Chapter 8 The Debtor, the Case, and Setting Up the Liquidation Trust
This chapter provides an introduction to the issues and concepts that should be contemplated when conceiving a structure for the proposed liquidation trust. It addresses general concerns, offers commentary on small vs. large trusts, provides general tips for contemplating the plan and disclosure statement, and offers insights and observations drawn from the General Motors bankruptcy and other recent large bankruptcy cases.
The trustee's operation of a liquidation trust in a chapter 11 case is governed by multiple documents and court orders. The trust agreement, disclosure statement, plan and confirmation order all outline pieces of the structure and must be interpreted together to define the operation of a liquidation trust.
In light of the various components, a number of issues and concepts should be contemplated up front when developing a structure for the proposed liquidation trust. General concerns and differences will also stem from the size of the trust and its purpose, and the language for the plan and disclosure statement will need to adapt accordingly. A number of observations and insights can be drawn from the experiences in General Motors and some of the other large bankruptcy cases of recent years, which offer additional concepts to consider.
A. Issues in Drafting Trust Agreements
While the trustee's authority is defined by the terms of the trust, such authority is also governed by the provisions of the confirmed chapter 11 plan of liquidation or reorganization, the bankruptcy court order confirming the plan, settlement agreements and stipulations previously entered in the case, and any orders or judgments that may affect the trustee's ability to take certain actions, such as objecting to claims or suing for recovery of preferential payments. For instance, a plan provision releasing the debtor's attorneys from liability would prevent the trustee from later suing them for malpractice. The scope of the trustee's authority is also affected by interpretations of the word "trustee" in varying contexts.65
A number of overall objectives must be kept in mind while drafting the liquidation trust instrument, including cost-effective administration, post-confirmation access to the bankruptcy court, limitation of trustee liability, and clear trustee authority to bring actions and liquidate estate property of the debtor. Besides the usual terms found in trusts (for instance, appointment of successor trustees and serving without bond), the liquidation trust should include provisions tailored to its purposes.
1. Cost Efficiency
In the interest of cost-effectiveness, the trustee should be able to perform ministerial tasks without needing to obtain court approval for non-material actions. The trust should avoid incurring needless costs and legal expenses by seeking court approval of what should be its everyday operations. Depending on the circumstances of each case, the trustee may be allowed to: (1) hire appraisers, accountants, auctioneers, business brokers and other professionals without the need for pre-approval by the court under § 327 of the Bankruptcy Code; (2) maintain bank accounts as the trustee sees fit; (3) file tax returns unilaterally; (4) sell small items of property without court order; and/or (5) file operating reports quarterly rather than monthly. The trustee may even be permitted to hire a professional that may not be purely "disinterested" under the Bankruptcy Code but may be the best selection under the circumstances. In preparing the trust agreement and ancillary documents, the parties must balance the goals of convenience and cost-savings against the comfort that notice, hearing and ultimate court approval provides for trust transactions that could later be subject to controversy.
2. Access to Bankruptcy Court
While efficiency dictates that the trustee should not require bankruptcy court approval for ministerial tasks, the trustee must have the ability to turn to the bankruptcy court as needed. Thus, the bankruptcy court must retain jurisdiction to determine anticipated causes of actions and other disputes. The concentration of all lawsuits, motions, hearings, trials and other legal actions in a single forum enhances the cost-effectiveness of trust administration by eliminating the costs (and other disadvantages) of litigating in various forums, including distant ones.
Although many plans purport to retain bankruptcy jurisdiction through a laundry-list plan provision, it is clear that a plan cannot confer jurisdiction on the bankruptcy court that did not previously exist during the case. The Supreme Court's decision in Stern v. Marshall66 made post-confirmation bankruptcy jurisdiction even more uncertain, since the court held that bankruptcy courts cannot enter final judgments on "private rights" (rights other than those "public rights" provided by Congress in bankruptcy legislation) because bankruptcy judges are appointed under Article I, not Article III, of the Constitution.67 As a result, the power of a bankruptcy court to enter judgment post-confirmation in an action brought by a liquidation trustee may depend on the character of the cause of action — whether it exists solely through bankruptcy legislation (for example, equitable subordination, claim objections, or complaints to recover of preferential transfers), or whether it is a dispute that is unrelated to the bankruptcy process (for instance, debtor claims of commercial disparagement against a creditor).
There is also increased efficiency from bankruptcy court retention of jurisdiction because that court, which may have supervised the underlying bankruptcy case for several years, is already familiar with the particular creditors and is also in the best position to interpret its own orders in the event that a defendant challenges the effectiveness or interpretation of any trust, plan or settlement provision. Furthermore, that court typically has vast experience in avoidance actions, fiduciary breach claims and other litigations that are common to many bankruptcies.
3. Transfers to the Trust
In addition to providing for continued jurisdiction by the bankruptcy court, the plan must also transfer and assign all or a portion of estate property, possibly including causes of action, to the trust. The plan may also provide for the transfer of all individual creditor claims to the trust, as such a transfer can enhance trustee standing to bring actions that could otherwise only be brought on behalf of individual creditors.68
The plan confirmation order and trust document should recite that the claims transfer is in consideration for undivided beneficial interests in the trust res and rights to distribution of trust property proceeds. In addition, the trust instrument should: (1) recite the plan provisions that identify the property to be transferred; (2) specifically consent to receive the assignment and transfer; and (3) expressly agree to administer the property and the claims consistent with the trust terms.
4. Limitation and Release of Liability
The trust documents should limit trustee liability to only those acts constituting gross negligence or willful misconduct. While trial attorneys for the Office of the U.S. Trustee (UST) generally look with suspicion on plan and trust provisions that purport to release a trustee or a trust professional from his or her own negligence, the current trend is for bankruptcy courts to accept and approve limitations of liability that track Delaware corporate law (i.e., business managers' liability restricted to acts constituting gross negligence or willful misconduct). In other words, the trustee must be "recklessly uninformed" or act "outside the bounds of reason" so as to be grossly negligent or voluntarily and intentionally engage in "unlawful or improper behavior" so as to commit intentional wrongdoing.69
Of course, even with such liability-limitation provisions, the trustee should act prudently, particularly as to the investment of asset proceeds. The UST will in most instances insist that the trust invest only in funds that the UST has approved for investment by UST-appointed trustees.
Similarly, the trust instrument and related...
