United States Trustee Fees Increase, Dramatically Impacting Viability of Mid-Size Chapter 11 Cases

Effective January 1, 2018, the quarterly fees payable by Chapter 11 debtors to the United States Trustee (UST) program increased dramatically for certain Chapter 11 debtors. Trustee fees are generally based upon gross disbursements by a Chapter 11 debtor, and for those debtors with $1 million or more in disbursements in a calendar quarter, the fee has increased to 1% of those disbursements, with a cap of $250,000.00 per quarter. 12 U.S.C. § 1930(a)(6)(B).

Previously, the fees for debtors with $1 million or more in quarterly disbursements ranged from $6,500.00 to $30,000.00.  So for many bankruptcy cases, this is effectively an exponential increase.

This can have devastating consequences for mid-size Chapter 11 debtors, especially those with high volume, low margin businesses. For example, grocery stores, meat packing plants, feed yards, airlines, and the like run through large amounts of cash, but often operate on narrow margins. Even repayments on revolving credit facilities can be considered “disbursements,” thus adding another 100 basis points to a DIP’s borrowing costs.

For those businesses (and their creditors, especially trade vendors and other unsecured creditors), the cost of bankruptcy protection may now be too high.

A case from the District of Alaska is illustrative:  In In re Peninsula Airways, Inc. (PenAir), comparable quarterly fees for that debtor increased from $20,000.00 to $156,000.00. That debtor (a small regional air carrier) asserted that its U.S. Trustee fees were effectively equivalent to the lease cost for two aircraft, and it was more than the interest payable on that debtor’s $4 million DIP loan. 

Similar situations have arisen in other cases. This expense does not occur in a vacuum. This new burden affects the viability of these debtors, and effectively comes out of the pockets of those debtors’ creditors. Imagine, for example, a case with a prepetition debt load (including secured claims) of say, less than $10 million incurring $200,000 in UST fees in one quarter – this was the case in a recent bankruptcy in the Northern District of Texas. As suggested above, this fee structure can have a devastating impact in agribusiness and food processing cases.

Lest anyone demonize the United States Trustees or their staff, this fee increase comes courtesy of Congress, not the USTs – it is embedded in the Bankruptcy Judgeship Act of 2007, and according to press reports, was a function of broader budgetary issues. 

To what extent this can be repaired short of a legislative fix remains to be seen. One very insightful – and appropriately named – commentary suggests perhaps a better approach to what constitutes a “disbursement,” starting with revolving debt payments.  See J. Marshall and R. Klein, How the New UST Fee Schedule is a Ticking Time Bomb for Middle Market Debtors, 35 Bankruptcy Strategist 7 (May 2018) (“By taking an expansive view of disbursements, courts have disconnected calculation of the UST fee from the actual economic activity of the debtor or the complexity of the bankruptcy case.”).

To expand on that commentary, perhaps a more nuanced approach to what constitutes a disbursement may help. Better yet, application of other standards (case size, asset structure, etc.) would also protect smaller cases from unintended (?) consequences of this legislation. But so far, nothing of the sort has materialized.

Finally, there is the statute itself – could it provide some relief?  Subsection (f)(3) reads as follows:

This subsection does not restrict the district court from waiving, in accordance with Judicial Conference policy, fees prescribed under this section for other debtors and creditors.

To our knowledge, there are yet no published decisions post-increase (2018) applying this subsection.

Some debtors may come up with these or other creative ways to “drill around” these fees (pre-packs, limiting disbursements, use of non-debtor entities, etc.). Meanwhile, however, many mid-sized businesses and their creditors may find themselves priced out of reorganization under the Bankruptcy Code.

 

*Roger Cox is the author of Cox’s Texas Creditors Rights Laws Annotated (Thomson Reuters 2018), and a former contributor to the SMU Law Review. He is Board Certified in Business Bankruptcy Law, Commercial Real Estate Law, and Farm & Ranch Real Estate Law by the Texas Board of Legal Specialization. Underwood has offices in Amarillo, Austin, Fort Worth, Lubbock, and Pampa. This article is for general and academic information only and is not intended as legal advice or as a specific position asserted on behalf of any existing or future client of the firm.

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