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The Bankruptcy StrategistFeaturesBankruptcyLitigation

Guidance on Distributions As 'Disbursements' and U.S. Trustee Fees

By Francis J. Lawall and Marcy J. McLaughlin Smith
December 01, 2021

Nowhere else is the old saying "you can't escape death and taxes" better exemplified than in Chapter 11. Under the Bankruptcy Code, debtors are subject to stringent reporting and fee requirements imposed by the Department of Justice and the Office of the U.S. Trustee. The U.S. Trustee fees, which have been significantly increased over the last several years, are based on the amount of "disbursements" made by a debtor during the prior reporting period. Therefore, a tension exists between a debtor's interest in characterizing payments made during the case as something other than a disbursement, in contrast to the U.S. Trustee's goal to deem all such payments as disbursements subject to fees. In a recent case from the Bankruptcy Court for the District of Delaware, In re Paragon Offshore PLC, 629 B.R. 227 (Bankr. D. Del. 2021), the bankruptcy court provided guidance on whether a post-plan effective date litigation trust's distributions constituted disbursements subject to the U.S. Trustee fee "tax."

In Paragon, a litigation trust was formed pursuant to the debtors' confirmed plan of reorganization, one purpose of which was to pursue estate claims against Noble Corp. Once the plan became effective, the Noble claims were transferred to the litigation trust, free and clear of all liens, claims, and interests. Consistent with grantor trust law, the plan provided that the transfer of assets, including the Noble claims, was deemed to be a transfer from the debtors to trust beneficiaries and then a transfer of those assets by the beneficiaries to the litigation trust.  As a result, the Paragon debtors and estates no longer held any interest in the trust assets (including the Noble claims) or the litigation trust.

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