Increased U.S. Trustee Fees Stick to ‘Revolvers’ but Not to Pending Cases

The struggle to roll back the U.S. Trustee fee is succeeding only with respect to companies whose chapter 11 cases were pending as of October 27, 2017, when the increase came into effect. Conversely, larger companies were dealt a setback when the Seventh Circuit reversed the bankruptcy court by ruling that the daily sweep on a revolving credit is a “disbursement” that must be included in calculating the U.S. Trustee fee.

Background

To ensure that taxpayers do not finance the U.S. Trustee Program, Congress revised the U.S. Trustee fees as part of the Bankruptcy Judgeship Act of 2017. Codified at 27 U.S.C. § 1930(a)(6)(B), the fee increases whenever the balance in the U.S. Trustee System Fund falls below $200 million at the end of any fiscal year through 2022. 

Since the fund balance was below the threshold, the fee increased as of Oct. 27, 2017, when the amendment became effective. With the increase, “the quarterly fee payable for a quarter in which disbursements equal or exceed $1,000,000 shall be the lesser of 1 percent of such disbursements or $250,000.”

In other words, if the debtor disburses $1 million a quarter, the quarterly fee is $10,000, or $40,000 a year. Under the prior fee schedule, the quarterly fee would have been $4,785 if disbursements were $999,999 in the quarter, or $6,500 if the quarterly disbursements were $1 million but less than $2 million.

If quarterly disbursements are $25 million or more, the fee is now $250,000 a quarter. At $25 million under the old schedule, the fee would have been $20,000 a quarter. For a company with $25 million in quarterly disbursements, the fee rose 1,250%

The word “disbursements” is not defined in the statute.

The increase is hitting middle-market companies, because the fee for large companies in chapter 11 is capped at $250,000 a quarter. The increase is tough on companies with low margins but high sales volumes.

‘Revolvers’ Are Taxed

Most larger companies in chapter 11 are financed with revolving credits provided by secured lenders. So-called revolvers allow the bank to reduce the debt every day by sweeping the debtor’s income. The lender makes new advances if the company is in compliance with the loan agreement. Lenders prefer revolvers because they afford more control than term loans.

A company in Wisconsin persuaded the bankruptcy judge that the daily sweep by the revolver bank was not a “disbursement” because it did not effectively reduce the debt. Omitting the revolver sweep from the calculation of “disbursements” dramatically reduced the debtor’s fee for the U.S. Trustee system. See In re Cranberry Growers Cooperative, 592 B.R. 325 (Bankr. W.D. Wis. 2018). To read ABI’s discussion of Cranberry Growers, click here. 

The bankruptcy judge authorized a direct appeal. The Seventh Circuit reversed on July 17 in a 29-page opinion by Circuit Judge Kenneth F. Ripple.

Since “disbursement” is not defined in the Bankruptcy Code, Judge Ripple looked to the word’s “ordinary meaning.” The term means money paid out or expenditures, and courts have given the term an “expansive meaning,” he said.

Judge Ripple reversed the bankruptcy court, ruling that payments by the debtor’s customers that reduced the revolver were “disbursements for the purposes of Section 1930(a)(6) and should have been included in the calculation of [the debtor’s] quarterly fees.”

On appeal in the circuit, the debtor for the first time latched on to decisions elsewhere holding that the quarterly fees were unconstitutional because they were not uniform throughout the U.S. Judge Ripple declined to reach the constitutional questions because they had not been raised in the bankruptcy court.

Question: Can bank lawyers draft revolvers so that daily sweeps won’t look like disbursements, but still give the bank as much protection as traditional revolvers?

The ‘Uniformity’ Issue

Alabama and North Carolina never have been part of the U.S. Trustee program. Instead, the six federal districts in those states continue using bankruptcy administrators. Originally, debtors in those states did not pay fees to the U.S. Trustee system. The exemption was found to violate the Uniformity Clause of the U.S. Constitution, which provides that taxes “shall be uniform throughout the United States.” See St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525 (9th Cir. 1994), amended, 46 F.3d 969 (9th Cir. 1995).

Consequently, Congress amended the statute to allow imposition of the U.S. Trustee fee in non-trustee districts. However, the lack of uniformity reemerged.

When Congress increased the U.S. Trustee fee, the statute authorized the Judicial Conference of the U.S. to impose the larger fee in Alabama and North Carolina. The Judicial Conference did increase the fee, but not for pending cases. 

In an opinion on July 15 dealing with a chapter 11 case that was pending when the larger fee came into effect, Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., held that the increased fee violates the Uniformity Clause, if the fee is seen as a tax, and violates the Bankruptcy Clause, if the fee is considered a user fee. In a case pending when the fee rose, he ruled that the debtor was only liable to pay the lower rate under the prior version of the statute.

In substance, Judge Huennekens adopted rulings by Bankruptcy Judge Ronald B. King of San Antonio in In re Buffets LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019). To read ABI’s discussion of Buffets, click here.

Last month, the district court in Buffets authorized a direct appeal to the Fifth Circuit.

The opinion from the Seventh Circuit is In re Cranberry Growers Cooperative, 18-3289 (7th Cir. July 17, 2019); the Virginia opinion is In re Circuit City Stores Inc., 08-35653 (Bankr. E.D. Va. July 15, 2019).