Increase in U.S. Trustee Fees Takes a Heavy Toll on Midsized Debtors

Note: This article originally appeared in the September issue of ABI Journal.

On October 26, 2017, Bankruptcy Act of 2017, a Bill to amend Title 28 of the United States Code to authorize the appointment of additional bankruptcy judges and for “other purposes” was enacted into law.[1] What many bankruptcy practitioners were unaware of was that one of the “other purposes” of the Bill was to dramatically increase the amount of quarterly fees paid to the United States Trustee Program.

It seems that little notice was given of the proposed change in the fee schedule and that, little or no notice was given of the change in the law prior to January 1, 2018.[2] The U.S. Trustee’s Office did post notice of the change on its website in February of 2018. For those who do not regularly check the United States Trustee’s website, the first realization that the change had occurred and the impact it would have, came when it came time for midsized debtor clients to pay the quarterly fees in April of this year.

The quarterly fee is calculated by totaling the debtor’s disbursements as reported on the Monthly Operating Reports for the three-month calendar quarter. No changes were made to the quarterly fee schedule for debtors who disburse less than $1 million per quarter, but now debtors disbursing $1 million or more must pay one percent of quarterly disbursement or $250,000 whichever is less. While this negatively impacts all debtors that disburse in $1 million or more per quarter, middle market debtors are being impacted the greatest by the increase.[3]

By way of example, whereas previously a debtor that made $3 million of quarterly disbursements paid $10,400 in quarterly fees, that debtor must now pay quarterly fees of $30,000. That is an increase of close to $80,000 annually. A debtor that made disbursements in the range of $10 million per quarter previously paid $13,000 per quarter, now must pay $100,000 per quarter, increasing its annual obligation by more than $360,000. A debtor making quarterly disbursements of $20 million previously paid $20,000 in fees. Now that debtor will be burdened with an U.S. Trustee fee requirement of $200,000 per quarter, increasing the amount paid in annually by $720,000. Under the prior system, it capped out at $30,000 per quarter for debtors making disbursements of $30 million or more. Now the cap is $250,000 per quarter. That is $1 million vs. $120,000 per year. While it is a significant increase for debtors that have disbursements per quarter over the $1 billion threshold, it doesn’t create the same kind of burden the new fee schedule creates for the middle market debtors. Those debtors are capped at $250,000 per quarter regardless of the billions disbursed per quarter.

Neither the legislative history or the Code provides a definition of disbursement. So it has been left to the courts to define disbursement and courts have interpreted the definition of disbursement very expansively. As one bankruptcy court noted, “[A]lthough not defined, ‘Congress intended to include in the calculation of UST fees all payments made by a Chapter 11 debtor, from whatever source and to whomever paid.’” In re WM Six Forks, LLC 502 B.R. 88, 92 (Bankr. E.D.N.C. 2013). quoting In re Huff, 270 B.R. 649, 650 (Bankr. W.D. Va. 2001); see also St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525, 1534 (9th Cir. 1994).

Courts have even expanded the definition of disbursements to payments made by third parties for the benefit of the debtors.   The Ninth Circuit Court of Appeals held that indirect payment of a debtor’s expenses—i.e., payments made by an unrelated third party to secured creditors of the debtor—are disbursements of the owing debtor and should be included in calculating its quarterly fees under § 1930(a)(6). St. Angelo v. Victoria Farms, Inc., 38 F.3d at 1533–34.  

Other courts concur. See In re Nassau Tower Realty, LLC, 518 B.R. 842, 847-48 (Bankr. D. NJ 2014) (holding that rents collected by the lender pursuant to an assignment of rent and insurance proceeds received by the secured creditor in its capacity as loss payee under insurance policy were properly included in quarterly disbursements on which quarterly fee was based); In re Charter Behavioral Health Systems, LLC, 292 B.R. 36, 48 (Bankr. D. Del. 2003) (concluding that jointly administered chapter 11 debtors employing centralized cash management system, under which one debtor paid all expenses of the other debtors did not mean that each debtor did not have its own disbursements, which had to be considered on a debtor by debtor in calculating the quarterly fees owed by each. In re Central Copters, Inc., 226 B.R. 447, 449–50 (Bankr. D. Mont. 1998) (finding that the sale proceeds of the secured property, which were paid directly from the purchaser to a secured creditor, should be included in the debtor’s disbursements for the purpose of the fee calculation under § 1930(a)(6)); In re Flatbush Assocs., 198 B.R. 75, 78 (Bankr. S.D.N.Y. 1996) (concluding that the rents paid directly by a debtor’s subtenants to an apartment cooperative, which satisfied the cooperative fees the debtor owed to the apartment cooperative, are the debtor’s disbursements); In re Meyer, 187 B.R. 650, 653 (Bankr. W.D. Mo. 1995) (“Disbursements subject to quarterly fees pursuant to 28 U.S.C. § 1930(a)(6) are unrelated to who makes the disbursement or to whom the disbursement is made.”) (citations omitted).

This very broad definition of disbursements has resulted in chapter 11 debtors having to pay quarterly fees on payments that the debtor made in connection with a loan finance notwithstanding the fact that the finance transaction merely substituted one lender for another and may not have resulted in any benefit to the estate. In re Huff, 270 B.R. 649, 653 (Bankr. W.D. Va. 2001);

Thanks to the Balanced Budget Down Payment Act enacted in January of 1996.[4] Chapter 11 debtors continued to have the obligation to pay quarterly fees post-confirmation. Prior to 1996, the U.S. Trustee quarterly fee was required for all chapter 11 cases until a plan was confirmed or the case was converted or dismissed. The 1996 amendments took the word “confirmed” out of section 1930(a)(6). Now, U.S. Trustee quarterly fees terminate only when a case is converted, dismissed or closed. Other older cases which interpret the payment of post-confirmation quarterly fees to narrowly include only payments made pursuant to the confirmed plan. The majority of the cases take a much broader view that all post-petition expenditures by the reorganized debtor are disbursements subject to the payment of quarterly fees.

Having such an expansive view of what constitutes a disbursement was not a burning concern when the maximum fee paid by a debtor was $30,000 per quarter, it is now a potentially crippling concern. Unless the courts are willing to contract the definition of disbursement or Congress implements a more reasonable fee schedule, the overall additional cost of paying these disproportionately high U.S. Trustee fees may prove impossible for already cash strapped middle market companies to afford themselves the protection of Chapter 11.

[1] The Bankruptcy Judgeship Act of 2017, Pub. L. No. 115-72.

[2] 28 U.S.C. 1930(a)(6) requires a Chapter 11 debtor to pay quarterly fees until the case is converted or dismissed.

[3] For the purposes of this article middle market debtors are companies that are defined by Divestopedia as having annual revenues of between $5 million and $1 billion.

[4] Public Law 104-99 - January 26, 1996.