United States Bankruptcy Appellate Panel of the First Circuit
CATHOLIC SCHOOL EMPLOYEES PENSION TRUST, a/k/a Fideicomiso Plan de Pension Para Empleados de Escuelas Catolicas, a/k/a Catholic Schools of the Archdioceses of San Juan Pension Plan, Debtor.
v.
FRANCISCO A. ABREU, YALI ACEVEDO, and EDDA D. GONZÁLEZ-VÁZQUEZ, Appellees. CATHOLIC SCHOOL EMPLOYEES PENSION TRUST, Appellant,
Appeal
from the United States Bankruptcy Court for the District of
Puerto Rico (Hon. Enrique S. Lamoutte, U.S. Bankruptcy Judge)
Javier
Vilariño, Esq., on brief for Appellant.
Ramón Dapena, Esq., German Brau, Esq., Francisco
Amundaray, Esq., and Carlos F. López, Esq., on brief
for Appellees.
Before
Feeney, Hoffman, and Cary, United States Bankruptcy Appellate
Panel Judges.
Feeney, Chief U.S. Bankruptcy Appellate Panel Judge.
Catholic
School Employees Pension Trust (the "Pension Trust"
or the "Trust") appeals from the bankruptcy
court's Opinion and Order (the "Dismissal
Order"), dated March 13, 2018, dismissing the Pension
Trust's chapter 11 case. In dismissing the case, the
bankruptcy court ruled that the Pension Trust was not a
"person" eligible to be a debtor under 11 U.S.C.
§ 109 because it was not a "business trust"
under § 101(9)(A)(v).[1] For the reasons set forth below, we
AFFIRM the Dismissal Order.
INTRODUCTION
The
Pension Trust administered and managed the Catholic Schools
of the Archdiocese of San Juan Pension Plan (the
"Pension Plan" or "Plan") which was
terminated in June 2016.[2] Prior to the commencement of the
Pension Trust's bankruptcy case, hundreds of Pension Plan
participants (identified in the Pension Plan as employees)
had commenced actions against The Holy Catholic Apostolic
Roman Church, the Archdiocese of San Juan, the
"Superintendence" [sic] of Catholic Schools of the
Archdiocese of San Juan, the Pension Plan, and various other
entities and individuals, including the current president of
the board of trustees of the Pension Trust, Dr. Ramón
A. Guzmán Rivera ("Dr. Guzmán"), in
courts of the Commonwealth of Puerto Rico and the U.S.
District Court for the District of Puerto Rico to recover
unpaid pension benefits, as well as other forms of relief.
Seeking a breathing spell from this litigation, the Pension
Trust filed a chapter 11 petition on January 11,
2018.[3]
On
February 6 and 7, 2018, motions to dismiss the chapter 11
case were filed by Yali Acevedo, on her own and on behalf of
180 plaintiffs in a case before the Court of First Instance,
San Juan; Francisco Abreu, on his own and on behalf of six
other plaintiffs in a case before the Court of First
Instance, Aguadilla; and Edda D.
González-Vázquez, a plaintiff in a case before
the U.S. District Court for the District of Puerto Rico
(collectively, the "Appellees"). The Appellees, who
are participants under the Pension Plan, asserted that the
Pension Trust was not a "person" eligible for
bankruptcy relief because it was not a "business
trust" under the Bankruptcy Code.[4] They alleged that
the Pension Trust did not engage in "income generating
activities" or "business activities" and,
therefore, was not a business trust eligible for relief under
the Bankruptcy Code. The Pension Trust opposed the motions to
dismiss, claiming, among other things, that it was a business
trust because it had attributes of a corporation and engaged
in business activities. According to the Pension Trust, the
court needed to consider the "totality of the
circumstances," including the terms of the Pension Trust
document, the business activities in which the Trust engaged
before the Pension Plan was terminated, and the economic
landscape that led to its financial decline. The Pension
Trust likened its post-termination activities to those an
insolvent corporation would undertake in liquidating its
assets in a chapter 11 bankruptcy case and stated that the
bankruptcy case was commenced "specifically to
effectuate the orderly liquidation of the business
trust." (emphasis in original).
The
bankruptcy court scheduled an evidentiary hearing on the two
motions to dismiss and, in a pre-hearing order, identified
the "key legal issue" in determining the Pension
Trust's eligibility as "whether the Pension Trust is
a business trust." After the evidentiary hearing, at
which the only witness was Dr. Guzmán, the president
of the Pension Trust's board of trustees, the bankruptcy
court dictated into the record its findings and rulings and
granted the motions to dismiss, indicating that it would
issue a written decision at a later date. That written
decision was the Dismissal Order in which the court
determined that the Pension Trust was not a business trust
and, therefore, was ineligible to be a debtor. Noting that
the Bankruptcy Code does not define the term "business
trust" and that no uniform standard has developed in the
case law in the First Circuit and elsewhere, the bankruptcy
court determined the relevant factors for evaluating whether
an entity is a business trust are: (1) "whether the
trust was created for the purpose of carrying [on] a
business, as opposed to the preservation of the
res"; (2) "whether the trust has the
attributes of a corporation"; (3) "whether the
trust engages in business-like activities"; and (4)
"whether the trust has a profit motive." See In
re Catholic Sch. Emps. Pension Tr., 584 B.R. 82, 87
(Bankr. D.P.R. 2018) (citations omitted). The bankruptcy
court did not engage in a detailed analysis of each of these
factors, but ruled that the Pension Trust was not a business
trust.
BACKGROUND[5]
I.
Pre-Bankruptcy Events
A.
The Establishment of the Pension Trust and the
Pension Plan
The
Pension Trust was established on November 26, 1979 by a Deed
of Trust. The Pension Plan was attached to, and incorporated
into, the Deed of Trust. The Settlor of the Pension Trust was
the Superintendent of the Catholic Schools of the Archdiocese
of San Juan (the "Settlor" or the
"Superintendent"). The Settlor also was denominated
in the Pension Plan as its "Sponsor." Pursuant to
the terms of the Pension Plan, the Settlor was responsible
for the appointment of a "Retirement Committee"
(hereinafter sometimes the "committee") of at least
seven members who would be "under the control and
direction of the Settlor and be accountable to it
[sic]." Pursuant to the Pension Plan, the Settlor also
was responsible for the appointment of trustees to take
possession of Plan property.
The
Deed of Trust incorporates by reference defined terms in the
Pension Plan. The Pension Plan defines the term
"Participant" as "any employee or their
beneficiaries of a participating employer who has acquired or
may acquire rights in the plan," and the term
"Beneficiaries" as "the person or persons,
natural or juridical [sic] designated to receive any benefits
payable pursuant [to] this document upon the death of the
participant," as well as "each and every one of the
beneficiaries or heirs after the death of the
participants."[6] The term "Participating
Employer" is defined as follows:
([i]) the Office of the Superintendent of Catholic Schools of
the Archdiocese of San Juan and any school that is under the
supervision of the Superintendent and chooses to participate
in the plan, (ii) any successor to the property of any of
them, (iii) any other Catholic school under the supervision
of the Superintendence [sic] of their respective diocese or
superintendence [sic] of Catholic schools that assumes in
writing the obligation of this plan, and (iv) any agency
and/or branch office of the Catholic Church of Puerto Rico,
but in each case subject to the approval of the plan sponsor
or their successor [sic].
The
Pension Plan provides that it was created by the
Superintendent "for the exclusive benefit of the
employees of the participating employers and/or their
beneficiaries," and that "[u]nder no circumstances
shall any trust property be used or any contribution made by
the employer[s] under the terms of this plan for purposes
other than the exclusive benefit of the employees and their
beneficiaries . . . ."[7] It also provides that it applies
"to current and future employees of participating
employers."
The
Deed of Trust provides that "the Trust shall consist of
such funds as shall from time to time be deposited with the
Trustee by the Settlor and its employees in accordance with
the term of the Plan . . . ." The Pension Plan in turn
provides that: "The custody and control of all the
assets constituting part of the fund shall be held by the
trustee[s] and neither the Settlor nor any participant shall
have any property right on it [sic], except that participants
are entitled to receive those payments and distributions that
are set forth herein." Thus, a board of trustees
(hereinafter sometimes the "trustees" or the
"board") administers the Trust and oversees its
compliance with the terms and conditions of the Deed of Trust
and the (now terminated) Pension Plan. The Deed of Trust
requires the trustees to discharge their duties with respect
to both the Trust and the Pension Plan "solely in the
interest of the participants and their beneficiar[ies]."
B.
The March 2016 Termination of the Pension
Plan
Article
18 of the Pension Plan contains provisions relating to its
termination and the liquidation of assets of the Pension
Trust. It provides:
A. The Settlor reserves the right to terminate this plan in
its entirety at any time, for any reason, or no reason at all
subject to the previous approval of the Secretary of the
Treasury, and/or the Pension Benefit Guarantee Corporation,
as well as the majority of participating employers.
B. This termination shall be effective if the committee and
the trustee[s] receive a termination permit from the
Secretary of the Treasury. In such case, each participant
shall take possession of all rights, title and interests of
accrued benefits acquired under the plan as provided in
Section D of this article.
C. The trustee shall execute each and every one of the legal
documents required to achieve the termination of the trust as
provided herein.
D. When the termination of the plan has been approved, the
plan trustees shall proceed to liquidate the trust fund and
to apportion the assets in accordance with the priorities
established by the regulations of Title IV of ERISA . . . .
If the assets available for distribution are not sufficient
to cover all claims within one of the established priorities,
these funds will be prorated and distributed equitably. . . .
On
March 14, 2016, Plan participants were informed that pension
payments would cease as of June 30, 2016, [8] and, in fact,
payments did cease. Unlike the Pension Plan, there was no
evidence or argument that the Pension Trust was ever
terminated.
As
noted above, following termination of the Pension Plan,
hundreds of Plan participants (including the Appellees) filed
complaints against the Pension Trust and other entities,
including, inter alia, the Archdiocese of San Juan,
in various local and federal courts seeking to recover
pension payments allegedly owed as well as other forms of
relief.[9]
II.
The Bankruptcy Case
A.
The Motions to Dismiss and Opposition
On
January 11, 2018, the Pension Trust filed a voluntary
petition for relief under chapter 11 of the Bankruptcy Code.
On February 6, 2018, Ms. Yali Acevedo and Mr. Francisco
Abreu, on their own and on behalf of other plaintiffs in
cases in the Puerto Rico courts, filed a motion to dismiss
the chapter 11 case, asserting that the Pension Trust was
ineligible to be a debtor in a bankruptcy case because it was
not a "business trust" under § 101(9)(A)(v).
Ms.
Edda D. González-Vázquez also challenged the
Pension Trust's eligibility to file a bankruptcy petition
by filing a motion to dismiss the case. She maintained the
Pension Trust could not be considered a business trust
because it was "not created for a business
purpose," had "no ongoing income generating
activities," and because its formation document
"prohibit[ed] the transferability of [ ] beneficial
interests."
On
February 20, 2018, the Pension Trust filed a single
opposition to both motions to dismiss, alleging that it was a
"business trust" and squarely fell within the
definition of a "corporation" set forth in §
101(9)(A)(v).
Thereafter,
the Appellees filed a response to the Pension Trust's
opposition raising additional arguments, including: (1) the
Pension Trust was "legally prohibited" from
conducting further business upon termination under Article
18(D) of the Pension Plan; (2) the Pension Trust
"neglected its duty to distribute the funds among the
employees"; and (3) the Plan's termination was
"illegal" because the Trust did not "obtain
the previous approval by the Puerto Rico Secretary of
Treasury" as required by the terms of the Pension Plan.
B.
The March 6, 2018 Bankruptcy Court Hearing
The
bankruptcy court held an evidentiary hearing on the two
motions to dismiss on March 6, 2018.[10] The parties introduced
the Deed of Trust and the Pension Plan as a joint exhibit,
and Dr. Guzmán testified. A four-part proffer of the
direct testimony of Luis Carrasquillo, a certified public
accountant, was considered by the court. The bankruptcy court
determined that the only relevant portion of the proffer was
Section D, in which Mr. Carrasquillo concluded: "In my
opinion, the Trust has all the attributes of an insolvent
corporation eligible for bankruptcy relief." The
bankruptcy court remarked, however, that Mr. Carrasquillo
offered no facts to support his opinion. The court admitted
the proffer into evidence but gave it little weight.
1.
Testimony of Dr. Guzmán
Dr.
Guzmán was the sole witness to testify. He testified
that he was appointed as a member of the board of trustees in
2011 and was elected president in 2012. He described his
duties and responsibilities as president as organizing and
presiding over meetings, preparing minutes and agendas,
receiving information from the Plan administrator,
communicating with other board members, recommending
candidates to become members of the board, and participating
in board determinations regarding the administration of the
Pension Plan and its assets.
(a)
Financial Difficulties
Dr.
Guzmán testified that at the time he became president
of the board, the Pension Trust was experiencing financial
difficulties, particularly with respect to the
"investment" of Pension Plan funds, as the fund was
a "limited fund" which only received contributions
from "participating employers." In practice, the
Pension Trust would turn over its funds to an investment
company and, according to Dr. Guzmán, "the worst
problem [the trustees] had to face was the matter of the
investment of the funds of the [P]lan." According to Dr.
Guzmán, the Pension Trust had invested funds with
"UBS" "for more than ten years," but it
"had to leave UBS." He stated: "[W]hat UBS was
really doing was bleeding us because they were charging us
commissions for all the money that the fund invested."
Dr. Guzmán testified that, following numerous
meetings, the board decided to withdraw funds from UBS and
transfer them to Popular Securities, where the board believed
it could obtain "safer profits" at less cost. The
Pension Plan experienced further financial hardship, however,
due to a significant decline in the number of participating
employers making contributions to the Plan. Dr. Guzmán
testified that, although the Pension Plan previously had
about 76 participating employers, mostly Catholic schools,
that number had decreased to 43 due to school closings. He
added that participating employers were precluded from
withdrawing from the Pension Plan, but "the reality is
that schools have shut down and disappeared as participating
employers."[11]
(b)
Employees
Dr.
Guzmán testified that during his tenure as president,
the Pension Trust had two employees. One was a full-time plan
"administrator" whose primary responsibilities were
to "control [ ] the payments" made to and by the
Plan and "bill participating employers" for their
contributions. The other employee was a part-time
administrative assistant who was responsible for preparing
all necessary forms and submitting them to the appropriate
government agencies. Dr. Guzmán testified that these
employees were "paid with the funds of the plan itself;
that is, from the revenues that the fund receive[d] from
participating employers[.]"
(c)
Termination of Plan
Dr.
Guzmán also testified about the
"termination" of the Pension Plan. When asked
whether "the plan terminated in March 2016," he
responded: "Exactly." He stated that "the
participating employers [we]re . . . the only ones who can
decide whether the plan will continue or be closed" and
that, after holding two meetings, the participating employers
"decided to terminate the plan."[12] As a result
of the termination, payments to beneficiaries under the Plan
ceased in June 2016. He stated, however, that notwithstanding
the termination of the Plan, the board of trustees continued
its efforts to collect the contributions still owed by
participating employers. He also testified that, although the
Pension Trust received no "new contributions" after
termination, the trustees successfully collected some of the
accounts receivable.
(d)
Trustees' Duty to Invest
Dr.
Guzmán testified that the board of trustees had a duty
"to invest and reinvest the trust['s assets]"
and it was his understanding that "[the board] had to
invest to make the fund grow." He testified that the
trustees were to "discharge [their] duties with respect
to the funds of the trust with diligence and prudence"
and that "business be conducted to achieve the
objectives of the trust."
(e)
The Bankruptcy Filing
Dr.
Guzmán, while admitting a lack of familiarity with
bankruptcy, opined that the Trust was insolvent and, in his
words "broke," and that the filing of a bankruptcy
petition was the most "equitable" way to
"divide up" the assets remaining in the Pension
Trust and distribute them to the Pension Plan beneficiaries.
He also indicated that the trustees' efforts to
distribute the remaining funds to the beneficiaries were
thwarted due to litigation commenced by beneficiaries, and
because "a group of plaintiffs [we]re carrying out an
attachment of the funds of the plan[.]"
(f)
Cross-Examination
On
cross-examination, Dr. Guzmán admitted that the
Pension Trust had no "inventory of goods for sale,"
"machinery or equipment for manufacturing,"
"real estate," or "intellectual
property." He testified that the Trust's only assets
were approximately $1.6 million-consisting of "money
contributed by the participating employers" and
"dividend[s] and/or interest[]"-and approximately
$1.7 million in "accounts receivable"-representing
amounts still owed by participating employers. He stated that
the Pension Trust has a board of trustees, but it does not
have any stockholders and it pays no dividends. It does not
have any loans from third parties or lines of credit. Dr.
Guzmán agreed that, under the terms of the Plan,
participants and beneficiaries cannot "assign [ ]or
transfer, encumber in any way, [or] dispose of any of the
benefits to which that person is entitled[.]"
Dr.
Guzmán confirmed that, pursuant to the Deed of Trust
and the Pension Plan, "the obligation of the trustee[s]
would be to receive the monies from the sponsoring employers,
to deliver the monies to the investment company, and from
that money in the investment companies, or accounts, to pay
the beneficiaries and participants of the plan."
He
testified that the Trust was a "not for profit"
organization, that the only "original source of
income" was from employer contributions, and that the
trustees were responsible for the "administration"
of the Trust funds. He stated that the "purpose" of
the Trust was to "preserve" Trust funds, and
"to make it [sic] grow," so that there would be
"money [ ] there to pay" benefits to employees and
the Trust's operational expenses. Dr. Guzmán
agreed that the trustees' main obligation was to
"receive monies from the sponsoring employers, to
deliver the monies to the investment company, and from that
money in the investment companies, or accounts, to pay the
beneficiaries and participants of the [P]lan[.]" He
rejected the suggestion that the Trust was akin to an
"estate trust" or an "inheritance
estate."
2.
Pertinent Provisions of the Deed of Trust and
Plan[13]
(a)
Contributions from Participating Employers
To
"finance" the Pension Plan, participating employers
paid contributions to the trustees. Specifically, under the
Plan, the participating employers agreed to "contribute
the necessary funds through [sic] the trustee[s] for the
operation and administration of the [P]lan, and that these
funds should be part of the trust property, which will be
maintained and managed by the trustee[s] for the benefit of
employees and their beneficiaries[.]" The Pension Plan
required all participating employers to make contributions as
calculated by the committee and provided that those
contributions were to be made "to accumulate the
necessary reserves to cover monthly pension expenses that are
payable to participants" of the Plan.[14] The amounts
contributed by the participating employers were to be
"used solely and exclusively by the [Pension Trust] for
exclusive purposes for the benefit of participants and/or
beneficiaries." The participants did not contribute to
the Pension Plan.
(b)
The Pension Trust's Assets
The
assets of the Pension Trust were mainly the contributions
made by participating employers under the terms of the
Pension Plan, but also could include, according to the Plan,
"income, interest, dividends, profits, earnings or
donations of any kind which became Trust
property."[15]
Article
13 of the Pension Plan, entitled "Establishing the
Trust," provided that the trustees would hold
"custody and control of all the assets" of the
Pension Trust and "neither the Settlor nor any
participant shall have any property right on it [sic], except
that participants are entitled to receive those payments and
distributions" in accordance with the Pension Plan.
(c)
The Board of Trustees
The
Pension Trust is governed by a board of trustees, which is
tasked with "manag[ing], invest[ing] and reinvest[ing]
the Trust" pursuant to its terms and "mak[ing]
payments of benefits from the Trust . . . pursuant to the
instructions of the Retirement Committee . . .
."[16] Article III of the Deed of Trust,
entitled "Powers of Trustees," directs that all of
the trustees' actions shall be taken "by
majority" vote. It also mandates that the trustees
"discharge their duties" with respect to the
Pension Trust and the Pension Plan "solely in the
interest of the participants and their beneficiar[ies],"
"with the care, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a
like capacity and familiar with such matters would use in the
conduct of an enterprise of like character with like
aims."[17]
(d)
Power to Invest
The
Deed of Trust requires the trustees to make investments on
behalf of the Pension Trust. It provides:
The Trustees shall invest and reinvest the Trust [assets],
without distinction between principal and income thereof, in
such bonds, notes, debentures, mortgages, preferred or common
stocks, pooled investment funds, or in such other properties
real or personal, and/or securities of any kind, class, or
character as the Trustee[s] may deem suitable[.]
Moreover,
the trustees are required to "diversify[ ] the
investment of th[e] Trust so as to minimize the risk of large
losses[.]" The Deed of Trust, however, provides that the
trustees will "not be liable for any loss resulting,
directly or indirectly, from any action taken by them to
carry out the suggestions from the Committee."
The
Deed of Trust further authorizes the trustees:
To invest and reinvest the Trust Estate, to collect the
income, rents, issues, profits and increase therefrom, to
sell upon any terms, give options to purchase, assign, lease,
exchange, convert, encumber, pledge, and mortgage; to alter
and change the investment thereof from time to time at its
discretion; to improve, manage, protect, subdivide, and
partition any real estate forming part of the Trust; to
dedicate to public use and vacate all or any part thereof; to
compromise, adjust and settle all claims to or against the
Trust . . .; to grant options to lease and to lease for any
term . . .; to make leases upon such terms and conditions as
may be deemed by it to be proper; to renew, cancel, amend
and/or extend leases and consent to the assignment and
modification of any lease . . .; and to vote personally or by
proxy any shares of stock which may at anytime be held by it
thereunder.
(e)
Power to Exercise Options
The
Deed of Trust authorizes the trustees to exercise options
relating to bonds, stocks, and securities.
(f)
Power to Participate in Reorganization of Corporation Held as
Part of the Trust
The
Deed of Trust permits the trustees to "become a party to
any reorganization, consolidation, merger, or other capital
readjustment of any corporation, the stocks or securities of
which may at anytime be held as part of the Trust." The
Deed of Trust and the Pension Plan do not expressly authorize
the trustees to commence a bankruptcy case on behalf of the
Pension Trust.
(g)
Power to Enter Contracts
The
Deed of Trust provides that the trustees "shall have
full power and authority by contract to bind the Trust Estate
without making themselves individually liable, and to perform
any and all other acts which it may deem proper to carry out
the purpose of this instrument."
(h)
Power to Employ Professionals and Personnel
The
trustees are authorized to "employ such agents, broker,
attorneys . . . and assistants as [they] may deem necessary
or proper in the . . . execution of th[e] Trust and pay
reasonable compensation for such services." The Pension
Plan also provides that the trustees are authorized to
"hire the required personnel for the administration of
th[e] [P]lan," and to pay such personnel from the
Trust's funds.
(i)
Limitations on Liability
The
Deed of Trust authorizes the trustees to "act upon the
instructions, directions, requests, and requisitions of the
members of the Committee," and limits the trustees'
liability in performing their duties under the Pension Trust
by providing that they "shall not be liable . . . except
for their own negligence or willful misconduct."
(j)
Prohibition from Engaging in Transactions with Disqualified
Persons / Parties-in-Interest
The
Deed of Trust prohibits the participating employers, the plan
participants and their beneficiaries, and the trustees from
engaging in certain transactions, such as any sale or lease
of property or loans involving a "Disqualified
Person" or "Party-in Interest."[18]
(k)
Use of Assets for Exclusive Benefit of Participants
The
Deed of Trust provides that "[a]t no time prior to the
satisfaction of all liabilities with respect to the
participants or their beneficiaries shall any part of the
Fund . . . be used for, or diverted to, purposes other than
the exclusive benefit of the participants or their
beneficiaries . . . ."
(l)
Full Power and Authority
The
Deed of Trust gives the trustees "full and complete
power and authority over the Trust except as herein provided
as fully and to the same extent any individual might, could
or would have owning similar property or securities in his
own right, and the enumeration of specific powers shall not
be taken to restrict general powers and authority" given
in the Deed of Trust.
(m)
Duty to ...