Pension Trust is not a Debtor under the Bankruptcy Code.

By: Danielle Ullo

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff


Under section 109 of title 11 of the United States Code (the “Bankruptcy Code”), a person is generally eligible to be a debtor.[1]  The definition of a person is broad and includes a corporation.[2] A corporation includes a business trust, which is not defined by the Bankruptcy Code.[3]  The United States Bankruptcy Appellate Panel for the First Circuit in Catholic School Employees Pension Trust provided some guidance as to what is a business trust.[4]  There, the court determined that a pension trust was not a business trust and thus not eligible to be a debtor  under  the Bankruptcy Code.[5]  The Catholic Schools of the Archdiocese of San Juan Pension Plan (the “Plan”) was formed on November 26, 1979 to pay pensions to “participants,” defined as “any employee or their beneficiaries of a participating employer who has acquired or may acquire rights in the plan.”[6]  The Plan was administered and managed by the Catholic School Employees Pension Trust (the “Trust”) and “Participating Employers” paid into the pension plan on behalf of each participating employee.[7]  The Deed of Trust stated that the Plan was created “for the exclusive benefit of the employees of the participating employers and/or their beneficiaries.”[8]

The Plan was terminated on June 30, 2016.[9] Upon learning of the Plan’s termination, hundreds of Plan participants brought actions against the Trust to recover unpaid benefits.[10]  The Trust subsequently filed a Chapter 11 petition with the United States Bankruptcy Court for the District of Puerto Rico. Certain Plan participants moved to dismiss the bankruptcy case asserting that the Trust was not a business trust and therefore it was not eligible to be a debtor under section 109 of the Bankruptcy Code.[11]

            Several circuits have addressed whether a trust is a business trust or some other trust that is not eligible to be a debtor. Here, the court acknowledges that there is “no uniform standard” to define a “business trust” for the purpose of section 109,[12] and then addresses the different tests adopted throughout various circuits. The court analyzed the Eighth Circuit’s “Six-Factor Test,”[13] the Second Circuit’s “Multi-Factor Approach,”[14] the Sixth Circuit’s “Primary Purpose Test”[15] and, lastly, the In re Dille Family Trust test, which distilled the other tests into a two-prong analysis.[16]  The In re Dille Family Trust test asks first “whether the trust itself was created for the purpose of transacting business for a profit” and next “whether the trust in-fact has all of the indicia of a corporate entity.”[17]  Ultimately, the court adopted the Dille Family Trust test to determine that the Trust was indeed not a business trust, because it (1) was not created for the purpose of transacting business for a profit, and (2) the Trust did not have the indicia of a corporate entity.[18]

            Under the Bankruptcy Code, a business trust is eligible to be a debtor while other trusts are not.[19]  Circuits have developed different tests to determine whether a trust is a business trust.[20]  According to the Ninth Circuit, those various tests can be distilled into a two-prong analysis asking whether the trust was created for the purpose of transacting business and whether the trust has the indicia of a corporate entity.[21] In applying this test to a pension plan, the court concluded that it did not satisfy either elements and thus was not a suitable debtor for Chapter 11 bankruptcy.[22]  Further, church plans, like the Pension Trust, are exempt from the Employment Retirement Income Securities Act of 1974 (ERISA).[23]  ERISA protects welfare benefit plans by requiring, for example, certain disclosures and setting minimum funding standards, and provides a federal backstop for distressed plans.[24] Since church plans are exempt from ERISA protection, they do not have the benefit of a federal backstop in the case of inadequate funding, thus adding an additional layer of risk for church plans.

[1] See 11 U.S.C. § 109(b) (“A person may be a debtor under [this title].”).

[2] 11 U.S.C. § 101(41), (9)(a)(v) (defining “person” for the purpose of the statute as including a corporation, which in turn includes a “business trust.”)

[3]  In re John Q. Hammons Fall 2006, LLC, 573 B.R. 881, 891 (Bankr. D. Kan. 2017) (“The Code does not further define “business trust.”).

[4] Catholic School Employees Pension Trust, 599 B.R. 634 (Bankr. App. 1st Cir. 2019); 11 U.S.C. § 109 (2012).

[5] 599 B.R. 634; Supra note 2. See In re Secured Equipment Trust of Eastern Air Lines, Inc., 38 F.3d 86 (2d Cir. 1994) (“Under the Bankruptcy Code, only a “person” may be an involuntary debtor. The term “person” has been defined to include “corporation,” and “corporation” has been further defined to include “business trust.”); In re Medallion Trust, 103 B.R. 8, 10 (Bankr. D.Mass. 1989), aff'd, 120 B.R. 245 (D.Mass. 1990) (explaining that the legislative history of the Bankruptcy code supports the proposition that a business trust is the only trust eligible for bankruptcy relief.).

[6] 599 B.R. 634 at 640.

[7] Id at 640-41.

[8] Id at 641.

[9] Id at 642.

[10] Id at 638, 642.

[11] Id at 639.

[12] Id (citing Murphy v. Bernstein (In re Dille Family Tr.), No 17-24771-JAD, 598 B.R. 179, 191-92, 2019 WL 826568 (Bankr. W.D. Pa. 2019).

[13] See Mosby v. Boatmen’s Bank of St. Louis Cnty. (In re Mosby), 61 B.R. 636 (Bankr. E.D. Mo. 1985) aff’d 791 F.2d 628 at 638 (8th Cir. 1986) (citing Morrissey v. Commissioner, 296 U.S. 344 (1935)). See id at 638 (“The distinguishing characteristics of a business trust include: (1) a trust created and maintained for a business purpose, (2) title to property held by trustees, (3) centralized management, (4) continuity uninterrupted by death among beneficial owners, (5) transferability of interests, and (6) limited liability.”).

[14] See In re Secured Equipment Trust, 38 F.3d at 89 (applying a fact-specific approach for determining whether the trust was a business trust. The factors considered by the Court were (1) “whether the trust at issue has the attributes of a corporation,” (2) whether the trust was “created for the purpose of carrying on some kind of business,” or to “protect and preserve the res,” (3) whether the trust engaged in “business-like activities,” (4) whether the trust “transact[ed] business for the benefit of investors,” and (5) whether there is a “presence or absence of a profit motive.”).

[15] See In re Kenneth Allen Knight Trust, No. 96-5353, 1997 WL 415318, at *4 (6th Cir. July 22, 1997) (“[T]rusts created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors qualify as business trusts, while trusts designed merely to preserve the trust res for beneficiaries generally are not business trusts.”).

[16] See In re Dille Family Trust, 598 B.R. 179 at 194 (Bankr. W.D. Penn. 2019) (“The first is whether the trust itself was created for the purpose of transacting business for a profit…. The second is whether the trust in-fact has all of the indicia of a corporate entity.”).

[17] Id.

[18]  Catholic School Employees Pension Trust, 599 B.R. 634 at 668.

[19] See supra notes 1-2.

[20] See supra notes 13-16.

[21] 599 B.R. 634.

[22] Id.

[23] 29 U.S.C. § 1003(b)(2) (“The provisions of this subchapter shall not apply if … such plan is a church plan”); see also Patterson v. Shumate, 504 U.S. 753 at 762 (“pension plans established by governmental entities and churches need not comply with Subchapter I of ERISA”); Israel Goldowitz, BAP Agrees: No Bankruptcy for Puerto Rico Church Pension Plan, 28 Am. Bankr. Inst. J., July 2019.

[24] See 29 U.S.C. § 1001.