Clarifying the Business Trust in Bankruptcy: A Proposed Restatement Test

When bankruptcy courts attempt to define the business trust, the “decisions are sharply, and perhaps hopelessly, divided.” The Bankruptcy Code, which guides the determinations of bankruptcy courts, specifically lists business trusts as eligible for protection. However, the Code does not define what a business trust is and does not list any criteria for determining when a trust is a business trust. The lack of a concrete definition has led many courts to formulate their own definitions of business trusts. While the courts hoped that they would eventually settle on a uniform test to tackle this issue, it has yet to occur. Presently, courts apply varying tests, some of which propose twenty-four individual factors to consider while others adopt tax and state laws. This confusion regarding the appropriate test leads to uncertainty on behalf of debtors, who are unsure if they will be eligible for bankruptcy protection. This Comment proposes a restatement test that incorporates the history of the business trust as well as courts’ various previous approaches into a single uniform test. Part II of this Comment will address the history of the business trust from its roots in feudal England to its use as a tool to circumvent strict corporate statutes. Part II will outline the current state of the law regarding business trusts, both within and outside the bankruptcy context. Part IV proposes a four-factor test to remedy the courts’ current confusion regarding business trusts