Partnership transfer to liquidating trust

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).

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.

For an entity with a complicated asset portfolio, it may make sense to transfer all assets, rights, and causes in action to a liquidating trust that can liquidate assets and investments over time, avoiding market dips and other timing concerns.

Moreover, to the extent that entities like partnerships and limited liability companies are not permitted to engage in business once they are dissolved, the liquidating trust may be authorized to operate or hold certain assets to take advantage of economic factors (but subject to tax considerations).

In conjunction with the other provisions of the Bankruptcy Code that require a disclosure statement and plan to provide “adequate information” for a claim or interest holder to make an informed judgment about the plan, Section 1123(b)(3) effectively provides notice to creditors of retention and prospective enforcement of claims that may enlarge the estate’s assets for distribution.

A plan must expressly retain claims to preserve a liquidating trust’s standing to pursue them after plan confirmation.

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.

Absent this provision, a debtor would be required to investigate and prosecute all avoidance and other causes of action prior to confirming a plan, which may take years.

Section 1123(b) (3) of the Bankruptcy Code facilitates the use of a liquidating trust for prompt administration of the estate by providing post-confirmation standing to an appointed representative of the estate to enforce claims and interests.

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.

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