July 31, 2019Articles

Bankruptcy Corner Utilizing Delaware Statutory Trusts as Chapter 11 Liquidating Trusts

Journal of Passthrough Entities, July-August 2019


Every year, thousands of companies seek protection under chapter 11
(“Chapter 11”) of Title 11 of the U.S. Code (the “Bankruptcy Code”) in the
U.S. Bankruptcy Courts in New York, Delaware, Texas, and other jurisdictions
around the country (such companies, the “Debtors”). While some of
these Debtors might seek to utilize Chapter 11 to effect a restructuring of
their operations, the majority of Debtors simply cannot service their secured
debt facilities and are seeking predominantly to right-size their balance sheets.
Other Debtors file for Chapter 11 protection in the midst or on the eve of
overwhelming litigation—often related to asbestos, toxic torts, products
liability, or environmental contamination. Regardless of the impetus for filing,
Chapter 11 provides a centralized, efficient process for these Debtors to both
determine the scope of their liabilities and maximize the value of their assets
for the benefit of their stakeholders.

Part of the Chapter 11 process for many Debtors—whether following a
sale of all or substantially all of their assets in a Bankruptcy Court-supervised
auction or in connection with a global settlement among various parties in
interest—is the proposal, solicitation, and confirmation of a plan of reorganization
or liquidation (a “Plan”) that provides for, among other things, an
orderly distribution of the Debtors’ assets. While some Plans contemplate
that the Debtors themselves will continue in existence to determine the scope
of their liabilities, liquidate their assets, and distribute the proceeds to their
various stakeholders, other Plans often provide for the creation of a trust
(a “Liquidating Trust”) to handle such matters, with the various creditors
of the Debtors as the beneficiaries. Whether or not the relevant Chapter
11 case was administered in the U.S. Bankruptcy Court for the District of
Delaware, Plans that contemplate a Liquidating Trust may, and often do,
utilize a Delaware Statutory Trust in connection with their implementation.
This column describes Delaware Statutory Trusts in general, briefly
explains some tax and securities implications of such trusts, and provides
some practical drafting tips.

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