Whether the trust is the product of a bankruptcy plan or a state law plan of dissolution, certain factors must be considered. Section 1123(b)(3)(B) of the Bankruptcy Code allows this prospect to be avoided.To find out more, Lawyer Monthly hears from Ashley B. It states that a plan may provide for the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any such claim or interest.The appointment is generally done in the plan, confirmation order and trust agreement. 94-45, the plan and disclosure statement must explain how the bankruptcy estate will treat the transfer of its assets to the trust for federal income tax purposes.The liquidating trustee must also demonstrate that he or she qualifies as a representative of the estate. 94-45 notes that it does not define as a matter of law the circumstances under which an organization will be classified as a liquidating trust for income tax purposes, the conditions are commonly incorporated into plans and liquidating trust agreements whether or not an advance ruling is sought. A transfer to a liquidating trust for the benefit of creditors must be treated for all purposes of the Revenue Code as a transfer to creditors to the extent that the creditors are beneficiaries of the trust.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.By establishing a liquidating trust pursuant to section 1123(b)(3) in a confirmed plan of reorganization or liquidation, a debtor can transfer causes of action and other assets to a trust, for future liquidation and distribution to the debtor’s creditors, and avoid delaying plan confirmation.The creditors become the trust beneficiaries and their claims are paid from trust assets by a waterfall established pursuant to the plan.
The Bankruptcy Group works regularly with clients through all phases of the reorganization or liquidation of troubled businesses, including out-of-court workouts and distressed asset acquisitions.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).Additionally, exculpation and release provisions provide further liability protection to the liquidating trustee. As the volume of crossborder Chapter 11 cases continues to increase, liquidating trustees prosecuting estate causes of action may face more personal jurisdiction challenges.Liquidating trusts created under bankruptcy plans often vest their trustees with authority to prosecute avoidance and related actions against the creditors and third parties. Bayard’s Bankruptcy Group has long provided services to debtors, official committees of unsecured creditors and equity holders, trustees, purchasers and lenders in bankruptcy cases.