In re WM Six Forks, LLC, Case No. 12-05854-8-ATS, 2013 WL 5354748 (Bankr. E.D.N.C., Sept. 23, 2013)
Pursuant to section 363(k), a secured creditor made a credit bid on its collateral—a mixed- use building owned by the debtor—and the sale was approved by the court. The debtor, however, did not include the $31 million credit bid when it calculated the quarterly fee owed to the U.S. Trustee. On the motion of the bankruptcy administrator, the court entered an order directing the debtor to appear and show cause for its failure to pay the full quarterly fee. Applying a broad reading, the Bankruptcy Court for the Eastern District of North Carolina held that a credit bid exercised by a secured creditor pursuant to section 363(k) of the Bankruptcy Code was a “disbursement” for purposes of calculating the quarterly fee due under 28 U.S.C. § 1930(a)(6).
Debtor, the owner of a mixed-use building, filed a voluntary chapter 11 petition. Pre-petition, the debtor executed a building loan agreement that was secured by a deed of trust and assignment of rents, profits and income from the building. Debtor also entered into a security agreement and financing statement covering “collateral…now or thereafter located on the premises of, related to, or used in connection with the construction, financing, repair, ownership, management, and operations of” the building. The creditor, successor-by-assignment to the original lender, filed a proof of claim based on the foregoing security instruments in the total amount in excess of $39 million.
A few months after the debtor filed its chapter 11 petition, the debtor and creditor entered into a purchase agreement by which the creditor would purchase the building for approximately $37 million. The purchase agreement also entitled the creditor “to exercise its credit bid right pursuant to section 363(k) of the Bankruptcy Code on account of its allowed secured claim in an amount not less than” the amount of its proof of claim. Thereafter, the court entered an order confirming the debtor’s amended plan of liquidation, which provided for the transfer of the building to the creditor in full satisfaction of its claim following court approval of the purchase agreement and certain bidding procedures. The court entered an order approving the sale of the building to the creditor, and the creditor then transferred its rights to a successor-by-assignment in consideration of the credit bid.
When the debtor filed its quarterly fee statement and post-confirmation report, it stated that the building was sold to the creditor and listed total disbursements of approximately $111,000, which resulted in a quarterly fee of $975. The debtor did not include the credit bid in its fee statement.
The bankruptcy administrator filed a motion arguing that the debtor owed the maximum quarterly fee of $30,000 pursuant to 28 U.S.C. § 1930(a)(6), based on its contention that the creditor’s credit bid of approximately $37 million was a “disbursement” under section 1930(a)(6). The court entered an order directing the debtor to appear and show cause for its failure to pay the correct quarterly fee amount. The parties disagreed on whether a credit bid is a “disbursement” under section 1930(a)(6).
The court began its analysis with the plain language of section 1930(a) (6). Section 1930(a)(6) requires that debtors pay the U.S. Trustee quarterly fees, which are calculated on a graduated scale based on “disbursements” made during a given quarter. The court held that the definition of the term “disbursements” was critical, but noted that neither the Bankruptcy Code nor the legislative history defined the term.
The bankruptcy administrator urged the court to adopt a broad interpretation of the term “disbursements” to include the successful credit bid in calculating the debtor’s quarterly fee, arguing that a broad interpretation was consistent both with the plain meaning of the term as well as with the purposes and legislative history of section 1930(a)(6). The debtor, pointing to language in the closing statement indicating that the debtor neither received nor made payments totalling $37 million in exchange for the building or for partial satisfaction of the existing debt, disputed the administrator’s claim that the credit bid was a “disbursement.”
The court looked to Black’s Law Dictionary and Merriam-Webster’s Dictionary and Thesaurus, both of which defined “disbursement” as the act of paying out money. The court also looked at sections 326(a) and 543 of the Bankruptcy Code for guidance. Section 326(a) sets trustee compensation limits based on “moneys disbursed.” The court cited opinions from the Third Circuit and the Ninth Circuit BAP standing for the proposition that the value of credit bids were not included in “moneys disbursed” under section 326(a), and held that in the context of 326(a), “disbursements means something more than monies.” Turning to section 543(a), which prohibits a custodian from making certain disbursements, including the disbursement of “offspring,” the court held that “disbursement” under section 543 “is broader than the disbursement of money.”
The court considered opinions from across the country—including from the bankruptcy courts for the Western District of Tennessee, the District of South Dakota, the Eastern District of North Carolina, the Western District of Virginia, the Western District of Texas, the Southern District of New York, and the Ninth Circuit—all of which broadly construed the term “disbursements” under section 1930(a)(6) to include all payments, whether made directly by the debtor or made by a third party. The court concluded that “[t]he congressional purpose underlying the United States Trustee Program and quarterly fees lent additional support to a broad reading of the term ‘disbursements’ in § 1930(a)(6),” because that section was established as a “revenue-generating mechanism” to impose costs “on ‘the users of the bankruptcy system, not the taxpayer.’”
Citing Supreme Court precedent from RadLax Gateway Hotel, LLC v. Amalgamated Bank, 132 S. Ct. 2065, 2070 n.2 (2012) and other courts around the country, the court held that credit bidding protects a creditor “against the risk that its collateral will be sold at a depressed price,” without requiring that the creditor put up additional cash or collateral to protect its interests. Thus, under section 363(k), a credit bid by the secured creditor is treated as the equivalent of a cash purchase. As further support for its conclusion that credit bids are “disbursements” under section 1930(a)(6), the court cited instances where the substitution of a new loan for an existing debt and the satisfaction of an old debt through the sale of real property securing that debt were held to be “disbursements”—even though there was no benefit to the estate in either instance.
The court found that the debtor’s quarterly payment was $30,000—not $975— because the creditor’s $31 million credit bid was a “disbursement” under section 1930(a)(6).
The Bankruptcy Court for the Eastern District of North Carolina has joined courts from across the nation in holding that “disbursements” for purposes of determining the quarterly fee owed to the U.S. Trustee under section 1930(a)(6) is to be broadly construed. In this case, credit bids by secured parties pursuant to section 363(k) are considered disbursements and must be included as such in debtors’ quarterly reports. The fact that the funds are paid by a third party and that the estate receives no benefit is not dispositive.