When a trust created under a chapter 11 plan makes distributions to creditors, the distributions are not subject to fees for the U.S. Trustee system because transfers by a trust are not disbursements by the debtor, according to Delaware Chief Bankruptcy Judge Christopher S. Sontchi.
In his June 28 ruling, Judge Sontchi referred to the “absurdity” of the U.S. Trustee’s position. He added, “I cannot stress enough how offensive I find the [U.S. Trustee’s] attempt to double, or triple collect its ‘tax.’” On the other hand, he said that the U.S. Trustee has “admirably” fulfilled its role “as the watchdog over the integrity of the administration of the U.S. bankruptcy system.”
If Judge Sontchi’s theory prevails, U.S. Trustees won’t be collecting fees after confirmation of chapter 11 plans where distributions are made by trusts and not by the debtors. It will no longer be necessary to close chapter 11 cases to cut off taxes paid to the U.S. Trustee system.
The Litigation Trust
The facts were typical of significant chapter 11 cases. The debtors confirmed a plan in mid-2017 that created a litigation trust to which the debtors transferred their claims against third parties. For the quarter in which the assets were transferred to the trust, the debtors paid the maximum fee owing to the U.S. Trustee under 28 U.S.C. § 1930(a)(6).
After the transfers to the trust, the chapter 11 plan provided that the debtors would have no further interest in the assets transferred to the trust. The plan also provided that quarterly fees would be paid to the U.S. Trustee “when due in accordance with applicable law.” In addition, the plan said that the debtors would remain obligated to pay the quarterly U.S. Trustee fees until the cases were closed.
The trust brought suit in late 2017 asserting claims transferred from the debtors. The trust negotiated a $90 million settlement this year. Judge Sontchi approved the settlement, and the trust received the settlement proceeds. The U.S. Trustee filed a motion asking Judge Sontchi to compel the trust to pay fees when the settlement proceeds are distributed to creditors.
Judge Sontchi denied the motion.
The Debtors Didn’t Make Disbursements
The U.S. Trustee based the motion on 28 U.S.C. § 1930(a)(6), which calculates the fee based on “disbursements.” The maximum quarterly fee is now $250,000, following the increase effective in the first quarter of 2018.
Judge Sontchi cited the Fifth Circuit for saying that several circuits define “disbursements” to mean payments made by or on behalf of the debtor. He went on to quote the Sixth Circuit for saying that “disbursements” is “commonly understood in this context to apply to payments made with the funds generated from the liquidation of the debtor’s assets.” Robiner v. Danny’s Mkts., Inc. (In re Danny’s Mkts., Inc.), 266 F.3d 523, 525 (6th Cir. 2001).
For Judge Sontchi, the “common thread” in the opinions “‘is the fact that the debtor had some interest in, or control over, the money disbursed,’” quoting In re Hale, 436 B.R. 125, 130 (Bankr. E.D. Cal. 2010). Quoting a district judge in Delaware, he said “‘it is the ultimate payment of the expense by any entity on behalf of a debtor that is the subject of quarterly fees.’” Walton v. Post-Confirmation Comm. of Unsecured Creditors of GC Companies, Inc. (In re GC Companies, Inc.), 298 B.R. 226, 230 (D. Del. 2003).
The trigger for payments of U.S. Trustee fees is commonly understood to be payments by or on behalf of the debtor, Judge Sontchi said. In the case at bar, the U.S. Trustee’s motion failed because “the Trust is not paying expenses on behalf of any Debtors.”
Rather, the disbursements triggering fees for the U.S. Trustee were made at confirmation when the debtors funded the trust. At the time, the debtors paid the maximum fees to the U.S. Trustee.
Judge Sontchi dug deeper into the plan to find further support for his conclusion. He cited the plan for providing that transfers to the trust were to be treated as transfers directly to trust beneficiaries — that is to say, to creditors.
Furthermore, the settlement proceeds were trust assets as to which the debtors had disavowed any further interest. Consistent with Section 1930, he said that the U.S. Trustee had already received its quarterly fee at confirmation based on transfers of claims made then by the debtor.
Judge Sontchi denied the U.S. Trustee’s motion because transfers to creditors by the trust were not “disbursements” on behalf of the debtors.
Observations
Judge Sontchi’s opinion gives tips on how to draft plans and related documents to cut off U.S. Trustee fees at confirmation.
In addition, the confirmation order could be written to provide that transfers by a trust will not be taxed by the U.S. Trustee. That way, the U.S. Trustee would be tasked with appealing the confirmation order and could not wait to claim fees after the trust makes disbursements.
When a trust created under a chapter 11 plan makes distributions to creditors, the distributions are not subject to fees for the U.S. Trustee system because transfers by a trust are not disbursements by the debtor, according to Delaware Chief Bankruptcy Judge Christopher S. Sontchi.
In his June 28 ruling, Judge Sontchi referred to the “absurdity” of the U.S. Trustee’s position. He added, “I cannot stress enough how offensive I find the [U.S. Trustee’s] attempt to double, or triple collect its ‘tax.’” On the other hand, he said that the U.S. Trustee has “admirably” fulfilled its role “as the watchdog over the integrity of the administration of the U.S. bankruptcy system.”
If Judge Sontchi’s theory prevails, U.S. Trustees won’t be collecting fees after confirmation of chapter 11 plans where distributions are made by trusts and not by the debtors. It will no longer be necessary to close chapter 11 cases to cut off taxes paid to the U.S. Trustee system.
The Litigation Trust
The facts were typical of significant chapter 11 cases. The debtors confirmed a plan in mid-2017 that created a litigation trust to which the debtors transferred their claims against third parties. For the quarter in which the assets were transferred to the trust, the debtors paid the maximum fee owing to the U.S. Trustee under 28 U.S.C. § 1930(a)(6).
After the transfers to the trust, the chapter 11 plan provided that the debtors would have no further interest in the assets transferred to the trust. The plan also provided that quarterly fees would be paid to the U.S. Trustee “when due in accordance with applicable law.” In addition, the plan said that the debtors would remain obligated to pay the quarterly U.S. Trustee fees until the cases were closed.
The trust brought suit in late 2017 asserting claims transferred from the debtors. The trust negotiated a $90 million settlement this year. Judge Sontchi approved the settlement, and the trust received the settlement proceeds. The U.S. Trustee filed a motion asking Judge Sontchi to compel the trust to pay fees when the settlement proceeds are distributed to creditors.
Judge Sontchi denied the motion.