A liquidating trust is one that is organized for the primary purpose of liquidating and distributing the assets transferred to it. When a plan under chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) is confirmed and establishes a liquidating trust, the trust is treated as a distinct entity. The liquidating trust terminates the debtor in possession’s status and conveys the estate’s rights and assets to a “liquidating trustee.” The confirmed plan does not simply substitute the trustee for the debtor-in-possession, but rather it creates a separate and distinct trust, holding certain property of the estate and giving the liquidating trustee control of this property.
When a plan, vesting a liquidating trustee with the exclusive ability to object to claims, is confirmed, the plan acts as a binding contract. Despite the binding nature of a confirmed plan, individual creditors may still attempt to object to proofs of claim before a court enters its actual confirmation order. Since the confirmed plan binds all parties, courts will respect the overall binding nature of the confirmed plan and will accordingly uphold the terms of the plan that govern who may object to claims. Even without considering the binding nature of a confirmed plan, courts also cite both long-recognized bankruptcy practice and sound policy concerns that drive the general line of authority respecting the exclusive authority of the liquidating trustee to object to claims.
Courts consider the binding effect of confirmed plans and how a confirmed plan can alter the rights of creditors to object to claims. Courts also consider the general line of authority among bankruptcy courts respecting the primacy of the trustee in the liquidation process. This memorandum examines these considerations in the context of a chapter 11 plan’s establishment of a liquidating trust and appointment of a liquidating trustee. These considerations in this context were effectively analyzed in the Kansas bankruptcy court’s decision in In re Abengoa Bioenergy Biomass of Kansas. Part I discusses the binding effect of a confirmed plan’s establishment of a liquidating trust and trustee on creditors. Part II discusses the courts’ recognition of the exclusive authority of the liquidating trustee to object to claims, which furthers sound public policy by ending litigation through the quick resolution of disputes and by promoting the expeditious administration of estates.