599 B.R. 634
1st Cir. BAP2019Background
- The Catholic School Employees Pension Trust (the Trust) managed a pension plan for Catholic schools in Puerto Rico; the plan was terminated in June 2016 and pension payments ceased.
- After termination, hundreds of plan participants sued the Trust and related entities to recover unpaid benefits; the Trust filed a voluntary Chapter 11 petition on January 11, 2018 to obtain a stay and orderly liquidation.
- Several plan participants (the Appellees) moved to dismiss, arguing the Trust is not a "person" under 11 U.S.C. § 109 because it is not a "business trust" within the definition of "corporation" in § 101(9)(A)(v).
- At an evidentiary hearing the Trust’s board president (Dr. Ramón Guzmán) testified; the Trust produced documents (Deed of Trust and Pension Plan) showing the Trust held employer contributions, invested passively, and was required to preserve assets for participants and beneficiaries.
- The bankruptcy court applied a multi-factor test (purpose, corporate attributes, business-like activities, profit motive) and concluded the Trust was not a business trust; it dismissed the Chapter 11 petition. The BAP affirmed.
Issues
| Issue | Plaintiff's Argument (Trust) | Defendant's Argument (Appellees) | Held |
|---|---|---|---|
| Whether the Trust is a "person" eligible to be a Chapter 11 debtor under § 109 because it is a "business trust" under § 101(9)(A)(v) | The Trust argued it functioned like a corporation: board governance, authority to invest and hire, engaged in business-like investment activities over decades, and the petition sought orderly liquidation to maximize value | Appellees argued the Trust was a passive, not-for-profit pension vehicle created to preserve the res for beneficiaries, had no outside investors, benefits were nontransferable, and lacked profit motive or active business operations | The BAP held the Trust was not a business trust as of the petition date: created to preserve the res, lacked key corporate attributes (notably investor capital and freely transferable beneficial interests), and engaged only in incidental/passive investments; dismissal affirmed |
| Proper temporal point for evaluating business-trust status | Trust urged the court to consider the Trust’s long-term (pre-termination) business activities, not only post-termination conduct | Appellees and court treated the petition date (and totality of circumstances) as governing eligibility evaluation | Held that eligibility is determined as of the petition date; the court considered overall history but found the Trust did not qualify at any relevant time |
| Standard for defining "business trust" for § 109 purposes | Trust accepted multi-factor/totality-of-circumstances tests and contended it met them | Appellees relied on decisions emphasizing primary purpose, corporate attributes (especially transferability), and active business operations | The BAP endorsed a distilled multi-factor approach (aligned with Dille synthesis): primary business purpose plus indicia of a corporate entity; applied that standard and affirmed dismissal |
| Burden of proof for business-trust status | Trust bore ultimate burden to prove eligibility but argued court undervalued its evidence | Appellees argued movants made a prima facie showing Trust was nonbusiness; burden shifting appropriate | Court used a burden-shifting approach: movants make prima facie case of non-business-trust; ultimate burden on the Trust; Trust failed to carry it |
Key Cases Cited
- In re Medallion Realty Tr., 103 B.R. 8 (Bankr. D. Mass. 1989) (historical discussion and guidance on distinguishing business trusts from traditional trusts)
- Morrissey v. Comm’r, 296 U.S. 344 (U.S. 1935) (six-factor test describing characteristics of business trusts)
- In re Mosby, 61 B.R. 636 (E.D. Mo. 1985) (applied Morrissey factors in bankruptcy context)
- Brady-Morris v. Schilling (In re Kenneth Allen Knight Tr.), 303 F.3d 671 (6th Cir. 2002) (adopted primary-purpose test and emphasized fact-specific findings)
- In re Parade Realty, Inc. Employees Ret. Pension Tr., 134 B.R. 7 (Bankr. D. Haw. 1991) (found pension trust was not a business trust; emphasized transferability and lack of investor capital)