The increase in fees payable to the U.S. Trustee Program puts a premium on closing a chapter 11 case as soon as possible after confirmation. Recognizing that the debtor was facing fees that had increased almost 200%, Bankruptcy Judge James J. Tancredi of Hartford, Conn., permitted a debtor to close the case even though 29 adversary proceedings were outstanding after confirmation.
Congress revised the U.S. Trustee fees as part of the Bankruptcy Judgeship Act of 2017. Under 27 U.S.C. § 1930(a)(6)(B) as it now reads, “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.”
For a company with quarterly disbursements of $25 million or more, the fee is now $250,000 a quarter. Under the old schedule, the fee would have been $20,000 a quarter, meaning that the new fee rose by 1,250%. Midmarket companies with high revenues and low margins are hit particularly hard.
The Plan to Avoid U.S. Trustee Fees
Thinking ahead, the debtor in Judge Tancredi’s case crafted a plan designed to allow the closing of the case soon after confirmation. The plan created a trust to prosecute lawsuits after confirmation and make distributions to creditors. The distributions were funded by an initial infusion from the debtor, recoveries in lawsuits and annual contributions by the debtor.
The plan was confirmed and quickly consummated. The debtor moved almost immediately to close the case. The U.S. Trustee objected, arguing that the case had not been fully administered because 29 adversary proceedings were outstanding.
The governing statute is Section 350, implemented by Bankruptcy Rule 3022.
Section 350 commands the court to close a case after the “estate is fully administered.” The rule directs the court to enter a final decree after the “estate is fully administered.” A case that has been closed may be reopened.
Although neither the statute nor the rule defines “fully administered,” the 1991 Advisory Committee Note to the rule lists six factors to consider. The debtor satisfied the first five factors but did not satisfy the sixth, which measures whether all motions and adversary proceedings have been resolved.
Including a decision from the Sixth Circuit, Judge Tancredi cited several authorities for the proposition that pending adversary proceedings do not warrant keeping a case open.
Ticking off the relevant facts, Judge Tancredi said that the plan had been consummated; the debtor had made all payments required before the effective date; all estate property had revested in either the debtor or the trust; the trust alone was responsible for claim objections, adversary proceedings, and distributions under the plan; and future lawsuit recoveries would flow through the trust and not through the debtor.
The case had a unique wrinkle. Before confirmation, the debtor lost a motion seeking a declaration that the new U.S. Trustee fee structure is unconstitutional. For a stay pending appeal, the debtor made a $300,000 deposit.
The appeal itself did not preclude closing the case, because any recoveries would flow directly to the debtor if the debtor were to win on appeal. If the debtor were to lose, the $300,000 deposit would cover payments owing to the U.S. Trustee. (N.B. The district court certified a direct appeal to the Second Circuit. A motion for allowance of a direct appeal is sub judice in the circuit. Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 19-4067 (2d Cir.))
Judge Tancredi said that any “material involvement” by the debtor’s estate in the adversary proceedings had ended on the effective date when the trust took over. The pending adversary proceedings, the judge said, were “not so material that it outweighs the overwhelming significance of all the other factors that weigh in favor of finding administrative closure herein.”
With regard to the appeal, Judge Tancredi said that delaying the entry of a final decree “would be absurdly punitive and needlessly dilatory rather than rehabilitative” because there would be no effect on the plan or the estate one way or another.
In view of the “totality of the circumstances,” Judge Tancredi called for the entry of a final decree closing the case because it had been “fully, substantively, and sufficiently administered.”
The increase in fees payable to the U.S. Trustee Program puts a premium on closing a chapter 11 case as soon as possible after confirmation. Recognizing that the debtor was facing fees that had increased almost 200%, Bankruptcy Judge James J. Tancredi of Hartford, Conn., permitted a debtor to close the case even though 29 adversary proceedings were outstanding after confirmation.
Congress revised the U.S. Trustee fees as part of the Bankruptcy Judgeship Act of 2017. Under 27 U.S.C. § 1930(a)(6)(B) as it now reads, “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.”
For a company with quarterly disbursements of $25 million or more, the fee is now $250,000 a quarter. Under the old schedule, the fee would have been $20,000 a quarter, meaning that the new fee rose by 1,250%. Midmarket companies with high revenues and low margins are hit particularly hard.
The Plan to Avoid U.S. Trustee Fees
Thinking ahead, the debtor in Judge Tancredi’s case crafted a plan designed to allow the closing of the case soon after confirmation. The plan created a trust to prosecute lawsuits after confirmation and make distributions to creditors. The distributions were funded by an initial infusion from the debtor, recoveries in lawsuits and annual contributions by the debtor.