As the number of liquidating chapter 11 cases increase across the country, meaningful amounts of funds may remain undistributed notwithstanding the best efforts and compliance with the terms of the confirmed plan by liquidating plan administrators and trustees of trusts formed under liquidating plans. This article focuses on the disposition of funds at or prior to the conclusion of the five-year period prescribed in 11 U. Utilization of undistributed funds for good causes is not without precedent."Undistributed funds" or other charitable purposes to enhance the good work of bankruptcy bar associations and to facilitate the efficient winding down of liquidating plans and trusts. District and appellate courts have provided a blueprint for doing so, and recently, a bankruptcy court has done so, too. If the funds remain on deposit in the court registry for five years, Chapter 129 of Title 28 of the U. Code applies to unclaimed funds in chapter 11 cases. §1143) for the presentment or surrender of a security or the performance of any other act required as a condition of participation in distributions under the plan "become property of the debtor or of the entity acquiring the assets of the debtor." 11 U. Clearly, no creditor or party in interest would deliberately craft a plan by which undistributed money or property became assets of the debtor entity five years after entry of the confirmation order. Section 347(a) applies only to cases under chapters 7, 12 and 13, and directs the deposit of unclaimed funds into the bankruptcy court registry trust account 6047BK. In practice, in the case of liquidating chapter 11 plans, unless the debtor entity is dissolved or extinguished under the chapter 11 liquidating plan, the debtor entity continues to exist. And what about those liquidating 11 cases in which the debtor's assets are sold in a series of sale transactions to multiple buyers? In our experience, not once has an asset buyer in a sale-based liquidating chapter 11 plan negotiated for the payment of these funds five years after the date of the confirmation order.
These sections are designed to achieve finality, judicial economy and the avoidance of disruptive wasteful litigation over funds that remain unclaimed five years after confirmation. The funds remained in the court registry until the court determined disposition). Generally, chapter 11 funds deposited in a court registry are commingled with chapter 7 and 13 unclaimed funds. Additionally, in one instance, a court ordered that a substantial amount of undistributed funds held in its court registry from a reorganization were subject to forfeiture to the federal government.
The liquidation trustee in essence has the duties and responsibilities of a state law trustee, including fiduciary duties to the liquidation trust. Liability for such errors and omissions is not necessarily limited to such insurance proceeds.
As such, candidates for liquidation trustee positions must consider the exposure potential to liabilities for acts and omissions occurring while administering the liquidation trust. Other penalties may be imposed, such as reducing the liquidation trustee's compensation or imposing a surcharge on the liquidation trustee.
The purpose of the liquidating trust was to liquidate all of the assets of the Corporation, including prosecuting the retained claims, and ultimately make a distribution to creditors from those liquidated assets. Adkins Corp.’s bankruptcy, the owner of the Corporation separately filed for chapter 7 bankruptcy relief. In the principal’s chapter 7 bankruptcy, using guiding Fifth Circuit precedent and the text of section 1123(b)(3), the Bankruptcy Court found that the Corporation’s plan did reserve breach of fiduciary duty claims, such as those that the liquidating trustee was ultimately pursuing (after the prosecution of the non-dischargeability action).
Generally, the appointment of a trustee in a chapter 11 case is a drastic remedy and requires a finding that the debtor, under existing management, has exhibited a practice of not complying with the various obligations and duties under the Bankruptcy Code. The chapter 11 plan established a liquidating trust that, upon plan confirmation, was transferred and received all the assets in the bankruptcy estate of the Corporation, including all potential claims and causes of action of the Corporation against third parties (the “retained claims”).