Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

Defusing the UST Tax Bomb

By Jacob H. Marshall
October 01, 2018

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.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
Major Differences In UK, U.S. Copyright Laws Image

This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.

Strategy vs. Tactics: Two Sides of a Difficult Coin Image

With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.

The Article 8 Opt In Image

The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.

Removing Restrictive Covenants In New York Image

In Rockwell v. Despart, the New York Supreme Court, Third Department, recently revisited a recurring question: When may a landowner seek judicial removal of a covenant restricting use of her land?

Fresh Filings Image

Notable recent court filings in entertainment law.