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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.
For an entity with a complicated asset portfolio, it may make sense to transfer all assets, rights, and causes in action to a liquidating trust that can liquidate assets and investments over time, avoiding market dips and other timing concerns.
Moreover, to the extent that entities like partnerships and limited liability companies are not permitted to engage in business once they are dissolved, the liquidating trust may be authorized to operate or hold certain assets to take advantage of economic factors (but subject to tax considerations).
The dissolution procedures for a business organization vary, depending on the type of entity and the jurisdiction in which it is formed.
For example, as shown on the below chart, a Delaware corporation continues to exist for a period of three years following the filing of a certificate of dissolution, but a Delaware partnership or limited liability company’s legal existence continues indefinitely following an event of dissolution, until a certificate of cancellation is filed.
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.
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.
In 1994, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 94-45 (“Rev. 94-45”), which established guidelines applicable to liquidating trusts formed to implement a Chapter 11 plan, which are similar to the considerations applicable to a liquidating trust outside bankruptcy. 94-45 lists twelve conditions which, if met, will generally result in the issuance by the IRS of an advance determination classifying the trust as a liquidating trust under Treas. The plan, disclosure statement, and any separate trust instrument must provide for consistent valuations of the transferred property by the trustee and the creditors, and those valuations must be used for all federal income tax purposes.
If followed, these guidelines should ensure that the establishment of the trust will be treated as a transfer from the bankruptcy estate to the beneficiaries followed by a deemed transfer by the beneficiaries to the liquidating trust. Finally, a liquidating trust may lose its grantor trust status “if the liquidation is unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the declared purpose of liquidation can be said to be lost or abandoned.” 26 CFR § 301.7701-4(d).
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.