The U.S. Trustee has recently taken the position that GUC Trusts (creditor trusts formed under bankruptcy plans) should be required to pay fees on account of their own disbursements to creditors. The outcomes in three recent bankruptcy cases highlight different approaches to addressing the U.S. Trustee’s argument: closing bankruptcy cases early, deferring the issue to a later date, or focusing on the distinction between contingent and non-contingent assets.
What You Need to Know
- There is little dispute that the transfer of assets by a debtor to creditor trusts formed under bankruptcy plans (GUC Trusts) is a disbursement triggering U.S. Trustee fees.
- The U.S. Trustee has recently taken the position that GUC Trusts should be required to pay fees on account of their own disbursements to creditors.
- The Bankruptcy Code does not define “disbursements,” and this ambiguity paired with the lack of specificity in section 1930(a)(6) form the crux of the U.S. Trustee’s argument.
The U.S. Trustee has begun to advance a novel argument that penalizes the beneficiaries of unsecured creditor trusts: that U.S. Trustee disbursement fees apply not only to disbursements made by debtors, but also disbursements made by creditor trusts formed under bankruptcy plans (commonly referred to as “GUC Trusts” or “Litigation Trusts”). Under 28 U.S.C. §1930(a)(6), the U.S. Trustee is entitled to a quarterly fee on any “disbursements” made by a debtor while its bankruptcy case remains open. While section 1930(a)(6) does not specify which entity must make these “disbursements,” section 1930(a) indicates that “the parties commencing a case under title 11” must pay the enumerated fees.
There is little dispute that the transfer of assets by a debtor to a GUC Trust is a disbursement triggering U.S. Trustee fees. However, the U.S. Trustee has recently taken the position that GUC Trusts should be required to pay fees on account of their own disbursements to creditors, on the grounds that contingent assets (like litigation claims) are not “disbursed” when they are transferred to a GUC Trust, but rather when their proceeds are eventually distributed to creditors. Notably, the Bankruptcy Code does not define “disbursements,” and this ambiguity paired with the lack of specificity in section 1930(a)(6) form the crux of the U.S. Trustee’s argument.
The outcomes in three recent bankruptcy cases, Careismatic, Thrasio and Rite Aid, highlight different approaches to addressing the U.S. Trustee’s argument: closing bankruptcy cases early, deferring the issue to a later date, or focusing on the distinction between contingent and non-contingent assets.
Careismatic Bankruptcy Cases Forced to Close Early to Avoid U.S. Trustee Fees
The U.S. Trustee in Careismatic objected to confirmation of a plan that did not require the GUC Trust to pay U.S. Trustee fees on proceeds of contingent assets, arguing that “disbursements” must be given their “ordinary, contemporary, common meaning.” In re Careismatic Brands, LLC, Case. No. 24-10561-VFP (Bankr. D.N.J.) [Dkt. No. 728], citing a number of cases interpreting section 1930(a)(6) to assert that “disbursement” means “money paid out.” The U.S. Trustee further asserted that non-cash assets transferred to a trust do not constitute a disbursement until a GUC Trust is able to translate those assets into a monetary recovery as that is when the money is “paid out.” Id.
To support its argument, the U.S. Trustee noted that when Congress drafted section 1930(a)(6), it did not specify which entity must make a qualifying disbursement, who the recipient of the disbursement must be, for what purpose the disbursement must be made, or the source from which the disbursement is paid. Id. As the limitations could have been explicit, the U.S. Trustee argued that Congress chose to provide a broad, all-encompassing definition of “disbursement.” Id. It further relied on decisions interpreting “disbursements” to include payments made to non-creditors and all payments made in a Chapter 11 case, regardless of who made the payment, the purpose of the payment, and its source. Id. The U.S. Trustee posited, citing In re Nassau Tower Realty, LLC, 518 B.R. 842 (Bankr. D.N.J. 2014), that the question is not who is paying, rather where the funds originated, concluding that proceeds that “originated from property of the bankruptcy estate” constitute disbursements under section 1930(a)(6). Id. Finally, the U.S. Trustee cited several cases supporting the proposition that liquidating trusts acting as the sole representative of a debtor post-Effective Date must pay fees under section 1930(a)(6), and that there was no “principled reason” to treat a GUC Trust any differently so long as a bankruptcy case remained open. Id.
In response, the Careismatic Creditors’ Committee emphasized the plain language of the statute, arguing that Congress had limited the scope of section 1930(a)(6) by requiring “[t]he parties commencing a case under title 11” to pay such fees in section 1930(a). In re Careismatic Brands, LLC, [Dkt. No. 749]. Among other things, the Creditors’ Committee further argued that the plain meaning of “distribution” includes non-cash assets, which meant that assets were distributed when they were transferred to the GUC Trust — not when those assets turned into proceeds. Id.
The Careismatic court ultimately agreed with the U.S. Trustee, citing a fear of future debtors structuring their plans to avoid paying these fees, and required the Careismatic GUC Trust to pay the U.S. Trustee’s fees on its future disbursements so long as a bankruptcy case remained open. See, In re Careismatic Brands, May 30, 2024 Hrg. Tr. 52: 4-8. In lieu of paying U.S. Trustee fees twice (once upon distribution of assets to the GUC Trust and once upon distribution of assets from the GUC Trust), the Creditors’ Committee agreed to dismiss its appeal of this ruling following the debtors’ decision to close substantially all related debtor cases, rendering the fee dispute largely irrelevant.
Alternatives to the Careismatic Approach
Following the Careismatic argument, the U.S. Trustee reiterated its argument in In re Rite Aid Corporation, et al., Case No. 23-18993-MBK (Bankr. D.N.J.), and in In re Thrasio Holdings, Inc. et al, Case No. 24-11840-CMG (Bankr. D.N.J.). In Rite Aid, however, the Creditors’ Committee framed its response differently, using several of the arguments set forth herein, and prevailed over the U.S. Trustee’s objection, whereas in Thrasio, the Creditors’ Committee effectively deferred this dispute to a later date. Practitioners confronted with this issue in the future, particularly in the District of New Jersey, should consider the following approaches where closure of substantially all bankruptcy cases in the near term (i.e., the Careismatic approach) is not feasible.
First, parties can always agree to defer the issue of whether a GUC Trust should pay U.S. Trustee fees incurred on account of contingent assets to when and if the GUC Trust makes the relevant distributions. See, e.g., In re Thrasio Holdings, Inc., [Dkt. No. 1124]. The fee dispute may be irrelevant by the time a GUC Trust is making distributions, as GUC Trusts often have much longer life spans than the open cases of a reorganized debtor. This approach allows the U.S. Trustee to receive its quarterly fees while the cases are still open, but does not require a debtor to prematurely close its cases like in Careismatic.
Second, practitioners may raise that the Careismatic court did not squarely address the plain language of section 1930(a), which places the responsibility for the U.S. Trustee fees on the “parties commencing the case under title 11.” See, In re Careismatic Brands, May 30, 2024 Hrg. Tr. 53: 9-12 (the court brushed over the issue by stating “[t]he technical distinctions as to whether it’s pour-over or complete liquidating trust or whatever it doesn’t really matter. It’s all payments that are being made on behalf of the debtor.”) Critically, however, the relevant caselaw does limit which parties constitute a debtor for the purposes of section 1930(a).
All of the cases the U.S. Trustee relied on in Careismatic for the proposition that “distributions” should be interpreted broadly directly refer to the debtor as the party liable for the fees. See, e.g., Cranberry Growers Cooperative v. Layng, 930 F.3d 844, 853 (7th Cir. 2019) (“In sum, ‘disbursements’ has been interpreted broadly to mean all payments by or on behalf of the debtor. The payments by [the debtor]’s customers to [its lender] were payments made on behalf of [the debtor] and resulted in the reduction of [the debtor’s] prepetition debt.”) (emphasis added). When courts have expanded the scope of the parties included in that definition, they have found a way to demonstrate the debtor’s involvement, control over, or participation with that party — none of which are typically present with a GUC Trust. See, e.g., Cranberry Growers, 930 F.3d at 851-52 (court describing the debtor’s involvement in facilitating the payments between its customers and its creditor); see also, In re HSSI, Inc., 193 B.R. 851, 854 (N.D. Ill. 1996) (construing disbursement to mean a transfer of money by the debtor in possession where the debtor has some interest in that money).
Third, as successfully argued by the Rite Aid Creditors’ Committee, distributions by GUC Trusts of contingent asset proceeds should not constitute “disbursements” under section 1930(a)(6) as a matter of policy. It is common practice for GUC Trusts to be vested with contingent assets in cases where cash to satisfy creditor claims is scarce. Until Careismatic, the U.S. Trustee had not successfully asserted that distributions of proceeds of non-cash assets GUC Trusts qualified as “disbursements” for the purposes of section 1930(a)(6). In fact, the only case squarely addressing this issue held that where U.S. Trustee fees had been paid upon a transfer of contingent assets to a Litigation Trust, and distributions by the Litigation Trust of the proceeds of those assets would not trigger a second obligation to pay U.S. Trustee fees to avoid “double-dipping.” In re Paragon Offshore PLC, 629 B.R. 227, 232 (Bankr. D. Del. 2021).
Proceeds derived from non-cash assets contributed to GUC Trusts are not derived exclusively, or even primarily, from a debtor. Recovering value from speculative assets like litigation claims often requires hundreds of hours of diligence and hundreds of thousands of dollars in legal fees on the part of the GUC Trust. It is the work of the GUC Trust that creates value to be distributed to creditors — without that work, contingent assets are worthless.
The Rite Aid court ultimately sided with the Creditors’ Committee on this point, entering a confirmation order including language clarifying that further distributions by the GUC Trust on account of contingent assets would not trigger U.S. Trustee fees. In re Rite Aid Corporation, [Dkt. No. 4352] at ¶266. And that is surely the correct result, for taken to its logical extreme the U.S. Trustee’s argument would imply that distributions on account of securities issued to creditors under a reorganized debtor’s plan should be subject to section 1930(a)(6)’s fees simply because a single bankruptcy case remains open, which is surely not what Congress intended in enacting section 1930.