March 29, 2019

Too Broke to Go Bankrupt? The Impact of The New US Trustee Fees On MidCap Bankruptcy Debtors

Chapter 11 is intended to provide businesses with the opportunity to restructure their financial affairs.  Business bankruptcies seek to balance the social good of ensuring that firms can continue to provide jobs, benefits, and products, with the maximization of recovery for creditors.  Preventing the inefficient dismemberment of companies and quelling creditor’s raw self-preservation instincts have been guiding principles of chapter 11 and its predecessors for more than 100 years.  From its early days, American bankruptcy law, an enumerated Congressional power (U.S. Const. Art. I, §8 cl. 4), departed from the English system, which strongly favored creditors.  “The English law of bankruptcy, as it existed at the time of the adoption of the Constitution, was conceived wholly in the interest of the creditor and proceeded upon the assumption that the debtor was necessarily to be dealt with as an offender.”  Cont'l Illinois Nat. Bank & Tr. Co. of Chicago v. Chicago, R.I. & P. Ry. Co., 294 U.S. 648, 668 (1935).  As commerce became more complex, the bankruptcy system also evolved. 

In 1978, Congress adopted the Bankruptcy Code, marking the beginning of the modern era of bankruptcy law.  As part of the adoption of the Bankruptcy Code, a pilot program was initiated to establish a government “watchdog” over the bankruptcy process, the United States Trustee Program (the “UST”).  Over the years, Congress expanded the role of the UST to appointment of trustees (both panel trustees and specially appointed trustees), appointment of creditor committees in chapter 11 cases, oversight and administration to prevent fraud and abuse, as well as many other matters.  By statute, the UST is supposed to be a self-funding entity.  However, “[a]ccording to the legislative history, the self-funding mechanism was designed to pay for the operation of the program, not to make money for the government.”  The major way the UST is funded is by statutory fees imposed on chapter 11 debtors. 

Since 1978 everything, bankruptcy included, has become more complex and expensive.  Therefore, small and mid-sized companies are finding it harder and harder to reorganize in bankruptcy.  Debtors must pay a quarterly fee based on the amount of “disbursements” they make.  However, the term “disbursements” is not defined in the Bankruptcy Code.

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