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Defusing the UST Tax Bomb
As predicted in the first part of this article (May, 2018), the new United States Trustee (UST) fee has had a disproportionate effect on middle-market, high-velocity cash flow companies. See, Katy Stech Ferek, Companies Grapple with Rise in Bankruptcy Fees, Wall St. J. Sept. 6, 2018. In fact, several debtors and cases have already been disrupted by the abrupt change in the UST fee schedule, with one debtor being forced to relinquish control of its business to a Chapter 11 trustee after it couldn't pay the increased fee (which was accruing at a faster pace than the interest on the debtor's DIP loan). See, Order Directing Appointment of Trustee, In re Peninsular Airways, Inc., Case No. 17-00282, Docket No. 409.
The best solution is for Congress to revisit the fee structure and refine it to reflect the realities of particular cases and the actual burden on the UST. However, legislation takes time, and practitioners need to cope with the new fees now. Over the past nine months, debtors and lenders have designed a variety of solutions to minimize the impact of the new fees. Primarily, those solutions have involved: 1) minimizing disbursements; 2) timing disbursements; and 3) preparing to litigate the definition of disbursements.
An Ounce of Prevention
As a reminder, the new UST fees (effective as of Jan. 1, 2018) tax the “disbursements” of a debtor, which is how the old fee schedule operated. However, where the old fee schedule capped the total fees at $30,000 per calendar quarter, the new fee schedule taxes 1% of every disbursement, up to $250,000 per quarter, for every debtor with disbursements over $1,000,000.
Since the cap on fees is on a per-debtor basis, jointly administered debtors can be required to pay up to $250,000 per quarter each; it isn't unrealistic for a company with multiple subsidiaries or sister-companies to incur $500,000 or more in UST fees per quarter. And since cases can last for years, significant funds are now being diverted from employees, vendors, and other unsecured creditors to fund the United States Trustee program. And given that the fees disproportionately affect revolving lenders, the DIP financing markets are being distorted, increasing costs for debtors and cutting into recoveries for unsecured creditors.
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