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The Bankruptcy Code has a problem: the Code directs “surplus assets” in a liquidating reorganization plan back to the debtor or to the entity acquiring the debtor’s assets, but doesn’t provide any instruction as to what should happen if the debtor and acquiring entity are both dissolved or in the process of dissolving (as is usually the case in liquidating chapter 11 plans). As a result, it is impossible to comply with this statutory scheme in instances where the chapter 11 plan has not provided sufficient detail as to how surplus assets should be distributed. The various approaches courts have taken in addressing this problem and possible ways Congress might correct it were the subject of an article recently published in the American Bankruptcy Institute Journal by Partner <a href="http://www.bakerlaw.com/marcehirschfield/">Marc Hirschfield</a> and Associate <a href="http://www.bakerlaw.com/jameswday/">Jim Day</a> (May 18).  In their article, titled “Disposition of Surplus Assets in Liquidating Bankruptcy Estates,” Hirschfield and Day begin by describing the case of In re Xpedior Inc., where a trust established by a liquidating chapter 11 plan was left with an $842,000 surplus after all creditors had received a 100 percent distribution and all administrative claims had been paid. After performing a thorough analysis, the court concluded that compliance with the Bankruptcy Code’s literal provisions was impossible, but that application of state law was preempted by the Bankruptcy Code. The Court ultimately arranged for the surplus funds to be donated to a series of different charities. Because judges arguably should not be in the position of designating charities to receive funds whose disposition is supposed to be controlled by the Bankruptcy Code, the Xpedior case revealed a gap in the Code that would be better addressed by Congress.  This problem with the Code can be remedied by requiring confirmation plans to provide for the distribution of surplus funds as a prerequisite to plan confirmation, or by providing that surplus funds will automatically revert either to the U.S. Treasury or to an approved charity fund, write Hirschfield and Day. In the interim, practitioners should make provisions for the disposition of surplus funds in liquidating chapter 11 plans, and may want to consider selling the rights to remnant assets early in the bankruptcy case.  <a href="http://www.bakerlaw.com/files/Uploads/Documents/News/Articles/BUSINESS/2013/2013-June-ABI-Journal-Day-Hirschfield.pdf">Read the full article</a>.

ABI Journal: Marc Hirschfield and James Day Address the Disposal of Surplus Funds in Liquidation Cases

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