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.Other timing considerations may be presented by contingent, unliquidated or unmatured claims.As reflected on the below chart, Delaware corporations, partnerships and limited liability companies must make reasonable reserve for all pending litigation, and for claims and obligations that have not yet accrued but, based upon facts known to management, are likely to accrue within ten years following the dissolution.These tasks may not justify the salaries being paid to the management team, which may wish to move on to new challenges.These considerations may tip the scales in favor of setting up a liquidation vehicle and bringing in an administrator experienced with winding down operations.Business organizations that are dissolving may wish to use a liquidating trust in order to delegate the administration of the winding up process.While the managers of a business may be well-suited for the tasks of running a going concern, their talents may not be optimal for the winding down process, which consists of marshaling and selling assets, making distributions to and communicating with creditors and estimating reserves.
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.A trustee qualifies as a representative of the estate if a successful recover would benefit, directly or indirectly, the debtor’s the creditors that are beneficiaries of the trust. The transfer will be treated as a deemed transfer to the beneficiary-creditors followed by a deemed transfer by the beneficiary-creditors to the trust.Treasury Regulation 301.7701-4(d), 26 CFR § 301.7701-4(d) (“Treas. 301.7701-4(d)”) provides for establishment of a liquidating trust as a grantor trust, such that it will be a pass-through entity for tax purposes, without an entity-level tax. The plan, disclosure statement, and trust agreement must provide that the beneficiaries of the trust will be treated as the grantors and deemed owners of the trust and that the trust instrument (or plan if a separate trust agreement does not exist) requires the trustee to file returns for the trust as a grantor trust pursuant to section 1.671-4(a) of the Income Tax Regulations, 26 CFR § 1.671-4(a).While Delaware corporations may take advantage of a “safe harbor” process that involves notice to creditors and guidance of the Delaware Court of Chancery in approving reserves, this process is rarely invoked and is not available for other Delaware entity forms.Failure to make “reasonable reserve” is a basis for liability on the part of the person(s) conducting the liquidation.