Lawyerly Lingo – Defining “Disbursements” for the Calculation of Quarterly Fees

Contributed by Rich Mullen
As J.K. Rowling wrote in Harry Potter and the Goblet of Fire, “Anyone can speak Troll . . . .  All you have to do is point and grunt.”  Imagine what the practice of law would be like if we were all fantastical trolls.  But there are not many lawyer trolls running around (except for maybe the patent troll variety), and the use and meaning of particular words matter significantly.  Very often, a case might turn on the precise meaning of a word in the unique context at issue.  This was true in In re WM Six Forks, LLC, Ch. 11 Case No. 12-05854-8-ATS (Bankr. E.D.N.C. Sept. 23, 2013), where the United States Bankruptcy Court for the Eastern District of North Carolina rejected a debtor’s argument that a credit bid should not be considered a “disbursement” under 28 U.S.C. § 1930(a)(6) and concluded that the credit bid should be included in the calculation of the debtor’s quarterly fees.
In WM Six Forks, the debtor owned a mixed-use building with 298 residential apartments and 14,000 square feet of retail space in Raleigh, North Carolina that secured a $36.6 million prepetition loan.  Shortly after the debtor filed its chapter 11 petition, the secured lender filed a proof of claim in the amount of $39 million.  Just a few months later, the debtor and the secured lender entered into a purchase and sale agreement providing for the sale of the mixed-use building for a credit bid of $37.1 million.  The court then entered an order confirming the debtor’s plan of liquidation, which provided for the sale of the mixed-use building pursuant to sections 363(b) and 1123(a)(5)(D) of the Bankruptcy Code following court-approval of the purchase agreement and certain bidding procedures.  The confirmation order also provided that, in accordance with the purchase agreement, the transfer of the mixed-use building would be in full satisfaction of the secured lender’s claim.  The debtor received no other qualified bids, and the court approved the sale of the mixed-use building for a credit bid of $37.1 million.
Subsequently, the debtor filed its quarterly fee statement and postconfirmation report listing disbursements for the quarter in an amount of $111,821.65, which resulted in a quarterly fee of $975 payable to the bankruptcy administrator.  Unhappy with payment of the $975, the bankruptcy administrator sought an order directing the debtor to show cause for its failure to pay the appropriate quarterly fee of $30,000 based on the sale of the mixed-use building for a credit bid of $37.1 million.  The court entered the order to show cause and the dispute concerning the word “disbursements” began.
Pursuant to 28 U.S.C. § 1930(a)(6), a debtor is required to pay quarterly fees calculated on a graduated scale that is based on the “disbursements” made by the debtor during a given quarter.  As recognized by the court, however, the term “disbursements” is not defined by 28 U.S.C. § 1930(a)(6), its legislative history, or the Bankruptcy Code.  The bankruptcy administrator argued that “disbursements” should be interpreted broadly to include the credit bid because such a broad interpretation is consistent with the plain meaning of the term and the purpose and legislative history behind 28 U.S.C. § 1930(a)(6).  The debtor, on the other hand, argued that the word “disbursements” did not capture the credit bid because the debtor did not receive or make any payments in exchange for the mixed-use building or partial satisfaction of the outstanding debt.
As mentioned, the court sided with the bankruptcy administrator, concluding that the credit bid was included in the term “disbursements” and that the debtor was required to pay a quarterly fee of $30,000.  In reaching this conclusion, the court first looked to Black’s Law Dictionary and Merriam-Webster’s Dictionary & Thesaurus for the word’s ordinary, contemporary common meaning.  Black’s defined “disbursement” as “the act of paying out money, commonly . . . in settlement of a debt or account payable,” and Merriam-Webster’s defined the word as “the act of disbursing” or “funds paid out.”
With these definitions in mind, the court turned to the Bankruptcy Code, specifically, sections 326(a) and 543(a).  Section 326(a), which sets the limits placed on the compensation of chapter 7 and chapter 11 trustees, focuses on “moneys disbursed,” and the court reasoned that use of the word “moneys” circumscribes the word “disbursed” and suggests that “disbursements” applies to more than money.  The court found similar support in section 543(a), which prohibits a custodian with knowledge of the commencement of the debtor’s case from making “any disbursement from,” among other things, “offspring,” which the court concluded was plainly broader than the disbursement of money.
Citing cases from several jurisdictions, the court also recognized that, for the purposes of calculating quarterly fees under 28 U.S.C. § 1930(a)(6), “disbursements” had been interpreted broadly to include all payments whether made directly by the debtor or by a third party on the debtor’s behalf.
Ultimately, the court reasoned that the Congressional purpose behind 28 U.S.C. § 1930(a)(6) required it to conclude that the credit bid was a “disbursement.”  The court recognized that 28 U.S.C. § 1930(a)(6) was established as a “revenue-generating mechanism” used to fund the United States Trustee Program by imposing a user tax on debtors in the bankruptcy system, and that the Supreme Court had recently reaffirmed a secured creditor’s ability to credit bid and, thus, purchase its collateral without committing additional cash.  Thus, the sale of the mixed-use building via credit bid must have been a “disbursement” because a purchase of assets by credit bid “is the equivalent of a cash purchase.”  The court reassured itself by citing to additional cases that found “a wide range of payments to constitute disbursements for purposes of calculating quarterly fees, including those where sale proceeds were utilized to retire existing debt.”
There are two big takeaways from WM Six Forks.  First, in calculating quarterly fees payable to a bankruptcy administrator or the United States Trustee, debtors must be mindful of all transactions that could be considered “disbursements,” especially those sales involving credit bids.  Second, and more generally, every practitioner should pay special attention to the specific words (and their meanings) used in written sources such as statutes, agreements, court decisions, and pleadings.  The outcome of your next case might depend on it.