Second Circuit's Significant Decision Could Impact Liquidating Trustees

In the case of United States of America v. Edward P. Bond, No. 12-4803 (2d. Cir. August 13, 2014), the United States Court of Appeals for the Second Circuit (the "Second Circuit") issued a decision that could have far-reaching effects on how liquidating chapter 11 bankruptcy cases will be handled in the future.

The facts of this case are relatively straightforward. In Bond, the court approved the creation of a liquidating trust in connection with the bankruptcy cases of PT-1 Communications, Inc. and its related subsidiaries (the "Debtors") pending in United States Bankruptcy Court for the Eastern District of New York (the "Bankruptcy Court'"). Edward P. Bond was eventually appointed as the liquidating trustee (the "Liquidating Trustee") for the liquidating trust, which was created upon confirmation of the Debtors' chapter 11 plan.

However, before the creation of the liquidating trust, the Internal Revenue Service filed an administrative expense claim in the Bankruptcy Court seeking an additional $2 million in interest and penalties for post-petition taxes due and owing from the Debtors' estates for the period from March 9, 2001 through December 31, 2001 (the "Stub Period"). The Debtors filed chapter 11 on March 9, 2001, which marked the commencement of the Stub Period. While the IRS's administrative expense claim was pending, the Debtors obtained confirmation of their plan, pursuant to which the liquidating trust was created. As part of the assets assigned to the liquidating trust, the Debtors assigned all of their rights and interest in and to any tax refunds due and owing the Debtors for the tax years 2004 and earlier. The plan was confirmed on November 23, 2004 and became effective on January 31, 2005.

Following his appointment, the Liquidating Trustee, pursuant to 11 U.S.C. § 505(a), filed a request for a federal income tax refund before the Bankruptcy Court. On March 14, 2005, the Liquidating Trustee also: (i) counterclaimed against the IRS in the Bankruptcy Court, objecting to the IRS's administrative expense claim; and (ii) sought a refund of the taxes paid during the Stub Period. In addition, in September of 2005, the Liquidating Trustee filed a refund request with the IRS, which, as noted by the Second Circuit, was still pending nearly nine years later.

Between 2006 and 2009, the Bankruptcy Court entered a series of decisions which, among other things, dismissed the IRS's administrative expense claim and granted summary judgment in...