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

Timothy T. Brock

Partner, Duane Morris

By Lawrence J. Kotler
September 8, 2021
Delaware Business Court Insider

In the recent decision of Paragon Offshore, No. 16-10386 (CSS), 2021 (Bankr. D. Del. June 28, 2021), the U.S. Bankruptcy Court for the District of Delaware (the court) addressed the issue of whether the Office of the United States Trustee (OUST) could collect its quarterly fees against assets that were previously transferred to a litigation trust (the litigation trust) free and clear of any and all claims, liens and other encumbrances pursuant to a confirmed plan of liquidation.

Paragon Offshore plc and certain of its affiliates (collectively, the debtors) filed for bankruptcy on Feb. 24, 2016. On June 7, 2017, the court confirmed the debtors’ Fifth Joint Chapter 11 plan (the plan). Pursuant to the terms and conditions of the plan, the litigation trust was established to pursue claims against Noble Corporation plc (Noble) and other third parties. In addition, the language of the plan provided that these claims were to be transferred to the litigation trust “free and clear of all liens, charges, claims, encumbrances and interests.” Furthermore, 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 became effective 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 any and all fees due and owing to the OUST pursuant to 28 U.S.C. Section 1930. In connection therewith, the debtors, for the quarter of July 1, 2017, through September 30, 2017―the quarter in which the claims were transferred to the litigation trust―paid the OUST the maximum fee due and owing pursuant to 28 U.S.C. Section 1930.

On Dec. 15, 2017, the litigation trust filed a complaint against Noble, among other entities. Following the filing of the complaint, certain of these defendants, including Noble, filed Chapter 11 bankruptcy cases in the U.S. Bankruptcy Court for the Southern District of Texas. Subsequent to the filing of these cases, the litigants engaged in active settlement discussions and, ultimately, the litigation trust settled its claims against Noble and these other defendants for a sum in excess of $90 million.

On Feb. 4, the litigation trust filed a motion seeking the court’s approval of the settlement, which it approved on Feb. 24. On March 19, the litigation trust received all of the payments required under the settlement agreement. Meanwhile, Noble, in its bankruptcy case, filed a post-confirmation report with its bankruptcy court indicating that it had paid the OUST the maximum amount required under 28 U.S.C. Section 1930 due, in large part, to the disbursements that Noble made pursuant to the terms and conditions of the settlement agreement with the litigation trust.

After the litigation trust received the settlement payment, the OUST filed a motion in the Paragon case seeking, among other things, to compel the debtors and the litigation trust to pay all quarterly fees allegedly due and owing to the OUST as a result of the litigation trust’s receipt of the settlement payment.

In addressing the issue of whether the OUST could recover additional sums due and owing pursuant to 28 U.S.C. Section 1930, the court first examined the statute. Noting that section 1930 requires the payment of quarterly fees to the OUST on “disbursements,” (citing 28 U.S.C. Section 1930(a)(6)), the court then addressed the issue of what constitutes a disbursement. As the court explained, the word “disbursements” is “commonly understood in this context to apply to payments made with the funds generated from the liquidation of the debtor’s assets.” (quoting Robiner v. Danny’s Markets (In re Danny’s Markets), 266 F.3d 523, 525 (6th Cir. 2001)).

The court then went on to examine other judicial decisions interpreting Section 1930(a)(6). The court found that “the common thread that appears to bind many of those decisions together is the fact that the debtor had some interest in, or control over, the money disbursed.” (quoting In re Hale, 436 B.R. 125, 130 (Bankr. E.D. Cal. 2010)). After examining those decisions, the court concluded that the “quarterly fees are not, as the OUST argues, triggered by ‘every situation’ when ‘any’ ‘entity’ makes ‘any’ payment to any ‘third party’ from ‘any source’ ‘for any reason.’ Rather, ‘it is the ultimate payment of the expense by any entity on behalf of a debtor that is the subject of the quarterly fees.” (quoting Walton v. Post-Confirmation Comm. of Unsecured Creditors GC Companies (In re GC Companies), 298 B.R. 226, 230 (D. Del. 2003)).

Using this standard, the court denied the OUST’s motion as a matter of law because:

By distributing “the corpus of the litigation trust pro rata to the beneficiaries of the litigation trust,” the trust is not paying expenses on behalf of any debtors. Rather, all “disbursements” related to any of the debtors’ obligations to the trust beneficiaries and the claims against Noble occurred at the effective date in 2017.

As the debtors had paid the maximum amount due and owing to the OUST at the time the claims against Noble and others were transferred to the litigation trust, the court ruled that a quarterly fee on account of the Noble settlement would essentially be a double payment. The court also opined that the payments made by the litigation trust to the trust beneficiaries were not payments made by or on behalf of the debtors. Rather, these payments represented the proceeds of trust assets paid to the trust beneficiaries and, pursuant to the plan, the debtors had no further interest in the trust assets or the litigation trust, as these assets had been vested in the litigation trust free and clear at least four years earlier.

Interestingly enough, the court did not expressly address the fact that the Noble debtors, in their respective bankruptcy cases, had paid fees due and owing to the OUST for the monies that they paid directly to the litigation trust as part of the settlement. Indeed, in addition to the double counting the court noted in its decision, there is also an issue of whether Noble’s payment of its quarterly fee would have, in effect, been triple counting. Although the court did not expressly address this issue, it noted in footnote 31 of its opinion how displeased it was with the OUST’s motion.

Based on the Paragon decision, it seems abundantly clear that a liquidating trust and the assets it receives pursuant to a confirmed plan of liquidation would be exempt from the quarterly fees due and owing the OUST pursuant to 28 U.S.C. Section 1930(a)(6), especially if the debtors had no interest in, or control over, the monies disbursed by such trust. As many Chapter 11 plans, particularly in recent years, have been liquidating plans whereby, upon the plan’s effective date, a liquidation or litigation trust is created and the debtors cease to exist, this decision may have far-reaching results on a going-forward basis.

Lawrence J. Kotler is co-chair of the bankruptcy and fiduciary representations division of Duane Morris’ Business Reorganization and Financial Restructuring practice group. He represents Chapter 11 debtors-in-possession, Chapter 11 trustees, Chapter 7 trustees, liquidating trustees, creditors’ committees, secured creditors and large institutional unsecured creditors in all facets of bankruptcy.

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