Suppose that a confirmed chapter 11 creates a trust to dissolve in three years, unless the bankruptcy court authorizes an extension before the dissolution date. In lawsuits brought by the trust, are defendants off the hook if there was no timely extension?
Bankruptcy Judge Marvin Isgur of Houston said that the result depends on the language of the trust agreement. If it says the trust “shall terminate,” the show is over; the trust is gone, and the defendants escape liability.
If the trust agreement instead says that the trust “shall be dissolved,” the trust survives unless someone with standing has moved to dissolve the trust. Significantly, a defendant in a lawsuit brought by the trust would not have standing to move for dissolution, Judge Isgur said in his August 21 opinion.
The Trusts’ Dissolution Provisions
An offshore oil producer confirmed a chapter 11 plan creating two trusts. One trust was tasked with plugging and abandoning wells. The second trust was designed to prosecute claims.
Both trust agreements said that the trusts “shall be dissolved” on the third anniversary of the plan’s effective date, “unless the Bankruptcy Court [extends the dissolution date], on motion by the Trustee . . . within the three-month period prior to the third anniversary.”
You know what happens next. The trustee did not move to extend dissolution until six months after the third anniversary. As beneficiaries of the trust, several creditors supported the trustee. Opposition came from several defendants in lawsuits brought by trustee.
The work of the trusts was not complete. The trustee was still prosecuting lawsuits, and wells remained to be plugged and abandoned.
The Trusts’ Language Controls
The defendants claimed that the trusts automatically dissolved on the third anniversary. They relied on Goldin v. Bartholow, 166 F.3d 710 (5th Cir. 1999), where the Fifth Circuit held that a trust terminated on the third anniversary of the effective date.
Although the facts were “nearly identical,” Judge Isgur said that “the language of the trust agreements is not.” Dissolution in Goldin “was self-executing,” but the trusts in the case before him “require acts of dissolution.”
In Goldin, the trust instrument said that the trust “shall terminate” on the third anniversary of the effective date. In the case before Judge Isgur, the trust documents said the trusts “shall be dissolved, in accordance with Section 8.02 hereof, no later than the third anniversary of the Effective Date.” Section 8.02 provided that the trustee or “any party in interest may apply to the Bankruptcy Court to terminate the Trust and the Trust may be terminated under such terms and conditions as the Bankruptcy Court may establish.”
Unlike Goldin, Judge Isgur said that “shall be dissolved” is “not self-effectuating.” He said that “the Trusts must be dissolved . . . , not that the Trusts simply dissolve.” Although the differences in language were “subtle,” he said the “distinctions are critical.”
Consequently, Judge Isgur held that the trusts “have not yet been dissolved.”
Defendants Lack Standing
The defendants nonetheless claimed the right to demand dissolution. Judge Isgur disagreed, for lack of standing.
As defendants in lawsuits, Judge Isgur said that the defendants had no standing to be heard on matters of case administration. On the other hand, they had standing to argue that the trusts had been dissolved, making the lawsuits moot. In other words, the defendants “have standing to raise mootness.”
“On the other hand,” Judge Isgur said, the defendants “do not have standing to argue against amendment of the Trusts or that the Trusts should be dissolved,” because they “have no pecuniary or property interest in the administration of the Trusts.” [Emphasis in original.]
In other words, the defendants did not have standing to importune Judge Isgur to dissolve the trusts and render the lawsuits moot.
The Trusts Are in ‘Limbo’
The question remains: What is the status of the trusts?
According to Judge Isgur, the “express language” of the trusts places them “in limbo.” Because the trustee missed the window to extend the term of the trusts, he said the court could not grant the trustee’s motion to extend the dissolution deadlines.
Judge Isgur closed his opinion by saying that the trusts “remain and have not been dissolved. No further action by the Court is presently appropriate.”
Suppose that a confirmed chapter 11 creates a trust to dissolve in three years, unless the bankruptcy court authorizes an extension before the dissolution date. In lawsuits brought by the trust, are defendants off the hook if there was no timely extension?
Bankruptcy Judge Marvin Isgur of Houston said that the result depends on the language of the trust agreement. If it says the trust “shall terminate,” the show is over; the trust is gone, and the defendants escape liability.
If the trust agreement instead says that the trust “shall be dissolved,” the trust survives unless someone with standing has moved to dissolve the trust. Significantly, a defendant in a lawsuit brought by the trust would not have standing to move for dissolution, Judge Isgur said in his August 21 opinion.
The Trusts’ Dissolution Provisions
An offshore oil producer confirmed a chapter 11 plan creating two trusts. One trust was tasked with plugging and abandoning wells. The second trust was designed to prosecute claims.
Both trust agreements said that the trusts “shall be dissolved” on the third anniversary of the plan’s effective date, “unless the Bankruptcy Court [extends the dissolution date], on motion by the Trustee . . . within the three-month period prior to the third anniversary.”
You know what happens next. The trustee did not move to extend dissolution until six months after the third anniversary. As beneficiaries of the trust, several creditors supported the trustee. Opposition came from several defendants in lawsuits brought by trustee.
The work of the trusts was not complete. The trustee was still prosecuting lawsuits, and wells remained to be plugged and abandoned.