In a 2021 opinion in In re Paragon Offshore PLC, 629 B.R. 227 (Bankr. D. Del. 2021) (“Paragon Offshore”), Judge Sontchi of the United States Bankruptcy Court for the District of Delaware held that a litigation trust created post-plan confirmation did not have to pay quarterly fees to the United States Trustee under 28 U.S.C. § 1930(a)(6).  Such fees are based on a formula tied to the amount of disbursements made by the debtor (or potentially, a successor, such as a liquidating trust) during each quarter that the debtor’s chapter 11 case is pending, capped at $250,000 per quarter.  Judge Sontchi likened the payment of quarterly fees by the litigation trust to double taxation given that the debtors previously paid quarterly fees when transferring claims to the trust, and that distributions made years later by the trustee were from trust assets that vested “free and clear” for the benefit of the trust’s beneficiaries.  The Fox Rothschild In Solvency Blog’s previous discussion on the Paragon Offshore decision can be found at: Court Rules that Litigation Trust Does Not Have to Pay Quarterly Fees to U.S. Trustee.

Paragon Offshore could be read as a blueprint for courts to exempt post-confirmation trusts from paying quarterly fees, or at least to help instruct parties how to draft plans and trust documents and structure post-confirmation transfers of assets in such ways to avoid payment of quarterly fees.  On the other hand, courts may view the holding as unique to the circumstances.

The extent of the Paragon Offshore decision was recently tested in the Bankruptcy Court for the Eastern District of Virginia in the Health Diagnostic Laboratory, Inc. (“Health Diagnostic”) case.[1]  Relying on Paragon Offshore, the liquidating trustee appointed for the liquidating trust created in Health Diagnostic argued that the trust should not be liable for quarterly fees to the United States Trustee under 28 U.S.C. § 1930(a)(6).  The trustee sought a determination on the extent of the trust’s liability for quarterly fees after the trustee made an interim distribution, which the United States Trustee asserted triggered the maximum $250,000 quarterly payment.  The trustee argued that the confirmed plan in the case did not require him to pay quarterly fees on distributions to beneficiaries of the trust, and that such distributions were not “disbursements” under 28 U.S.C. § 1930(a)(6) because the beneficiaries are equitable owners of the trust’s assets.

The bankruptcy court, however, disagreed and distinguished the circumstances in the case from Paragon Offshore.  The court noted that the plan in Health Diagnostic substantively consolidated the multiple bankruptcy estates and that unlike Paragon Offshore, the liquidating trust was the successor to the debtor under the plan and that the plan included explicit and unambiguous language transferring the debtors’ obligation to pay quarterly fees to the trustee under 28 U.S.C. § 1930(a)(6).  This language in the plan was specifically requested by the United States Trustee, and therefore the United States Trustee was entitled to the benefit of the bargain it negotiated with the debtors.  In contrast, the court noted that the trust in Paragon Offshore “did not become the successor to the debtors, and the liquidating trustee did not step into the shores and acquire all of the duties of the debtors.”  Further, unlike Paragon Offshore, no quarterly fees were assessed with respect to the transfer of assets from the debtors to the liquidating trust.

The decision indicates that bankruptcy courts will not follow Paragon Offshore as a blanket blueprint for finding that post-confirmation trusts are exempt from paying United States Trustee quarterly fees on the basis that 28 U.S.C. § 1930(a)(6) is only limited to the actual debtor.  The court noted in Health Diagnostic that holding otherwise could virtually eliminate quarterly fees “by the simple expedient of transferring assets from the bankruptcy estate to a post confirmation entity for subsequent payment.”[2]

Read together, Paragon Offshore and Health Diagnostic reflect that plan language and circumstances of the case will inform whether a post-confirmation trust is obligated to pay quarterly fees. Architects of chapter 11 plans and post-confirmation trust documents should therefore be mindful to draft the documents with provisions that could help the trust avoid paying quarterly fees (if that is the desired result).

On a final note, the court Health Diagnostic noted that its decision does not consider the constitutional issue addressed by the Supreme Court last year in Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022) with respect to the sharp increase in United States Trustee quarterly fees enacted by Congress in 2018.

[1] In re Health Diagnostic Laboratory, Inc., 15-32919 (Bankr. E.D. Va. Jan 4, 2023).

[2] A practical impact, however, noted by the Court, is that payment of quarterly fees could cause a liquidating trustee to withholding making interim distributions to avoid paying quarterly fees until a final distribution is made.