Getting Value for “Remnant Assets”: A Solution for Unexpected Chapter 7 and 11 Assets

What happens when an unexpected check payable to an old corporate debtor shows up on your desk years after the case has been closed and all of the files have been sent to storage?  The solution is bound to be in the Chapter 11 Plan, right?  Or maybe the post-confirmation trust agreement?  Or, in the case of a Chapter 7, is it in the Bankruptcy Code?  In reality, there may not be a pre-determined course of action for disposing of unexpected assets.  And where the size of the asset does not justify the cost of re-opening the case or is not enough to make another creditor distribution, the decision of where the money should end up is not always clear.

Common sense tells us that it would be impractical to monetize each and every asset of a debtor corporation, particularly smaller assets, during the pendency of a Chapter 7 or Chapter 11 liquidation.  Not only would the time required to do so unnecessarily delay distribution to creditors, but the professional fees necessary to accomplish such a feat would outweigh the likely benefits.  For this reason, it may be surprising that most Chapter 11 plan documents do not contemplate a solution for unexpected, small or large, assets that surface after the final distribution.

When the Plan does not plan for unexpected assets.
Typical Chapter 11 Plans will include a provision to address undeliverable or uncashed creditor distribution checks.  (In Chapter 7 cases, 11 U.S.C. § 347 provides that such checks shall be deposited into the court registry).  Although creditors are responsible for updating their notice and distribution addresses with the applicable court and claims agent, history teaches us that by the time most Chapter 11 cases are ready for interim or final distributions, some creditors have since relocated or gone of out business.  Whatever the reasons, often a fair number of creditor distribution checks are not negotiated.  Consequently, Chapter 11 Plans often provide for a re-distribution of uncashed or undeliverable claim distribution checks across the remaining creditor pool or a charitable donation of such unclaimed distributions.

What the typical Chapter 11 Plan does not address is how to dispose of an asset, large or small, which is discovered after the final distribution and which does not fall into the category of uncashed or undeliverable creditor distributions.  For example, a utility company may reconcile its closed customer accounts and issue a refund check for the unused portion of a deposit or for a credit based on a retroactive rate change.  And if the Chapter 11 debtor filed a proof of claim against an unrelated debtor in its bankruptcy case, distribution on that claim might finally occur as many as five or ten years later.  When the Chapter 11 Plan offers no guidance on how to resolve assets received after the case is closed and the post-confirmation entity has been discharged of its duties and powers, receiving a check in any amount after final distribution may prove to be more than just a nuisance.

Do I still have requisite authority to dispose of the unexpected asset?
Perhaps the first question that must be answered when an unexpected asset presents itself is whether and to what extent the case professionals still have authority to act.  Whether the post-confirmation estate operated through a plan administrator, creditor trust or liquidating agent, a determination must be made about the existing authority of such person or entity to act.  If the Plan provides for a creditor trust to terminate on a date certain or within a set period or time and relinquishes the creditor trustee’s powers upon termination, a court order to re-open the creditor trust for the limited purposing of administering the newly discovered asset may be required.  While there are sound reasons for limiting the temporal scope of post-confirmation representatives or entities, requesting a Plan provision that allows for limited authority to address unexpected assets up to a certain value without further order of court merits practical consideration when drafting the Plan or moving for entry of the final decree and case closure.  However they elect to ultimately dispose of the unexpected asset, professionals should first obtain or otherwise ensure that they have the requisite authority to make that disposition.

A charitable donation may not the best answer.
Some professionals opt to donate unexpected assets to charity as a solution, but concern exists about the political or social issues that may be implicated with such an election.  For example, courts have denied proposals to donate estate assets to support faith-based charities, recognizing that estate funds should not be used to further personal beliefs.  On the other hand, some courts actively encourage charitable donations of unclaimed estate funds, particularly where the recipient charities fund legal costs for the indigent.  But even donations to legal aid groups may be subject to scrutiny by the creditor body or U.S. Trustee where the case professionals hold an administrative position or membership in the charity’s sponsoring organization.  Unless and until Congress enacts a charitable donation protocol in Chapter 11 cases, the more prudent practice is to find other, creditor-friendly alternatives for disposing of such assets.

Hindsight is (only) 20/20.
Once bankruptcy professionals have been in the fortuitous position of receiving an unexpected asset in a closed case, they are more apt to expect the unexpected asset in other cases.  Of course, the benefit of hindsight does not change the fact that it is not cost-effective for bankruptcy professionals to try to uncover every asset and that it is not prudent to unnecessarily extend the life of the post-confirmation estate on the speculation that some unknown assets may trickle in.  This reality will not change no matter how diligent or clairvoyant the case professionals may be.

Residual or “remnant” asset sales are the solution.
Alas, there is a practical solution to ensure that bankruptcy professionals bring value into the estate for any and all remaining assets, particularly latent assets that would only prove to be a nuisance down the road.  Importantly, this solution is equally applicable to Chapter 7 and Chapter 11 cases.

At the end of a bankruptcy case, when all or most known assets have been fully administered and final distribution is imminent, a sale of the debtor’s residual assets around the close of the case will enable the post-confirmation estate representative or Chapter 7 trustee, as the case may be, to monetize any remaining known or unknown assets (i.e. the “remnants” of the debtor) for the benefit of the estate and its creditors.  Moreover, a sale of remnant assets easily resolves the age old question of what to do with the unexpected check that shows up on your desk after the final distribution has been made and the case has been closed.

And in the event that the Chapter 11 Plan does not address undeliverable creditor checks in the final distribution, the residual asset sale can be an efficient solution for that as well because the estate receives value upfront for the possibility that creditor distributions may not be timely negotiated, without the costs or need for a supplemental distribution.

The proof is in the pudding.
Bankruptcy professionals who have designed their closing process to include a residual asset sale as part of every case have said that residual or “remnant” asset sales enable them to report with absolute certainty that they have not only fully administered all of the known estate assets, but they have also received value for any unknown assets that may show up after the case is closed.  Bottom line: Remnant asset sales avoid the risk and hassle of unexpected assets and are a convenient, efficient, and cost-effective way to resolve the loose ends of a bankruptcy case.

About the Author
Janice A. Alwin is Vice President and General Counsel of Oak Point Partners, Inc., a private investment firm that specializes in the purchase of residual assets from bankruptcy estates around the time of final distribution or final decree.  As a former bankruptcy practitioner, Ms. Alwin has represented debtors, trustees, financial institutions, and asset purchasers in all aspects of insolvency matters, including complex chapter 11 bankruptcy cases and related litigation.