Liquidating trusts can be effective tools to wind down any business enterprise, including debtors in Chapter 11 bankruptcy cases and entities that dissolve outside of bankruptcy. To that end, in a Chapter 11 case, a debtor’s exclusive right to file a plan is limited to 120 days (subject to extensions for cause), but once a plan is confirmed, the bankruptcy estate ceases to exist and the debtor loses its status as debtor in possession, including its authority to act as a bankruptcy trustee and pursue estate claims. Norton Liquidating trusts are organized for the primary purpose of liquidating assets transferred to them for distribution to trust beneficiaries. The US Bankruptcy Code seeks to promote the effective administration and settlement of a debtor’s assets and liabilities within a limited frame of time.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.
A plan must expressly retain claims to preserve a liquidating trust’s standing to pursue them after plan confirmation.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.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.
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.