The Restructuring Report

Debtors in possession or other estate representatives are required to pay U.S. Trustee fees during the pendency of the case. It is often assumed that other entities to whom estate property is transferred must also pay such fees until the case is closed. But as a couple of recent cases illustrate, it may be possible with careful drafting to curtail the reporting and payment of such fees once assets are transferred to a liquidating trust.

U.S. Trustee fees are imposed in chapter 11 cases to defray the costs of the U.S. Trustee program. Congress established the requirement to pay the fee in 28 U.S.C. § 1930(b). That section, when read with section (a), provides that the fees must be paid by the parties commencing the case (usually the debtor) until the case is converted or dismissed. The fee is calculated as a percentage of disbursements on a calendar quarterly basis and is capped at $250,000 per quarter.

Many liquidating chapter 11 cases provide in their plans of liquidation for the transfer of certain assets of the debtor or the estates to a liquidating trust formed for the benefit of creditors. Usually, assets are transferred to the trust on the plan effective date. Asset may include litigation claims, like avoidance causes of action, cash and other property not reduced to cash. The trustee of the liquidating trust may then be tasked with liquidating assets to cash, pursuing litigation recoveries, reconciling claims and disbursing cash to creditors.

Two recent bankruptcy court opinions came to different conclusions on whether the liquidating trustee is obligated to make quarterly payments post-confirmation on disbursements from the liquidating trust. Both show how the plan itself may determine the outcome of liability to pay the fees post-confirmation.

In re Paragon Offshore, PLC

In In re Paragon Offshore, PLC, 629 B.R. 227 (Bankr. D. De. 2021), Judge Sontchi concluded that the liquidating trust was not obligated to pay quarterly fees on disbursements from the trust to creditors. In that case, the court had previously confirmed a plan that provided for the establishment of a litigation trust and the transfer to the trust of certain litigation claims. The plan provided that after the assets were transferred to the trust, the debtors and their estates had no further interest in the trust assets or the litigation. The trust documents provided for the trust to pursue the litigation and disburse any recoveries to creditors who were beneficiaries of the trust. The court noted that for the quarter in which the trust was established and assets transferred to the trust, the debtors paid the maximum fee due to the U.S. Trustee.

Over the next four years, the liquidating trustee pursued the litigation claims successfully and was preparing to disburse settlement proceeds to creditors. The U.S. Trustee brought a motion seeking a court order compelling the trustee to file quarterly reports and to pay the quarterly fee on these disbursements. The bankruptcy court rejected the motion.

In ruling against the U.S. Trustee, the court analyzed who has the obligation to pay disbursements used to calculate the fee and what “disbursements” means in section 1930. The court observed that there were several reported decisions on what constituted a disbursement under section 1930 and noted that the common thread was the debtor retained some interest in or control over the money disbursed. The court reasoned that the plan and trust documents are clear; that the debtors retained no interest in the assets transferred to the trust. Therefore, the trustee was not a successor to the debtor and distributions from the trust did not count as disbursements for purposes of calculating the fee. Second, the court noted, the motion must fail because the payments made to creditors under the trust were not payments made by or on behalf of the debtors, who were the parties ultimately responsible for payment of the U.S. Trustee fees as parties initiating the cases.

In re Health Diagnostic Laboratory, Inc.

The bankruptcy court in In re Health Diagnostic Laboratory, Inc., 15-32919 (Bankr. E.D. Va. Jan. 4, 2023), came to the opposite conclusion. There the liquidating trustee brought a motion seeking a determination that the trustee was not obligated to file reports or pay quarterly fees calculated on disbursements from the trust to creditors. The court rejected the motion, reasoning primarily that the language of the confirmed plan made the trust responsible for payment of the fee. The plan in that case provided that the debtor transferred all of its remaining assets to and vested the assets in the liquidating trust. Importantly, the plan provided that the liquidating trustee was the debtor’s successor for all purposes and the plan expressly required the liquidating trustee to file quarterly reports for the debtors and pay quarterly fees on reported disbursements. The court also noted that the U.S. Trustee did not assess a fee based on the transfer of the assets from the debtors to the trust.

In its reasoning, the Heath Diagnostics court relied heavily on the fact that the plan language imposed on the liquidating trustee the duty to file reports and pay fees. The court also noted that the trustee was the debtor’s successor and the debtor had the initial burden to pay the fees under the statute.

In drafting liquidating plans, plan proponents should consider whether it is possible to draft plan provisions that eliminate the requirement to file reports and pay U.S. Trustee fees by the liquidating trust or trustee. For example, the plan may provide that the debtor has no interest in the assets once transferred to the trust and that disbursements from the trust are not on behalf of the debtor. The plan may also provide that the initial transfer of assets to the trust will be included as disbursements for purposes of calculating the fee.

There may be tradeoffs in not providing for the liquidating trustee as a successor to the debtor. For example, it may be necessary to provide that the liquidating trustee has standing to pursue litigation claims of the estate as the estate representative to pursue avoidance causes of action belonging to the estate, as permitted under 11 U.S.C. § 1123(b), or to make sure that all assets are transferred to the trust for administration by the liquidating trustee. Therefore, drafters should carefully consider these tradeoffs in crafting plan language.