In re Catholic School Employees Pension Trust

          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 ...