Chapter VIII Post-Confirmation Issues

• Jurisdiction: United States

Chapter VIII Post-Confirmation Issues

By Henry J. Jaffe and Michael J. Custer Pepper Hamilton LLP

A. Liquidating Trusts, Claims-Allowance Process

After a chapter 11 plan of reorganization is confirmed, an estate may be organized and administered in a number of ways. In a traditional reorganization, where a debtor emerges from bankruptcy as a reorganized entity, the reorganized debtor will often be the entity that handles post-confirmation issues (including pursuing causes of action and objecting to claims) and other administrative tasks. In other cases, including cases with liquidating chapter 11 plans, the task of administering a post-confirmation estate will typically fall upon either a liquidating trustee or a plan administrator. In still other cases, these duties are divided or shared between the reorganized debtor and one or more liquidating trustees or plan administrators; there is no set "formula" for how these tasks are to be divided.

Where a liquidating trust is formed, the liquidation trust's governance, powers, duties and other matters are set forth in a trust agreement, usually approved in connection with confirmation of the debtor's liquidating plan. Trust agreements generally provide that a liquidating trustee is authorized, among other things, to file, prosecute, compromise and/or settle objections to disputed claims against a bankruptcy estate.

Regardless of who precisely is charged with administering the post-confirmation estate, the estate fiduciary (or fiduciaries) will typically focus on three primary goals: (1) augmenting and liquidating estate assets for the benefit of creditors, including pursuing claims and causes of action belonging to a debtor's estate; (2) conducting a claims-allowance process where the claims of the estate are reviewed, and where appropriate, claims objections are filed to appropriately reduce or eliminate claims that the estate fiduciary believes are not valid, are overstated, have been satisfied or are not entitled to the priority asserted by the claimant; and (3) making distributions to creditors in accordance with the requirements of an approved chapter 11 reorganization plan and the Bankruptcy Code.

In this chapter, we focus on issues pertaining to the claims-allowance process, causes of action held by the bankruptcy estate, and the nature and extent of a bankruptcy court's post-confirmation jurisdiction. A committee should keep all of the following issues and processes in mind when negotiating a plan of reorganization or negotiating matters with a debtor that could affect the debtor's post-confirmation estate.

B. Claims Objections

The first step in the claims-objection process is the review and investigation of filed and scheduled claims to determine which claims are potentially objectionable. With the assistance of one or more of a debtor's former employees, who may be retained on a consulting basis or otherwise, a liquidation trustee is often given the task of reviewing all filed and scheduled claims to determine what claims are objectionable and what claims will be allowed without objection. A reconciliation of claims will be based largely on the debtor's available books and records. A review of scheduled claims involves a review of a debtor's schedules filed in a particular bankruptcy case and investigating whether such debtor's book and records support the scheduled claims. Note that if a debtor has scheduled a claim but has not listed it as disputed, contingent or unliquidated, and no proof of claim has been filed, local rules may provide that a liquidation trustee needs to amend the schedules to contest the claim and provide appropriate notice, rather than file a claim objection.³⁴⁹ Where a claim appears in the debtor's schedules but has been designated as disputed, contingent or unliquidated, the scheduled party must file a proof of claim asserting its right to payment or risk being barred from asserting a claim against the debtor's estate.

With respect to all filed proofs of claims, a liquidation trustee will need to obtain copies of such proofs of claim. If a claims agent was retained in the case, the liquidation trustee can obtain filed proofs of claim from the claims agent. If no claims agent was retained, a liquidation trustee will need to obtain copies of the proofs of claim from the debtor or the bankruptcy court clerk's office. Importantly, a filed and properly documented proof of claim constitutes prima facie evidence of the validity and amount of the claim unless a party in interest objects.³⁵⁰

Bankruptcy Rule 3007 governs objections to claims. Bankruptcy Rule 3007(a) provides that an objection must be filed and served on the claimant at least 30 days prior to a hearing on an objection.³⁵¹ Claims can be objected to on non-substantive grounds (e.g., the claim is duplicative, was late-filed, etc.) or substantive grounds (e.g., it is not supported by the debtor's books and records). Bankruptcy Rule 3007(d) permits "omnibus" objections to more than one claim if all the claims were filed by the same entity, or if the objections are all based on the grounds that the claims should be disallowed, in whole or in part, because:

1. they are duplicative of others claims;
2. they have been filed in the wrong case;
3. they have been amended by subsequently filed proofs of claim;
4. they were not timely filed;
5. they have been satisfied or released during the case in accordance with the Code, applicable rules, or a court order;
6. they were presented in a form that does not comply with applicable rules, and the objection states that the objector is unable to determine the validity of the claim because of the noncompliance;
7. they are interests rather than claims; or
8. they assert priority in an amount that exceeds the maximum amount under § 507 of the Bankruptcy Code.³⁵²

Bankruptcy Rule 3007(e) sets forth the requirements for omnibus claim objections, to which local rules may add their own requirements. The omnibus claim objection process is an important tool in the liquidating trustee's claims-resolution process, and typically a liquidating trustee will file multiple omnibus claim objections during the course of the post-confirmation claim administration process.

A claim objection is a contested matter governed by Bankruptcy Rule 9014. As such, many of the "7000 series" Bankruptcy Rules (which apply in bankruptcy adversary proceedings) also apply to these proceedings, including much of the discovery rules under Bankruptcy Rules 7026 and 7028-7037. Therefore, once a claim objection is filed, a liquidating trustee will be subject to discovery on the objection, including document production, interrogatories and requests for admission and depositions, prior to a hearing. Once discovery has concluded, the bankruptcy court will hold a hearing on the claim objection. Provided that the claim has been properly filed (including supporting documentation), the liquidating trustee will bear the burden of introducing evidence to rebut the claim's presumptive validity, at which point the claimant must prove the validity and amount of its claim by a preponderance of the evidence.³⁵³

The claim-objection process will allow a liquidating trustee to achieve a definitive claims pool from which to calculate distributions. A liquidating trustee should establish a reserve for disputed claims that are liquidated. However, with respect to contingent or unliquidated claims that remain unresolved at the point in time when the liquidating trustee wishes to make an initial distribution, a liquidating trustee may seek to estimate those claims through an estimation motion under § 502(c) of the Bankruptcy Code, which provides that "[t]here shall be estimated for purposes of allowance under this section (1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case; or (2) any right to payment arising from a right to an equitable remedy for breach of performance."³⁵⁴ Estimation helps the bankruptcy court "avoid the need to await the resolution of outside lawsuits to determine issues of liability or amount owed by means of anticipating and estimating the likely outcome of these actions."³⁵⁵ The Bankruptcy Code does not direct how a liquidating trustee or a bankruptcy court should determine estimation, and courts have held that while the principal consideration in an estimation proceeding must be an accommodation to the underlying purposes of the Bankruptcy Code, the only requirement is that the value of the claim be determined in accordance with the legal rules that will govern the final amount of the claim.³⁵⁶

Once outstanding claims have been sufficiently resolved through either or both the objection process and the estimation process, a liquidating trustee will engage in the distribution process pursuant to Bankruptcy Rule 3021, which provides, in relevant part, that "after a plan is confirmed, distribution shall be made to creditors whose claims have been allowed, to interest holders whose interests have not been disallowed, and to indenture trustees who have filed claims under Rule 3003(c)(5) that have been allowed."³⁵⁷ The first step will be to ensure that the liquidating trustee has all the necessary information from the holders of allowed claims, including proper addresses to which distributions will be sent and all desired tax forms, such as a W-9. The liquidating trustee may also file a motion seeking the entry of an order establishing procedures, not already encompassed in the court-approved trust agreement, that will assist in the distribution process. These may include procedures for (1) providing notice to holders of allowed claims, (2) "undeliverable" notices or distributions, (3) distributions made by check that are not negotiated, (4) the use of funds returned to the liquidation trustee or unused following a final distribution, and (5) any other element of the claim-distribution process...