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Foreign Trusts Present Tricky Eligibility Issues

In bankruptcy as in federal jurisprudence generally, to characterize something with the near-epithet of “federal common law” virtually dooms it to rejection. [1]  But, since “common law” is “[t]he body of law derived from judicial decisions, rather than from statutes,” [2] is judicial interpretation of the Bankruptcy Code [3] ever “federal common law”?  Does it cross over to that dangerous territory if Congress left few clues as to what it intended in the provision undergoing interpretation?

These questions were evoked by a recent decision of the Bankruptcy Court in Delaware [4] on an issue that arises fairly often—is this entity permitted to be a debtor in a case under a particular Chapter, or under the Code at all?  In EHT US1, the question was whether a real estate investment trust formed as a “collective investment scheme” under the law of Singapore was a “business trust” as that term is used in the Code so that it could be a debtor in Chapter 11.  For a trust to be a “person” that may be a debtor under the Code, it must be a “business trust,” of which Congress did not provide a definition; [5] it is universally understood that no other trusts may be debtors under the Code.

Judge Sontchi properly asks, “what law governs whether EH-REIT is a business trust”? [6]  He answers:

There is a split of authority as to whether the law of the jurisdiction in which the trust resides or federal common law governs.  That said, the weight of authority falls in favor of applying federal common law.  The Court disagrees with this authority. [7]

His footnotes for the first and second sentences of the answer cite Dille Family Trust [8] and Catholic School Employees Pension Trust[9]  However, there is one problem.  Neither Dille Family Trust nor Catholic School Employees Pension Trust uses the phrase “federal common law” in this context.  Dille Family Trust characterizes the issue as a “federal question” and “a matter under federal law,” and Catholic School Employees Pension Trust refers to “federal law.” [10]

Based upon the disfavor cast upon federal common law by Butner v. U.S. [11] and the “striking inconsistency” among the many courts that have attempted to explicate exactly what the Code denotes by the term “business trust,” Judge Sontchi concludes,

Thus, the Court finds that federal common law should not determine whether a trust is a “business trust” under the Bankruptcy Code.  Rather, the law of the jurisdiction in which the trust is organized, in this case the Republic of Singapore, shall govern. . . .  [T]he Court shall now turn to whether EH-REIT is a business trust under Singapore law. [12]

The Court had before it the testimony of two Singapore law professors, and, after a detailed analysis of the testimony of each of them, concludes as follows:

In sum, the Court finds Professor Tjio’s testimony to be highly persuasive and not rebutted by Professor Loi’s testimony.  Thus, the Court holds that EH-REIT is a business trust under Singapore law and, thus, an eligible debtor under the Bankruptcy Code. [13]

To this blogger, the issue is not a single either-or question and does not depend on labels.  Rather, the analysis logically falls into two parts:

First, what characteristics must an entity have in order to be a business trust in the sense that Congress intended when it provided that a business trust is eligible to be a debtor under the Code (but any other kind of trust is not)?  That is unquestionably a question of United States federal law—and not federal common law, but the interpretation of an Act of Congress.  It is evident from the dozens of cases cited by Dille Family Trust and Catholic School Employees Pension Trust that the courts have not agreed on a common formulation of what those characteristics are, but that does not lead to the conclusion that they are asking the wrong question.

Then, does any particular entity presenting itself at the courthouse door claiming to be a business trust have those necessary characteristics?  That is unquestionably a question for the law of the jurisdiction of the entity’s formation and its constitutive documents.

[1]  Rodriguez v. FDIC, 140 S. Ct. 713, 716 (2020)(Gorsuch, J.):

Should federal courts rely on state law, together with any applicable federal rules, or should they devise their own federal common law test?  To ask the question is nearly to answer it.  The cases in which federal courts may engage in common lawmaking are few and far between.

[2]  Black’s Law Dictionary (11th ed. 2019).

[3]  Subsequent references herein to the “Code” denote the Bankruptcy Code, Title 11 of the U.S. Code.

[4]  In re EHT US1, Inc., et al., Debtors, No. 21-10036 (Bankr. D. Del. June 1, 2021)(Sontchi, C.J.)(hereinafter “EHT US1”).

[5]  Code §§ 101(9)(A)(v), (41); 109(a).  It was apparently undisputed that the collective investment scheme was neither a partnership or conventional corporation nor any other kind of “person.”

[6]  EHT US1 slip op. at 19.

[7]  Id. at 19-20 (footnotes omitted).

[8]  Murphy v. Bernstein (In re Dille Family Trust), 598 B.R. 179, 191 (Bankr. W.D. Pa. 2019).

[9]  Catholic School Employees Pension Trust v. Abreu, 599 B.R. 634, 654 (1st Cir. Bankr. 2019).

[10]  Dille Family Trust at 191; Catholic School Employees Pension Trust at 654.  Dille Family Trust (at 191-92) does use the phrase “general common law,” but it does so in this context:

This conclusion [that the determination of whether a trust is a business trust is a federal question] also makes sense in light of the United States Supreme Court decision in Field v. Mans, 516 U.S. 59 (1995)  In Field v. Mans, the United States Supreme Court declared that when Congress utilizes in the Bankruptcy Code a term of art with an established legal meaning, Congress meant to “incorporate the general common law” or the “dominant consensus of common-law jurisdictions, rather than the law of any particular State.”  Field, 516 U.S. at 70 n. 9.

Field v. Mans and the cases cited therein by Justice Souter may point the way to solving the “business trust” interpretation challenge.

[11]  440 U.S. 48 (1979).

[12]  EHT US1 slip op. at 23 (footnote omitted).

[13]  Id. at 28.