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Bankruptcy Court Closes Chapter 11 Cases Even with an Appeal Pending and Over the Objection of the U.S. Trustee.

Debtors in chapter 11 cases are required to make quarterly payments to the United States Trustee’s Office.  These fees support the UST Program that serves in all districts but those in two states.[i]  Quarterly fees must be paid until cases are closed.  And cases are closed when they are “fully administered,” a term that isn’t defined in the Bankruptcy Code or Rules.

What if a chapter 11 case is ready to close save for one judgment, order, or decree by a bankruptcy judge that is appealed to a district court?  Will a bankruptcy court close the case or wait for a final order to be issued in the appeal?  Does the possibility of a remand after the appeal impact if a case can close?

This issue arose in a case where the U.S. Trustee argued that the case should not be closed until an appeal was resolved.  The court disagreed and explained how a case can be “fully administered” even when an appeal is pending and a remand is possible.  In re Clinton Nurseries, Inc., No. 17-31897, slip op. (Bankr. D. Conn. Mar. 6, 2020).  The longer cases remain open the more quarterly fees debtors must pay.

A group of debtors had filed chapter 11 cases in 2017.  Two years later, the debtors confirmed a plan that set up a post-confirmation trust.  The debtors had also challenged the constitutionality of the quarterly fees they were required to pay.  The bankruptcy court had ruled against the debtors, and the debtors appealed to the district court.  That appeal had not been adjudicated when the bankruptcy court confirmed the debtors’ plan.  The debtors sought entry of a final decree and an order closing the cases.  The UST objected, arguing that the chapter 11 cases were not “fully administered” due to the pending appeal and shouldn’t be closed.

Bankruptcy Code section 350(a) provides that “[a]fter an estate is fully administered and the court has discharged the trustee, the court shall close the case.”  Federal Rule of Bankruptcy Procedure 3022 provides that “[a]fter an estate is fully administered in a chapter 11 reorganization case, the court, on its own motion or on motion of a party in interest, shall enter a final decree closing the case.”  

In Clinton Nurseries, Bankruptcy Judge James J. Tancredi looked to factors outlined in the Advisory Committee Notes to Rule 3022 and concluded that – even with the appeal pending – the debtors’ cases were “fully administered.”  The debtors had consummated their plan; all property was vested in the reorganized debtors or the post-confirmation trust; the trust was now responsible for adversary proceedings that the debtors had commenced; proceeds from those cases would not go to the reorganized debtors and would be “handled entirely by the . . . [t]rust;” the debtors had funded the trust; the debtors had closed loan documents with their principal lender; pursuant to the court’s direction, the quarterly fees in dispute in the appeal were escrowed and, depending on the outcome of the appeal, would go either to the reorganized debtors or the UST — they wouldn’t go to the debtors’ estates; and the “totality of the circumstances justifies and supports a determination that the [d]ebtors’ estates are fully, substantively, and sufficiently administered in accordance with the Plan.”  Slip op. at 8.

That left the issue about a possible remand on appeal and the need for further action by the bankruptcy court.  Judge Tancredi looked to Bankruptcy Code section 350(b) and the Court’s ability to reopen the chapter 11 cases, if necessary.  He said that section 350(b) “expressly provides the procedure for just such an occasion, namely, to reopen the case for cause.  Such an eventuality should not prevent the closure of a case when a plan of reorganization has been substantially consummated and what remains is an otherwise fully administered estate.”  Slip op. at 9.   Judge Tancredi added that “a refusal of this Court to enter a final decree while there is a bona fide appeal pending on an issue which does not impact the Plan or the Debtors’ estates would be absurdly punitive and needlessly dilatory rather than rehabilitative.”  Id.  He signed off on the final decree and closed the cases.

[i] The UST Program is part of the Department of Justice.  Two percent of the fees debtors pay are sent to the general treasury to fund bankruptcy judgeships.  All other funds are paid to the UST System Fund.  The districts that don’t participate in the UST Program are those in Alabama and North Carolina.  They have Bankruptcy Administrators that function under the Judicial Branch.  Debtors that file cases in Alabama and North Carolina are required to pay quarterly fees as well.