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In re Cranberry Growers Cooperative

United States Court of Appeals, Seventh Circuit

July 17, 2019

In Re: Cranberry Growers Cooperative, doing business as CranGrow, Debtor-Appellee,
v.
Appeal Of: Patrick S. Layng, United States Trustee for Western District of Wisconsin.

          Argued May 17, 2019

          Appeal from the United States Bankruptcy Court for the Western District of Wisconsin. No. l:17-bk-13318-cjf - Catherine J. Furay, Chief Bankruptcy Judge.

          Before Ripple, Manion, and Sykes, Circuit Judges.

          RIPPLE, CIRCUIT JUDGE.

         Under 28 U.S.C. § 1930(a)(6), quarterly fees paid by a chapter 11 debtor to the bankruptcy Trustee are based on the debtor's disbursements. Here, the Bankruptcy Court determined that certain payments made by the customers of Cranberry Growers Cooperative ("CranGrow") to its lender should not be considered "disbursements" for purposes of that calculation. Patrick S. Layng, United States Trustee for the Western District of Wisconsin ("Trustee"), appeals that determination. CranGrow agrees with the Bankruptcy Court's interpretation of disbursements, but, for the first time on appeal, maintains that the Bankruptcy Court unconstitutionally applied the recently amended fee schedule in assessing its quarterly fees.

         We believe that the language of the fee statute requires that payments made by CranGrow's customers to CranGrow's lender be considered disbursements. We also decline CranGrow's belated invitation to consider the constitutionality of the fee statute. We therefore reverse the Bankruptcy Court's judgment and remand for further proceedings consistent with this opinion.

         I

         BACKGROUND

         CranGrow is an unincorporated association that filed for chapter 11 bankruptcy relief on September 25, 2017.[1] At that time, CranGrow owed its bank, CoBank ACB ("CoBank"), roughly $8.1 million on a revolving line of credit.[2]

         Shortly after filing for bankruptcy, CranGrow asked the Bankruptcy Court for permission to enter a new borrowing arrangement with CoBank that would give CranGrow an additional $5 million in credit needed to satisfy various monthly obligations.[3] According to the agreement, CoBank would increase the limit on CranGrow's revolving line of credit to $13.25 million.[4] CoBank would advance funds under the new line of credit so that CranGrow could pay its operating expenses[5] in accordance with a budget that CranGrow regularly submitted to CoBank.[6] In return, CranGrow agreed that all proceeds from its inventory sales would be paid directly to CoBank; these payments first would be used to pay off the existing, prepetition debt of $8.1 million, and then to repay amounts that CoBank extended under the new, postpetition line of credit.[7] Thus, according to this "roll-up" arrangement, postpetition payments would be used to reduce the prepetition debt balance.[8] The financing agreement also provided that the post-petition loan would be given priority over other postpetition administrative expenses.[9] In seeking the Bankruptcy Court's approval for this arrangement, CranGrow represented that it had no other reasonable alternatives for postpetition financing.[10] Although the Trustee objected to the roll-up request, [11] the Bankruptcy Court approved the financing arrangement.

         After the agreement was signed, CranGrow's customers made payments to CoBank, and these payments were applied daily, as they were received, to reduce CranGrow's prepetition debt to CoBank.[12] The payments did not result in an automatic extension of postpetition credit to CranGrow in the amount of the payments. Instead, CoBank extended funds for operating expenses to CranGrow on a weekly basis[13] according to the budget that had been submitted to, and approved by, CoBank.[14]

         On December 19, 2017, CranGrow proposed a chapter 11 reorganization plan. The Bankruptcy Court confirmed the plan on February 16, 2018, and it became effective on April 27, 2018. During this time, CranGrow made the required quarterly fee payments to the Trustee. As already noted, § 1930(a)(6) of Title 28 of the United States Code provides that fees are to be calculated based on the amount of the debtor's disbursements during the preceding quarter. In calculating its quarterly fees, CranGrow did not include as disbursements the amount that CranGrow's customers paid directly to CoBank.[15] CranGrow took the position that the collection of accounts receivable was not a disbursement because "[w]hen collected, accounts receivable sweep to pay down the revolver ..., and then the revolver is borrowed against to remit disbursements."[16]

         The Trustee disagreed with this characterization. He maintained that, because the customers' payments were being used to reduce CranGrow's prepetition indebtedness, they should be considered disbursements.[17] When CranGrow continued to calculate and pay its quarterly fees without including its customers' payments to CoBank, the Trustee sent CranGrow a delinquency notice. CranGrow objected and asked the Bankruptcy Court to interpret the term disbursement to exclude the receivable payments to CoBank on the ground that the "funds were never seen by CranGrow or deposited in any way into a debtor-in-possession account."[18] In the alternative, it asked the Bankruptcy Court to waive the fees.[19]

         In a written opinion, the Bankruptcy Court held that the customer payments to CoBank were not disbursements. It acknowledged that "[m]ost courts turn to the 'plain meaning' of 'disbursement' and define it expansively to include any transfer of funds of the estate-regardless of the method of transfer."[20] The court further acknowledged that "[m]ost often, payments on revolving lines of credit are considered disbursements."[21] Nevertheless, even though CranGrow's arrangement with CoBank "appear[ed] on the surface" to be similar to cases in which payments to creditors had been considered disbursements, the Bankruptcy Court concluded that the substance of the arrangements requires a different result:

The deposit of funds into CranGrow's account was not governed by a formula that determined the amount of available credit. Rather, all of the collected accounts receivable minus fees and interest were deposited into Debtor's account. This flow of funds into the Debtor's account was viewed by the parties as a cash management system. There was a continual flow of dollars against the prepetition debt converting it to immediately available funds as postpetition debt. While expenditure of the funds is limited by a budget, there was a symmetry between amounts credited against the prepetition line of credit balance and the amounts drawn on the postpetition line of credit. [22]

         The Bankruptcy Court also believed that the Trustee's authorities were distinguishable

because the funds at issue here-as a matter of substance-never settle debt. The cases cited by the [Trustee] involve funds permanently leaving the estate, whether through payment of operating expenses, prepayment of a loan, satisfaction of a mortgage through selling land, or reduction of line of credit indebtedness for periods of time. Here, the funds at issue-cash collateral-were returned to CranGrow immediately. It paid interest and fees from those funds before the money was deposited in its account. To the extent there was no reduction in the total revolver indebtedness, there was no real change in the underlying economic circumstances. CoBank merely received accounts receivable, subtracted fees and expenses, and returned the remainder to CranGrow. Analyzing the economic realities yields the conclusion these funds functionally belonged to CranGrow the entire time and were thus not "paid out" or "expended" in the traditional sense of "disbursement."[23]

         Instead, the Bankruptcy Court likened CranGrow's arrangement to that employed in In re HSSI, 176 B.R. 809 (Bankr. N.D. 111. 1995), rev'A, 193 B.R. 851 (N.D. 111. 1996). In that case, subsidiary debtors deposited proceeds from some of their sales into "a pooled account. Pooled funds were used to make payments to a postpetition lender on an outstanding loan. Payments from the pooled account to repay the loan were disbursements, but payments from the single accounts to the pooled accounts were not disbursements."[24] According to the Bankruptcy Court, CranGrow's roll-up arrangement

contain[ed] elements of a cash management system and transfers like that in HSSI. First, the DIP Revolver Loan document refers to the setup as a "cash management arrangement," revealing the parties' intent. Second, funds are merely "recycled" through CoBank, who serves only as a conduit between revenue and expenses, since funds are immediately readvanced and deposited into Debtor's account.[25]
Finally, the court was concerned with "double dip [ping]" by the Trustee.[26] The court explained that, given that farming is seasonal, "CranGrow operates at break-even or a loss for much of the year," during which times
CranGrow is cash-poor. Its prepetition revolver exhausted, it needed the availability of overadvances from the DIP Revolver Loan. In fact, the Revolver draw/repayment is projected to be identical to the net negative cash flow until about the fourth quarter of 2018. The negative cash flow also includes the [United States Trustee] quarterly fee. Since it is cash flow negative and draws additional funds to pay UST fees, CranGrow incurs UST fees on fees if applying accounts receivables to the prepetition debt and then immediately converting it to a post-petition debt readvance counts as two separate disbursements. This in effect represents a fee on a fee, or a form of double tax, resulting in an unfair cycle and snowball effect for much of the year.[27]

         According to the Bankruptcy Court, "the [Bankruptcy] Code aims to provide debtors with a 'fresh start.'"[28] Including "revolver" transactions as disbursements would have "a 'severe impact' on the ability of debtors, including CranGrow, to obtain a 'fresh start' and effectively reorganize."[29] In sum, the Bankruptcy Court concluded that treating the revolver payments as disbursements "harms the viability of CranGrow moving forward, "[30] and, generally, "does not further the underlying purposes of section 1930(a)(6)."[31] Consequently, the Bankruptcy Court denied the Trustee's petition for fees.[32] The Trustee petitioned to file a direct appeal to this court, which we granted.[33]

         II

         DISCUSSION

         A.

         Section 1930(a) of Title 28 of the United States Code requires debtors to pay fees into the United States Trustee System Fund to support the operations of the bankruptcy courts. During the pendency of their bankruptcy cases, chapter 11 debtors are required to pay quarterly fees to the Trustee based on the amount of disbursements made by the bankruptcy estate. See 28 U.S.C. § 1930(a)(6). These range from $325 per quarter for debtors whose disbursements are $15, 000 or less to $30, 000 per quarter for debtors whose disbursements total more than $30, 000, 000. See id.

         In 2017, Congress enacted a temporary amendment to 28 U.S.C. § 1930(a)(6) that significantly increases the fees for debtors whose quarterly disbursements are $1, 000, 000 or more; it provides:

During each of fiscal years 2018 through 2022, if the balance in the United States Trustee System Fund as of September 30 of the most recent full fiscal year is less than $200, 000, 000, the quarterly fee payable for a quarter in which disbursements equal or exceed $1, 000, 000 shall be the lesser of 1 percent of such disbursements or $250, 000.

28 U.S.C. § 1930(a)(6)(B).

         Here, the parties dispute the meaning of the term "disbursement."[34] Because "disbursement" is not defined in the Bankruptcy Code, we employ the ordinary meaning of the term. See Ransom v. FIA Card Servs., N.A., 562 U.S. 61, 69 (2011) (employing the ordinary meaning of the term "applicable" because the term is not defined in the Bankruptcy Code). The dictionary definition of "disbursement" is "[m]oney paid out; expenditure." The American Heritage Dictionary of the English Language (5th ed. 2018). In applying this term, courts have concluded that it is an "expansive term." Tighe v. Celebrity Home Entm't, Inc. (In re Celebrity Home Entm't, Inc.), 210 F.3d 995, 998 (9th Cir. 2000) (internal quotation marks omitted).[35] It includes payments "made in the ordinary course of business/' Walton v. Jamko, Inc. (In re Jamko, Inc.), 240 F.3d 1312, 1316 (11th Cir. 2001), whether made to secured or unsecured creditors, see St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525, 1534 (9th Cir. 1994), amended, 46 F.3d 969 (9th Cir. 1995). Moreover, disbursements include "[p]ayments made on behalf of a debtor, whether made directly or indirectly," Genesis Health Ventures, Inc. v. Stapleton (In re Genesis Health Ventures, Inc.), 402 F.3d 416, 422 (3d Cir. 2005); see also St. Angelo, 38 F.3d at 1534-35, as well as payments made on revolving lines of credit, see In re Fabricators Supply, Inc., 292 B.R. 531, 534 (Bankr. D.N.J. 2003); United States Trustee v. Werner struck, Inc. (In re Werner struck, Inc.), 130 B.R. 86, 89 (D.S.D. 1991). Indeed, the Bankruptcy Court acknowledged that "[t]he great weight of case law broadly defines 'disbursements, '" and the majority view considers direct payments to revolving lines of credit to be disbursements.[36]

         Based on this definition, the payments made by CranGrow's customers to CoBank were disbursements. They were funds "paid out" to one of CranGrow's creditors on behalf of CranGrow. Indeed, the customer payments here closely resemble those in In re Fabricators Supply, in which the court concluded that such payments constituted disbursements. In that case, after filing for chapter 11 protection, Fabricators entered into a postpetition loan agreement for a $2.5 million revolving line of credit with Fleet Capital. In re Fabricators Supply, 292 B.R. at 532. At the time that the postpetition financing agreement was authorized by the court, Fabricators owed Fleet approximately $1.8 million. Id. The agreement "direct[ed] Fabricators to remit to Fleet all cash collateral, and further authoriz[ed] Fleet to apply the funds collected to the outstanding balance owed." Id. Pursuant to the agreement, Fabricators deposited all accounts receivable and other proceeds into an account that Fleet maintained. Id. Fabricators described this account for receivables as "blocked" because "Fleet ha[d] sole control over this account, and Fabricators [could ]not withdraw any money from the account." Id. at 532-33 (internal quotation marks omitted). Fleet swept the monies from the blocked account on a daily basis. Id. at 533. Fabricators maintained a separate, operating account with Fleet from which it paid vendors and other expenses. Id. The operating account was funded by monies transferred from the blocked account based on the available credit on the revolving loan. Id.

         Fabricators maintained that Fleet's sweeps of the blocked account should not be considered disbursements for purposes of § 1930(a)(6). It characterized its agreement with Fleet "as creating a continuous flow of dollars against its credit line such that no disbursement occurs when Fleet sweeps the blocked account." Id. Instead, it maintained "that disbursements only occur[red] when it ma[de] payments from its operating account." Id. The bankruptcy court, however, disagreed. It held that Fleet's daily sweeps of the blocked account were disbursements for purposes of calculating the quarterly fees. It noted first that the term "disbursements" had to be given its "ordinary, contemporary common meaning." Id. (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)). It further observed that two courts of appeals, after surveying various possible definitions, had concluded that "disbursement simply means ... 'to expend' or 'to pay out.'" Id. (quoting Cash Cow Sews, of Via.., LLC v. United States Trustee (In re Cash Cow Servs. of Via.., LLC), 296 F.3d 1261, 1263 (11th Cir. 2002); St. Angelo, 38 F.3d at 1534). The court in Vabricators then concluded that

it is readily apparent that the process by which Fabricators deposits its accounts receivable into the blocked account and Fleet then sweeps that account results in disbursements to Fleet on which the quarterly fees should be calculated. Fabricators' contention that it cannot be charged with a disbursement from the blocked account because it exercises no control over the account is totally without merit. The blocked account and the sweep of that account is simply the payment mechanism to which Fabricators agreed when it entered into the Loan Agreement with Fleet. The accounts receivable deposited by Fabricators into the blocked account certainly constitute debtor funds, and the sweep of the account by Fleet certainly constitutes an "action or fact of disbursing" ....

Id. at 534. The court in Vabricators disagreed with the characterization "that there [wa]s no economic substance to the sweeps by Fleet because the amount of the debt owed by Fabricators [wa]s essentially the same before and after the sweeps occur as a result of the revolving nature of the loan." Id. It explained that "the revolving nature of the Line of Credit is precisely what results in the disbursement when the blocked account is swept. During the term of the Line of Credit, Fabricators actually engages in a series of borrowing transactions which are repaid by the sweeps of the blocked account." Id.

         Just as Fleet's sweep of Fabricators' blocked account constituted a disbursement, so too do payments by CranGrow's customers to CoBank. In both scenarios, customer payments are being used to pay down the debtor's revolving line of credit. In CranGrow's case, however, the disbursement was simply more direct: the customers were not depositing their payments into an account that was being swept, but were sending their payments directly to CranGrow's creditor.

         CranGrow submits that there are critical differences between the situation in Fabricators and the one before us, and, therefore, Fabricators should not guide our analysis. These distinctions, however, are either illusory or immaterial. For instance, CranGrow submits that, according to the agreement in Fabricators, Fleet would make the funds available to the debtor based on a "lending formula," id. at 532, whereas here, once funds were received from CranGrow's customers, they became immediately available to CranGrow through the postpetition line of credit.[37] However, the amount of funds that CoBank made available to CranGrow was based on a budget submitted to, and approved by, CoBank.[38] And, as CranGrow's counsel acknowledged ...


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