Cranberry Growers Coop. v. Layng

• Decision Date: 17 July 2019
• Docket Number: No. 18-3289,18-3289
• Citation: 930 F.3d 844
• Parties: 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.
• Court: U.S. Court of Appeals — Seventh Circuit

930 F.3d 844

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.

No. 18-3289

United States Court of Appeals, Seventh Circuit.

Argued May 17, 2019

Decided July 17, 2019

Justin M. Mertz, Attorney, MICHAEL BEST & FRIEDRICH LLP, Milwaukee, WI, Peggy Hunt, Attorney, DORSEY & WHITNEY LLP, Salt Lake City, UT, for Debtor-Appellee.

Tiffany E. Rodriguez, Attorney, OFFICE OF THE UNITED STATES TRUSTEE, Madison, WI, Sumi Sakata, Wendy Cox, Attorneys, DEPARTMENT OF JUSTICE, Executive Office for United States Trustees, Office of the General, Washington, DC, for Trustee-Appellant.

Randall L. Klein, Attorney, GOLDBERG KOHN LTD., Chicago, IL, Amicus Curiae for COMMERCIAL FINANCE ASSOCIATION.

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.

IBACKGROUND

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 expenses⁵ 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 postpetition 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 basis¹³ 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. Ill. 1995), rev'd , 193 B.R. 851 (N.D. Ill. 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 set-up 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 over-advances 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 postpetition debt re-advance 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...