Court Rules That Litigation Trust Does Not Have To Pay Quarterly Fees To U.S. Trustee

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Pursuant to 28 U.S.C. § 1930(a)(6), chapter 11 debtors must pay a quarterly fee to the United States Trustee for deposit in the United States Treasury, until the case is converted or dismissed.  The fee is based on a formula tied to the amount of disbursements made by the debtor during each quarter of the pendency of its chapter 11 case, capped at $250,000 per quarter.

Chapter 11 plans often provide for the creation of post-confirmation litigation trusts to administer specified assets and/or prosecute and settle certain claims for the benefit of designated beneficiary classes (often unsecured creditors).  The assets and claims are typically assigned or transferred by the debtor to the trust free and clear pursuant to the plan and confirmation order.  Once the plan is effective, administration of the transferred assets and claims is no longer a function of the debtor, but within the purview of the trust and the appointed trustee, with disbursements to trust beneficiaries to be made directly from the trust.

Notwithstanding that the debtor is no longer administering assets and claims and making disbursements following the transition to a litigation trust, the United States Trustee has sought payment of statutory quarterly fees under 28 U.S.C. § 1930(a) for disbursements made by post-confirmation trusts.  This can make the administration of litigation trusts costly, and litigation trusts will often look for ways to administratively close bankruptcy cases, even with adversary proceedings pending, in order to avoid having to making ongoing payments to the United States Trustee.  However, circumstances may necessitate that cases remain open for prolonged periods, such as to facilitate claims administration or if the plan requires the bankruptcy court to approve asset sales or settlements entered into by the trust.

In a recent opinion in the Paragon Offshore, PLC (“Paragon”) case in the United States Bankruptcy Court for the District of Delaware, Chief Judge Christopher Sontchi made clear that he believes the payment of post-confirmation quarterly fees by a litigation trust was not only inappropriate, but “offensive.”[1]   In Paragon, the plan established a litigation trust into which the debtor transferred the right to pursue certain claims for the trust’s beneficiaries (creditors of the debtor).  The plan provided that quarterly fees owed to the United States Trustee shall be paid by the debtors and reorganized debtors until the debtors’ chapter 11 cases are closed.  The plan and litigation trust became effective on July 18, 2017.  For the quarter between July 1, 2017 and September 30, 2017, the period during which the claims were transferred by the debtor to the litigation trust, the debtors’ distributions exceeded $623 million and the debtors accordingly paid the maximum fee due to the United States Trustee for that period under 28 U.S.C. § 1930(a).

Certain of the claims transferred to the litigation trust were settled in early 2021 for $90,375,000 and were approved by the Bankruptcy Court on February 24, 2021.  The trust received all of the settlement proceeds on March 19, 2021.  On May 12, 2021, the United States Trustee filed a motion to compel the trust to file post-confirmation quarterly reports and pay quarterly fees pursuant to 28 U.S.C. § 1930(a)(6) in connection with the settlement.

Chief Judge Sontchi determined that the quarterly fee requirement of 28 U.S.C. § 1930(a)(6) is triggered only by “payments by or on behalf of the debtor.”  The litigation trust was not paying any expenses on behalf of the debtors, but for the beneficiaries of the trust.  All disbursements related to the debtors’ obligations occurred on the effective date when the debtor transferred the claims to the litigation trust.  Chief Judge Sontchi regarded that as the “ultimate payment” made by the debtors, following which, the debtor remitted the required quarterly fee to the United States Trustee.  He noted that the litigation trust’s distributions four years later are from the trust’s assets, which vested “free and clear” in the trust years earlier, for the benefit of the trust’s beneficiaries.  The debtors did not have any interest in or control over the money disbursed.

Further, Chief Judge Sontchi regarded any payment of quarterly fees by the litigation trust at this point as effectively a tax on creditors given that the debtors had previously paid the required quarterly fees to the United States Trustee when the claims were transferred to the trust.  Making his feelings clear, Chief Judge Sontchi stated:

“I cannot stress enough how offensive I find the [United States Trustee’s] attempt to double, or triple its ‘tax.’  It would be hypocritical for a person’s whose livelihood depends on the taxation of his fellow citizens to suggest that taxation is, in and of itself, reprehensible.  It is, of course, necessary.  What is reprehensible is attempting to take money out of the pockets of creditors, which are already receiving a small recovery on their claims, multiple times for the same distribution.”[2]

It will be interesting to see if other bankruptcy courts follow the Paragon decision.  The decision may also provide a blueprint for debtors to draft plans and trust documents with language to help post-confirmation trusts avoid payment of fees to the United Stats Trustee.  This in turn may facilitate easier administration of post-confirmation trusts, knowing that cases may remain open to address various matters without having to incur substantial quarterly fees.

[1] Paragon Offshore, PLC, Case No. 16-10386-CSS (June 28, 2021).

[2] Id. at 6 FN 31.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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