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Delaware Bankruptcy Court Denies “Offensive” and “Reprehensible” U.S. Trustee Fees in the Paragon Case

Written by: Steven D. Adler

On June 29, 2021, Delaware Bankruptcy Court Judge Christopher S. Sontchi issued a letter opinion in Paragon Offshore, PLC, Case No.: 16-10386 (CSS) denying the Office of the United States Trustee’s (the “OUST”) motion to compel payment of $250,000 in quarterly fees to the OUST based on settlement proceeds received by the Paragon litigation trust.  Notably, Judge Sontchi found the OUST’s motion to be an “offensive” and “reprehensible” attempt to collect its “tax” for a second or even third time because the quarterly fee had already been paid by the debtors when they transferred their claims to the litigation trust.

The Paragon litigation trust was established upon the confirmation Paragon Offshore plc’s (“Paragon”) plan in 2017 to pursue claims against Noble Corporation plc (“Noble”) and others.  On December 15, 2017, the litigation trust filed a complaint against several Noble entities and certain directors of Noble and Paragon.  Six weeks before the trial, Noble and certain related companies filed chapter 11 petitions in the Southern District of Texas.  Ultimately, the litigation trust settled its claims for $90,375,000 and received the settlement payment.  Noble paid the OUST fees in its own case based on its disbursements, which included the settlement payment.

Thereafter, on May 12, 2021, in the Delaware Paragon case, the OUST filed its motion seeking to compel payment of all quarterly fees in connection with settlement payment from the litigation trust to its beneficiaries pursuant to 28 U.S.C. § 1930.  The OUST argued that the litigation trust or Paragon itself was liable for the fees because the trust litigated the Noble claims on behalf of Paragon’s bankruptcy estate and the resulting settlement proceeds were plan payments.

In the opinion, Judge Sontchi analyzed case law interpreting section 1930(a)(6), which requires the payment of quarterly payments to the U.S. Trustee on “disbursements.”  He found that although courts interpret section 1930(a)(6) differently, the common understanding is that quarterly fees are triggered only by “payments by or on behalf of the debtor[.]”  In denying the motion, the Court reasoned that by distributing the corpus of the litigation trust to its beneficiaries, the trust was not paying any expenses on behalf of any debtors.  Instead, pursuant to the plan and trust agreement, all disbursements relating to any of the debtors’ obligations to the trust beneficiaries and the Noble claims occurred on the effective date of the debtors’ plan when the debtors transferred the claims to the litigation trust.  At that time the OUST received the maximum quarterly payment possible for such disbursements.

The Court also noted that the trust received the settlement proceeds long after the debtors and their estates agreed they would have no further interest in or with respect to the litigation trust and its assets.  Further, citing to In re Hale, 436 B.R. 125, 130 (Bankr. E.D. Cal. 2010), Judge Sontchi found that “[t]his is not a case where the debtors ‘had some interest in, or control over, the money disbursed.’”

In addition, in the opinion, Judge Sontchi recognized that the OUST has become a tax collector in recent years.  He stated that since Congress dramatically increased its previously modest quarterly fees, “the OUST has been compelled to act as a tax collector, focused on increasing the coffers of the U.S. Treasury, perhaps, at times, in derogation of its original mission.”

Judge Sontchi further expressed his displeasure with the OUST’s motion in this case.  He stated in a footnote that “I cannot stress enough how offensive I find the OUST’s attempt to double, or triple collect its tax.  It would be hypocritical for a person’s whose livelihood depends on the taxation of his fellow citizens to suggest that taxation is, in and of itself, reprehensible.  It is, of course, necessary.  What is reprehensible is attempting to take money out of the pockets of creditors, which are already receiving a small recovery on their claims, multiple times for the same distribution.”

Based on this case, reorganized debtors and post-confirmation trusts should carefully review their plans, trust agreements, and the law in their district when they are charged quarterly disbursement fees by the OUST to ensure that such fees are appropriate and are not a double “tax.”  Such a situation may exist when the quarterly fees are based on “disbursements” from litigated claims that were previously transferred free and clear from a debtor and its estate.

A copy of the opinion can be found here.

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