Rochelle's Daily Wire

Disagreeing with the result reached by now-retired Bankruptcy Judge Christopher S. Sontchi of Delaware, Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., ruled that a liquidating trust is obligated to pay fees to the U.S. Trustee System, as the successor to the chapter 11 debtor.

Comparing the two opinions suggests that an adroitly drafted chapter 11 plan may cut off the obligation for a liquidating trust to pay fees to the U.S. Trustee, without offending the January 4 opinion by Judge Huennekens.

The Opinion by Judge Sontchi

If liquidating trusts created by chapter 11 plans must pay fees to the U.S. Trustee, creditors will have diminished recoveries because the fees can be as much as $250,000 a quarter. The somewhat differing facts in the two cases must be understood to grasp the legal issues.

We begin with Judge Sontchi’s case, In re Paragon Offshore PLC, 629 B.R. 227 (Bankr. D. Del. June 28, 2021). To read ABI’s report, click here.

In the Delaware case, the confirmed chapter 11 plan created a liquidating trust, into which the debtor transferred assets, including litigation claims. At the time of the transfer, the debtor paid fees to the U.S. Trustee based on the transferred assets.

Later, the liquidating trust settled a litigation claim that had been transferred to it by the debtor. Judge Sontchi ruled that the trust was not obligated to pay fees to the U.S. Trustee when the liquidating trust distributed the litigation proceeds to creditors.

Judge Sontchi found no obligation to pay U.S. Trustee fees because the distributions to creditors were not distributions by the debtor. Furthermore, requiring a payment would amount to double-dipping because the debtor had paid the fee when the assets were transferred to the liquidating trust.

The Virginia Plan

The chapter 11 plan in Judge Huennekens’ case created a liquidating trust, but the details of the plan were different. All of the debtor’s assets were transferred to the trust, and the Virginia plan said that the liquidating trust was the “successor” to the debtor “for all purposes.”

The plan also specifically required the liquidating trust to pay U.S. Trustee fees “until such time as . . . the court orders otherwise,” the case was closed, or the case was dismissed.

The Virginia plan was confirmed in 2016. In the second quarter of 2021, the liquidating trustee obtained authority to make the first interim distribution. The U.S. Trustee claimed a $250,000 quarterly fee based on the distribution.

The liquidating trust filed a motion for a declaration that the trust was not obligated to pay.

Judge Huennekens’ Logic

The outcome turned on 28 U.S.C. § 1930(a)(6), which calculates the fee based on “disbursements.” The first words in Section 1930(a) say that the “parties commencing a case under title 11 shall pay” the fees under subsection (a)(6).

Seemingly in agreement with Judge Sontchi, Judge Huennekens said that Section 1930 made the debtor the party to pay the quarterly fees. “But,” he said, the plan “intervened” and “clearly requires the Liquidating Trustee to make the Contested Quarterly Payments.”

Why? Because, Judge Huennekens said, the plan made the trust “‘the successor of the debtors . . . for all purposes.’” [Emphasis in original.] In other words, he said that the “Plan removed from the Debtors the unequivocal obligation that they had to pay the quarterly fees and transferred that obligation to the Liquidating Trustee. The language of the Plan is not ambiguous on this point.”

Judge Huennekens said that the U.S. Trustee had insisted that the plan contain the language requiring the liquidating trust to pay fees. Based on the idea that a plan is binding on everyone, he said that the U.S. Trustee was entitled to “the benefit of the bargain.”

Judge Huennekens rejected the idea that the distributions by the trust were not “distributions” within the meaning of Section 1930. The term, he said, “must include all distributions made by the Liquidating Trustee pursuant to the Plan to the Debtors’ creditors on account of their allowed claims filed against the Debtors’ estates.”

“Otherwise,” Judge Huennekens said, “quarterly fees could be virtually eliminated by the simple expedient of transferring assets from the bankruptcy estate to a post confirmation entity for subsequent payment.”

Citing three decisions by bankruptcy courts in the 1990s, Judge Huennekens said that a “majority” of courts require liquidating trusts to pay U.S. Trustee fees.

Judge Huennekens ended his opinion by showing how the Paragon decision by Judge Sontchi was “factually distinguishable.” The Delaware plan, he said, did not transfer all of the debtor’s assets into the trust. Furthermore, the trust was not the debtor’s successor, nor did it step into the shoes of the debtor.

In addition, Judge Huennekens noted how the Delaware debtor had already paid the fee when the assets were transferred to the trust on confirmation.

Calling the trust the “successor to the Debtors for all purposes,” Judge Huennekens directed the liquidating trust to pay the contested fee.

Observations

Three points of distinction stand out between the two cases. Drafting a plan with these distinctions in mind might avoid having a liquidating trust pay U.S. Trustee fees:

1.     Don’t characterize the trust as the debtor’s successor.

2.     In the quarter when the trust is funded after confirmation, have the debtor pay the fee based on the assets transferred to the trust.

3.     Don’t include language in the plan explicitly requiring the trust to pay the fee.