Quarterly Chapter 11 Fees Paid First in Chapter 7 Distributions

Understand the complexities and nuances of the Bankruptcy Code to better advise clients and prepare for court.

By Daniel Gill

Quarterly fees a former Chapter 11 debtor owed to the U.S. government must be paid on par with Chapter 7 administrative expenses, an Ohio federal judge ruled ( U.S. Tr.. v. STE-BRI Enters., Inc. , 2017 BL 337102, N.D. Ohio, No. 5:16-cv-2515, 9/22/17 ).

The opinion by Judge Sara Lioi, of the United States District Court for the Northern District of Ohio, reversed a bankruptcy court, which directed that Chapter 7 administrative expenses be paid in full before the quarterly fees. Those would be paid on par with Chapter 11 administrative expenses after the Chapter 7 expenses, the bankruptcy court had said.

Ste-Bri Enterprises Inc. filed a Chapter 11 case on Aug. 25, 2011. In Chapter 11, a company can keep operating and enjoy certain protections from creditors while trying to reorganize.

Ultimately Ste-Bri failed to come up with a workable plan of reorganization and it converted to Chapter 7 in March 2014. In that chapter, an independent trustee is appointed to liquidate the debtor’s assets for the benefit of its creditors, which are paid according to a strict priority schedule set forth in the bankruptcy code.

At the time it converted, the company owed about $9,700 for Chapter 11 quarterly fees which had come due.

Because there were insufficient funds to pay all administrative expenses and the quarterly fees in full, the Chapter 7 trustee proposed to pay her Chapter 7 administrative expenses on par with the U.S. trustee quarterly fees. No one objected.

Despite no objection, the bankruptcy court raised the question of whether the Chapter 7 expenses should be superior in priority to the quarterly fees. It ruled that they should, following a minority of cases having considered the question.

The district court said the bankruptcy court erred in its decision, agreeing with the majority of courts looking at the issue.

The court relied on Section 507(a)(2) of the Bankruptcy Code. That section says that in a business bankruptcy, first priority for payment of claims goes to allowed administrative expenses, claims of any Federal Reserve bank made under another statute, and “any fees assessed against the estate under chapter 123 of title 28.” That section is the predicate for assessing U.S. Trustee quarterly fees.

The court followed those courts, like the Ninth Circuit, which said that Congress intended the quarterly fees to have a priority equal to that of the Chapter 7 expenses, and superior to Chapter 11 expenses.

Amy Leizman Good, Cleveland, represented the United States Trustee. The Chapter 7 trustee, Dynele Schinker-Kuharich, was represented by Michael A. Steel, Akron, Ohio.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Try Bankruptcy on Bloomberg Law