Editor’s Note: This will be the HLS BRT’s last post of the semester and we look forward to resuming posts in late January 2025.
By: Brian Schartz, P.C., Christian O. Nagler, P.C., Anna G. Rotman, P.C., Tabitha De Paulo, and Mac A. Bank (Kirkland & Ellis)
Brian Schartz, P.C., Christian O. Nagler, P.C., Anna G. Rotman, P.C., Tabitha De Paulo, and Mac A. Bank (clockwise from top left)
In an important win for SPAC investors, the U.S. Bankruptcy Court for the Eastern District of Texas held that the express terms of a SPAC’s trust agreement control whether a SPAC trust account is “property” of a debtor’s estate.
Prior to filing for chapter 11 relief, SPAC-debtor Financial Strategies Acquisition Corp. (“Financial Strategies”) failed to consummate a business combination transaction within the time frame prescribed under its underlying SPAC trust agreement. As a result, the SPAC trust account was required to terminate, necessitating the distribution of the funds held therein to its investors. Rather that facilitating such distribution, Financial Strategies filed a chapter 11 petition (Case No. 23-42345 (BTR)) and motion seeking the turnover of the funds held in the trust account to pay creditors—primarily insiders and other creditors that waived their rights to collect against the trust assets—contrary to the terms of the trust agreement. As is typical in the industry, the underlying trust agreement specifically detailed Financial Strategies’ limited interest in the trust account, which was confined to: (a) the interest on the principal to pay certain taxes and certain liquidation expenses and (b) the principal of the trust solely to effectuate an investor approved business combination. Based on the terms of the trust agreement, the Court denied Financial Strategies’ motion to compel, holding that Financial Strategies had (a) no interest in the principal of the trust account and (b) a limited interest in the interest on the principal, solely to the extent provided in the trust agreement.
In addition to its motion to compel turnover of the trust funds, Financial Strategies filed a motion to convert its case from chapter 11 to chapter 7. Due in large part to Financial Strategies lacking an interest in the principal of the trust account, the Court denied the motion to convert and dismissed the chapter 11 case with prejudice and barring refiling for 30 days.
The Court’s holding protects a preeminent investor protection in the SPAC industry, the SPAC trust account, recognizing that a debtor can only access funds to the extent expressly provided in the underlying trust agreement. Otherwise, such funds are not property of a debtor’s estate.
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