed administrative and priority claims, filing U.S. Trustee reports, filing taxes, filing corporate dissolution papers, and winding up payroll and benefit plans. These roles may or may not be handled by a separate designated agent or plan administrator. Therefore, each trust agreement and plan should be designed to address the issues that need to be resolved in the particular bankruptcy.

In general, the assets and functions of the liquidation trust must be limited to the assets in which creditor-beneficiaries are treated as the grantors and deemed owners. A liquidation trustee can be designated in the plan and trust agreement as a disbursing agent.⁸⁷ Other plans separately identify the tasks and the funds needed to accomplish them as a way to ensure that trust assets are not used for non-trust beneficiaries, even though the same person/trustee may actually perform both roles.⁸⁸ A liquidation trustee may also be designated in the plan and trust agreement as the appointed representative of the estate.⁸⁹ Note, however, that an estate representative can typically only be endowed with authority over estate causes of action, and not as a representative to handle operating affairs of the debtor.

In one example, the Refco Litigation Trust Agreement states:

Pursuant to section 1123(b) of the Bankruptcy Code, the Plan appointed the Litigation Trustee as the duly appointed representative of the Estates, and, as such, the Litigation Trustee succeeds to all of the rights and powers of a trustee in bankruptcy with respect to prosecution of the Contributed Claims for the ratable benefit of the Litigation Trust Beneficiaries. To the extent that any Contributed Claims cannot be transferred to the Litigation Trust because of a restriction on transferability under applicable non-bankruptcy law that is not superseded or preempted by section 1123 of the Bankruptcy Code or any other provision of the Bankruptcy Code, such Contributed Claims shall be deemed to have been retained by the Reorganized Debtors and RCM, as applicable, and the Litigation Trustee shall be deemed to have been designated as a representative of the Estates pursuant to section 1123(b)(3)(B) of the Bankruptcy Code to enforce and pursue such Contributed

...