DE Court Watches Integrity of Bankruptcy Trust, Rules for Debtors

Section 1930 (a) (6) of Title 28 requires the payment of a quarterly fee to the United States Trustee (the “UST”) for each quarter in which a bankruptcy case is opened. The amount of fees is calculated based on the amount of disbursements made by the debtor during each quarter. But, are these fees payable when a trust, established by a confirmed plan, makes distributions rather than a debtor? This question was answered recently by Delaware Chief Bankruptcy Judge Sontchi, who wrote a letter decision dismissing the UST’s motion to compel payment of additional Section 1930 fees for distributions. carried out by a litigation trustee. Judge Sontchi’s ruling is likely to have an immediate impact on liquidation plans and post-confirmation trust documents.

Facts

On February 14, 2016, Paragon Offshore plc (“Paragon”) and its affiliated debtors (collectively, the “Debtors”) filed voluntary requests for relief under Chapter 11 of the Bankruptcy Code. On June 7, 2017, the Court confirmed the fifth joint plan of Chapter 11 of the Debtors (the “Plan”). The Plan came into effect on July 18, 2017 (the “Effective Date”).

The Plan established, among other things, the Paragon Litigation Trust (the “Trust”) to pursue claims against Noble Corporation plc (“Noble”) and others “for the benefit of the interest holders of the Litigation Trust”. After the transfer of the claims to the Trust, the Debtors and their assets have agreed that they “will no longer have any interest in or with respect to the Trust Assets or the Litigation Trust”. The litigation trust agreement. which sets out the rights, powers and obligations of the Trust, also came into force on the Effective Date.

For the quarters between July and September 2017, when the Plan came into effect and the Debtors effectively transferred the Noble claims to the Trust, the Debtors’ distributions exceeded $ 623 million. During these quarters, the debtors paid the UST the maximum amount of UST fees payable at that time.

In December 2017, the Trust filed lawsuits against several Noble entities. After months of negotiations, during which Noble filed its own Chapter 11 case, the Trust settled its claims for $ 90,375,000 and filed a motion with the court for approval of the settlement. The court approved the settlement with the Noble parties and on March 19, 2021, the Trust received the required payments under the settlement (the “Settlement Proceeds”).

The Trust then sought to make distributions to holders of Litigation Trust interests in accordance with the Plan. On May 12, 2021, UST filed a motion to “compel Paragon and the Paragon Litigation Trust, if applicable, to pay the full quarterly fees when due” as part of the settlement proceeds. In view of the dollar amount of the settlement proceeds, the motion sought to compel the payment of $ 250,000 in statutory fees to the UST.

The parties informed the matter and the Court held a hearing on the motion on June 10, 2021. The UST argued that while this is not technically a disbursement made by the debtors, the trust does not exist in a vacuum without the debtors and that the trust was created and exists to facilitate the scheme. Therefore, in the reasoning of the UST, the payments of the trust are sufficiently linked to the accounts receivable to entitle the UST to the applicable charges of the UST. On the other hand, the Trust and the Debtors argued that the distribution of the Settlement Proceeds does not constitute payment by or on behalf of any of the Debtors because the Trust is a separate entity.

Court decision denying further UST charges

Sontchi J. reviewed the applicable case law on the definition of “disbursements” in the context of section 1930 (a) (6) costs and found that the term is associated with “payments made by or on behalf of the debtor” and is often understood to be “generated by the liquidation of the debtor’s assets”. The Court further explained that “the common thread that seems to link many of these decisions is the fact that the debtor has some interest or some control over the money paid”. (citing About Hale, 436 BR 125, 130 (Bankr. ED Cal. 2010)).

With this in mind, Sontchi J. ultimately dismissed the UST’s claim for payment of additional statutory fees in connection with the proceeds of the settlement. The Court explained that UST received the fees to which it was entitled under Section 1930 (a) (6) in July and September 2017, when the Debtors transferred assets to the Trust. The distribution of the Settlement Proceeds to the Beneficiaries of the Litigation Trust, by contrast, are distributions by the Trust “for the benefit of the holders of the Interest in the Litigation Trust”, and not by or on behalf of the Debtors. Indeed, the Debtors disclaimed any interest in the Trust Proceeds, as Trust Assets, and had no control over the Settlement Proceeds.

Take away food

In dismissing the petition, the Court both commended the UST office for admirably playing its watchdog role over the integrity of the bankruptcy process and simultaneously expressed its deep disappointment at the attempted bankruptcy. UST to “double, or even triple, to collect its tax” by “” absurd[]”reasoning. If Justice Sontchi’s ruling prevails, Chapter 11 debtors who transfer assets and claims to the litigation trust will not need to close a bankruptcy case as soon as possible to limit the amount of UST fees paid. To this end, Sontchi J.’s analysis provides a good framework for drafting litigation trust plans and documents in order to separate Chapter 11 debtors from the following trust. On the other hand, USTs will be obligated. to assert the claims assessment at the plan confirmation stage to ensure that the UST can recover the largest allowable UST costs for the assets transferred to a litigation trust.

© Copyright 2021 Squire Patton Boggs (US) LLPRevue nationale de droit, volume XI, number 197

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