Even after a liquidating trust has expired by its terms, the Fifth Circuit tells us that the trustee retains the right to protect the trust estate and defend appeals.
The corporate chapter 11 debtor sold most of the assets and confirmed a plan. The plan created a liquidating trust to prosecute claims belonging to the estate. The confirmation order continued the automatic stay to protect assets of the trust.
The plan called for the trust to terminate at the end of 2018, about two years after the plan was confirmed.
Six months after the trust’s termination date, owners of the debtor sued third parties in bankruptcy court, asserting claims belonging to the estate. The owners reasoned that they could sue because the trust had terminated, and the trustee of the trust no longer had authority to prosecute claims of the estate.
The trustee of the liquidating trust sought sanctions in bankruptcy court and dismissal of the owners’ suit for interference with trust property. The bankruptcy court dismissed the owners’ suit and awarded sanctions representing the trustee’s legal expenses.
Later, the bankruptcy court ruled that the trustee continued in possession of trust property even though the trust had terminated.
The district court affirmed the dismissal and sanctions, and so did the Fifth Circuit in an opinion on February 11 by Circuit Judge Jerry E. Smith.
The owners argued in the circuit that the appeals court had no appellate jurisdiction because the trustee had no standing once the trust had terminated. The owners also wanted the circuit court to vacate the sanctions on the theory that the trustee had no standing to seek sanctions after the trust terminated.
Judge Smith observed that the bankruptcy judge had imposed sanctions under the court’s inherent power under Section 105(a) because the owners were interfering with trust property. He held that the bankruptcy court had jurisdiction to impose sanctions given that the bankruptcy court had jurisdiction over the debtor’s case.
Next, the owners argued that the trustee had no standing to defend the appeal. Judge Smith said that “standing isn’t the right doctrine.”
Citing the Supreme Court, Judge Smith explained that a litigant must have standing to “initiate” a proceeding. Because the trustee was defending the appeal, he said that the trustee “doesn’t need to show he would have standing.”
Again citing the Supreme Court, Judge Smith said that Article III only requires that the opposing party demonstrate “concrete adverseness” and have an ongoing interest in the dispute.
To conclude the analysis, Judge Smith referred to Texas law regarding the powers and responsibilities of a trustee after a trust has terminated. Although the trustee no longer had “legal ownership” of the trust assets, the trustee had continuing possession of the assets and a duty to return the trust property to the beneficiaries of the trust.
Consequently, Judge Smith said that the trustee had “an interest in defending his continued possession of the trust assets so he can fulfill his fiduciary duties and return the property to the trust beneficiaries. That’s enough to give him a meaningful interest in this case, so we have jurisdiction.”
Having established the circuit’s jurisdiction, Judge Smith proceeded to uphold the dismissal and sanctions on the merits.
Even after a liquidating trust has expired by its terms, the Fifth Circuit tells us that the trustee retains the right to protect the trust estate and defend appeals.
The corporate chapter 11 debtor sold most of the assets and confirmed a plan. The plan created a liquidating trust to prosecute claims belonging to the estate. The confirmation order continued the automatic stay to protect assets of the trust.
The plan called for the trust to terminate at the end of 2018, about two years after the plan was confirmed.
Six months after the trust’s termination date, owners of the debtor sued third parties in bankruptcy court, asserting claims belonging to the estate. The owners reasoned that they could sue because the trust had terminated, and the trustee of the trust no longer had authority to prosecute claims of the estate.
The trustee of the liquidating trust sought sanctions in bankruptcy court and dismissal of the owners’ suit for interference with trust property. The bankruptcy court dismissed the owners’ suit and awarded sanctions representing the trustee’s legal expenses.
Later, the bankruptcy court ruled that the trustee continued in possession of trust property even though the trust had terminated.