Qualifying as a debtor is the first eligibility requirement for bankruptcy protection under the United States Bankruptcy Code (the “Code”). Failure to satisfy the requirements to be a qualifying debtor forecloses an entity from obtaining bankruptcy relief. Thus, it is crucial that qualifying debtor categories are defined and delineated, particularly for business entities for whom debtor status is not always so clear.
Section 109 of the Code includes “business trust[s]” as a party entitled to bankruptcy relief but excludes other trusts from that definition. While the Code is clear to exclude ordinary trusts from eligibility to be a debtor, it leaves the term “business trust” undefined. Because the Code does not explicitly define the term “business trust,” it has been up left to the courts to come up with a cohesive and uniform interpretation of a debtor under section 109. Courts continue to grapple with how to define “business trust,” and have equivocated on which sorts of trusts should be considered business trusts. The ongoing question of how to define a business trust has impacted the ability of pension trusts to file for bankruptcy. While the pension trusts argue that they should be treated as business trusts for the purpose of debtor eligibility, the courts that have heard their claims have rejected them and have held instead that pension trusts do not qualify as business trusts for the purpose of section 109.
This memorandum addresses why pension trusts should not be included within the definition of a business trust for the purposes of section 109 of the Code pursuant to the frameworks of the traditional Morissey test, the substantial business activities test, and the In re Dille Family Trust analysis.