Chapter 7 Practical concerns in Establishing the Liquidation Trust

• Jurisdiction: United States

Chapter 7 Practical concerns in Establishing the Liquidation Trust

This chapter focuses on the practical issues that need to be addressed when establishing the liquidation trust. Issues include preparation for the effective date, taking control of the debtor's assets and liabilities, use of former employees, and ERISA concerns with winding down the debtor's business.

Liquidation trusts are only as effective and efficient as their implementation. The key to getting started is properly planning for the winding down of the business. Preservation of assets for liquidation, and especially preserving the debtor's records, will likely prove to be critical in establishing a foundation for recoveries. Effective preparation of assets for marketing and sale will usually help to maximize value in liquidation. Properly preserving the debtor's business records can often be costly and time-consuming, with the direct benefits somewhat difficult to evaluate. The outcome of complex litigation will necessarily involve volumes of documentary evidence and contemporaneous business records. Cataloguing and preserving the factual basis for litigation will entail significant expenditure of resources and expense.

Therefore, the selection and preservation of the right evidence and the ability to discard irrelevant and costly volumes of documents and records will be essential. All of these efforts must be anticipated in the plan and disclosure statement, which lay out the concept for the trust's operation. Estimating the adequacy of the initial trust funding will depend on developing reliable projections of the trust's anticipated costs and fees at the outset. Ongoing monitoring and evaluation of funding levels and anticipated recoveries will be part of the long-term planning and management of the trust.

A. Effective Date

The term "effective date" is not defined in the U.S. Bankruptcy Code, nor is it explained. Yet, it is a crucial date upon which a confirmed bankruptcy plan becomes operative. It is also an operative phrase under § 1129, which sets the date upon which the financial requirements of a plan must be met. Most chapter 11 plans define or specify the date in their plan and disclosure statement and in relevant trust agreements. Typically, the effective date specified is 30-90 days after the confirmation of the plan is approved by court order, and it is the date upon which the debtor-in-possession's legal status ceases, the post-petition debtor's legal status commences, plan distributions are made, and other financial confirmation requirements are met. From the trustee's perspective, the effective date has critical importance in determining the trust's legal rights, ownership control over assets, and obligations to its beneficiaries.

The range of effective dates applied in liquidation trusts varies based on trust documents, jurisdiction and precedent. Some examples include: the date on which the confirmation order becomes final, the date on which the confirmation order is entered, the date upon which the plan is substantively consummated, the date upon which regulatory bodies authorize key events or actions such as assignments of FCC licenses, or the date upon which substantial plan financial transactions occur. In general, indefinite effective dates or dates that violate the U.S. Bankruptcy Code, or very distant dates, are held to be unreasonable.⁵¹ As a practical matter, the effective date is when the new trustee becomes legally obligated to the trust agreement, and when the trustee's duties to perform duties under the trust agreement commence.

B. Taking Control of the Assets and Liabilities

Trustees taking control on the effective date face a wide range of possible situations. Poorly managed debtors with inadequate control over their assets and disjointed business operations are not unusual. To the extent that an incoming trustee can help prepare the debtor for the effective date, the transition will take place much more smoothly. Some examples of key items to consider in making preparations for a smooth transition, or items that should be addressed immediately upon taking control of the trust's assets and liabilities, include:

• identifying assets ahead of time and making appropriate arrangements for their seizure and/or lock-down;
• making sure accounting and financial operations remain intact until they can be transferred in an organized fashion to the trustee;
• establishing a start date and setting up new books and records of the new trust that can commence on the effective date;
• obtaining listings of bank accounts, signature authorizations, and bank and investment records, and making sure that accounts are reconciled and transactions in transit are accounted. To the extent that new accounts can be set up in advance of the effective date and activated upon the effective date, seamless transitions of banking and cash management can be facilitated;
• making sure that property, casualty and other insurance is in place, that the insurance names the trustee as an additional insured, and that all brokers are notified of the transition. Insurance may be replaced, but it should be in place at all times;
• securing the debtor's books and records to both operate the trust going forward as well as preserve evidence for any litigation matters;
• making certain all premises are secured with appropriate fire and security protections and that alarm systems are present and functioning; this includes naming the trustee as the contact person;
• making certain that computers and IT functions are staffed and maintained as part of ensuring the integrity of the financial and legal records of the debtor. Plans to maintain, transfer, reduce or eliminate IT functions should be carefully conceived with input from counsel regarding any requirements for ongoing litigation and the preservation of evidence;
• reviewing employee payroll and personnel management systems, including contacts, and making sure that outside payroll vendors are notified of the transition. Appropriate measures must be taken to properly terminate personnel and payroll vendors in compliance with existing staff plans, pension plans and 401(k) plans, as well as ERISA, WARN and other regulations. Steps should be planned and executed with attention to tax filing deadlines, final reports, retention of records requirements and other factors;
• notifying relevant law enforcement or regulatory bodies in a timely manner or in advance of key events; and
• drafting trust agreements and other documents that can benefit from the input of the incoming trustee. Many case-specific issues can be addressed, including giving the trustee appropriate authority to act, the ability to retain selected professionals, the ability to retain former debtor personnel, the discretion to sell assets and settle litigation, and other items. In addition, appropriate indemnifications can be addressed, and an oversight body or committee can be appointed.

A confirmed bankruptcy plan operates as both a judgment and as a contract.⁵² As such, issues regarding the legal transfer of litigation rights (i.e., res judicata defenses against post-confirmation suits brought by trustees) and the interpretation of contractual issues (i.e., ambiguities in language within the trust agreement, plan, disclosure statement or other documents) can affect the trustee's ability to act. Statute of limitations rules will also apply (i.e., deadlines to file avoidance actions are typically based on the date of the order for relief). There may also be deadlines specified for certain events under the plan itself. The effective date for the plan confirmation...