Establishing a liquidating trust

Dispositions Independent of Letters; Family Exemption; Probate of Wills and Grant of Letters 33.

In 2013, the liquidating trustee filed a motion in the bankruptcy court for an order determining that its membership interest in West Lakeside was unaffected by the plan because the plan transferred the debtor’s membership interest in West Lakeside to the trust. buttressed the bankruptcy court’s finding with California contract law, which applied in interpreting the plan. Section 541 allows the estate to take a debtor’s assets free and clear of prepetition contractual or statutory restrictions on a transfer. agreed, pointing to section 1123(b)(3)(B) of the Bankruptcy Code, which allows a plan to provide for “the retention and enforcement by the debtor, by the trustee, or by a representative of the estate appointed for such purpose, of any claim or interest.” 11 U. The trust was then able to enjoy the same membership interest in West Lakeside as the Debtor had prior to bankruptcy. Code 17301(a) provides, in relevant part, that a membership interest or economic interest is only assignable with the consent of a majority in interest of the members not transferring their interests (except as provided in the operating agreement or articles of organization).

On January 9, 2009, Alameda and certain of its affiliates filed for chapter 11 protection in the United States Bankruptcy Court for the Central District of California.

The debtors’ joint chapter 11 plan established a liquidating trust for the primary purpose of liquidating and distributing Alameda’s assets.

Without the benefit of insurance, a challenge to a trust’s status could lead to the diminution in value of the trust assets, or worse, if the challenge is made after funds have been distributed, there may not be sufficient trust assets to defend such challenge, or pay any tax, interest or penalties, and the practical recovery of funds from beneficiaries may be difficult.

Ambridge’s Tax Qualification Insurance extension can protect trusts (and indirectly their beneficiaries) from the financial exposures resulting from a disqualification as a liquidating trust.

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Because liquidating trusts are formed to maximize value and distribute to creditors some or all of the proceeds of divested assets of a formerly distressed and now liquidated entity, trusts and trustees are subject to scrutiny of already disgruntled beneficiaries or other third parties who may disagree with the manner in which the trustee is attempting to liquidate otherwise illiquid assets.

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