What law determines whether a “business trust” may be an eligible debtor under Chapter 11? There is a split of authority as to whether the law of the jurisdiction in which the trust resides or federal common law controls. The weight of authority is in favor of applying federal common law. However, in In re EHT US1, Case No. 21-10036 (CSS), 2021 WL 2206507 (Del. Bankr. June 1, 2021), Chief Judge Christopher Sontchi disagreed with the majority consensus and held that the law of the jurisdiction in which the trust is organized will govern.
A business trust or a common law trust is a species of unincorporated business entity. It developed in the 18th century in England to circumvent restrictions imposed upon the creation of corporations, which required an act of Parliament or a charter from the Crown as a voluntary association of people to offer shares to the public without governmental authorization. As it developed, a business trust is similar to a traditional trust in that its trustees are given legal title to trust property to administer for the advantage of its beneficiaries who hold equitable title to the trust’s assets. A written declaration of trust specifies the terms of the trust, its duration, the powers and duties of the trustees, and the interests of the beneficiaries. Two characteristics that business trusts share are: First, the trust exists for the purpose of transacting business for a profit as opposed to merely preserving a res for beneficiaries. Second, the trust-in-fact has all the indicia of a corporate entity. If both of these elements are present, then the trust at issue is more than a gratuitous or ordinary trust and is a business trust.