Bankruptcy Court Rejects US Trustee Fees on Trust Distributions in ‘Paragon Offshore’

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In the recent decision of Paragon Offshore, No. 16-10386 (CSS), 2021 (Bankr. D. Del. June 28, 2021), the United States Bankruptcy Court for the District of Delaware (the court) considered whether the Office of the United States Trustee United (OUST) may collect its quarterly fees from assets that have previously been transferred to a litigation trust (the Litigation Trust) free and clear of all claims, liens and other charges in accordance with a confirmed liquidation plan.

Paragon Offshore plc and certain of its subsidiaries (collectively, the debtors) filed for bankruptcy on February 24, 2016. On June 7, 2017, the court upheld the debtors’ fifth Chapter 11 joint plan (the plan). Pursuant to the terms and conditions of the plan, the Litigation Trust has been established to pursue claims against Noble Corporation plc (Noble) and other third parties. In addition, the wording of the plan provided that these claims were to be transferred to the litigation trust “free and clear of all liens, charges, claims, charges and interest”. In addition, the Litigation Trust was established to pursue these claims “for the benefit of the holders of the Litigation Trust interests”. Following confirmation of the plan, it went into effect on July 18, 2017, and the claims against Noble and others were transferred to the Litigation Trust.

In addition to transferring the claims to the litigation trust, the plan also provided that the debtors would pay all fees due and owed to the USTE in accordance with Section 28 USC 1930. In this regard, the debtors, for the quarter of the 1st July, 2017, until September 30, 2017, the quarter in which the claims were transferred to the Litigation Trust, paid the UST the maximum fees due and payable under Section 28 USC 1930.

On December 15, 2017, the Litigation Trust filed a lawsuit against Noble, among other entities. Following the filing of the lawsuit, some of those defendants, including Noble, filed Chapter 11 bankruptcy cases with the U.S. South District Bankruptcy Court of Texas. After the filing of these cases, the parties engaged in active settlement discussions, and ultimately the Litigation Trust settled its claims against Noble and these other defendants for more than $ 90 million.

On February 4, the litigation trust filed a petition seeking court approval of the settlement, which it approved on February 24. On March 19, the Litigation Trust received all payments required under the Settlement Agreement. Meanwhile, Noble, in his bankruptcy case, filed a post-confirmation report with his bankruptcy court stating that he had paid the OST the maximum amount required under Section 28 USC of 1930 in This is largely due to the disbursements made by Noble in accordance with the terms and conditions of the Settlement Agreement with the Litigation Trust.

After the litigation trust received the settlement payment, the OST filed a petition in the Paragon among other things, to compel debtors and the litigation trust to pay all quarterly fees allegedly owed and owed to USTE as a result of the litigation trust receiving the settlement payment.

In addressing the issue of whether the USTE could collect additional amounts due and owed under Section 1930 of USC 28, the court first considered the law. Noting that Section 1930 requires the payment of quarterly fees to OUST on “disbursements” (citing 28 USC Section 1930 (a) (6)), the court then turned to the question of what constitutes disbursement. As the court explained, the word “disbursement” is “commonly understood in this context to apply to payments made with funds generated by the liquidation of the debtor’s assets.” (citing Robiner c. Danny’s Markets (In re Danny’s Markets), 266 F.3d 523, 525 (6th Cir. 2001)).

The court then considered other court decisions interpreting section 1930 (a) (6). The court concluded that “the common thread that seems to link many of these decisions is the fact that the debtor had some interest or control over the money disbursed.” (citing About Hale, 436 BR 125, 130 (Bankr. ED Cal. 2010)). After reviewing these decisions, the court concluded that the “quarterly charges are not, as the USTR argues, triggered by“ all situations ”when“ any ”“ entity ”performs“ any ”. payment to a “third party” from “any source”. ‘for whatever reason.’ On the contrary, “it is the final payment of the expenditure by any entity on behalf of a debtor that is the subject of the quarterly charge”. (citing Walton v. Comm. post-confirmation. unsecured creditors GC Companies (In re GC Companies), 298 BR 226, 230 (D. Del. 2003)).

Using this standard, the court dismissed USTE’s motion in law because:

By distributing “the litigation trust corpus on a pro rata basis to the beneficiaries of the litigation trust”, the trust does not pay expenses on behalf of any debtor. Rather, all “disbursements” related to any of the debtors’ obligations to the beneficiaries of the trust and claims against Noble occurred on the effective date of 2017.

As the debtors had paid the maximum amount due and owed to the UST by the time the claims against Noble and others were transferred to the litigation trust, the court ruled that a quarterly royalty under the Noble settlement would be essentially a double payment. The court also ruled that the payments made by the litigation trust to the beneficiaries of the trust were not payments made by or on behalf of the debtors. Rather, these payments were the proceeds of the trust assets paid to the beneficiaries of the trust and, according to the plan, the debtors no longer had any interest in the assets of the trust or the litigation trust, as those assets had been vested. to the dispute trust in a free and clear manner. at least four years earlier.

Interestingly, the court did not specifically address the fact that the Nobles debtors, in their respective bankruptcy cases, had paid the fees owed and owed to the UST for the sums they paid directly to the UST. litigation trust in connection with the settlement. Indeed, in addition to the double counting that the court noted in its decision, the question also arises as to whether Noble’s payment of its quarterly fees would, in fact, have been triple counting. While the tribunal did not specifically address this issue, it noted in footnote 31 of its opinion how unhappy it was with the UST’s request.

Based on Paragon decision, it seems quite clear that a liquidation trust and the assets it receives under a confirmed liquidation plan would be exempt from quarterly fees owed and owed to the UST under Section 28 USC 1930 (a) (6), especially if the debtors had no interest or control over the amounts disbursed by this trust. Like many Chapter 11 plans, especially in recent years, have been liquidation plans whereby, on the effective date of the plan, a liquidation or litigation trust is created and the debtors cease to exist. , this decision can have far-reaching results on the future basis.

Reprinted with permission from Delaware Business Court Insider, © ALM Media Properties LLC. All rights reserved.


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