United States District Court, D. New Jersey
McNulty United States District Judge.
matter comes before the Court on the motion of the defendant
Bankruptcy Management Solutions, Inc. ("BMS") to
dismiss the complaint. (DE 16). Plaintiff Spinner Consulting
LLC ("Spinner") alleges that BMS participated in a
horizontal conspiracy with its competitors to fix the manner
of charging fees for its bankruptcy software services in
violation of the Sherman Act, 15 U.S.C. § 1.
debtor files a Chapter 7 petition in bankruptcy, an estate
containing the debtor's property is created and a trustee
is appointed to administer the estate. BMS provides software
and other services to assist in administration of the estate.
Prior to the financial crisis in 2008, BMS would direct a
trustee who wished to use its product to deposit the funds of
the estate in a specific partner bank. The partner bank
earned money on the deposit, paying interest to the estate as
well as a fee to BMS. At that time, the U.S. Trustees'
rules governing Chapter 7 bankruptcy accounts prohibited
banks from charging a fee for their services.
the financial crash and the resulting decline in interest
rates, this payment structure became unfeasible. BMS and its
competitors lobbied the Executive Office of the United States
Trustee (“EOUST") to suspend the rule that
prohibited banks from charging a fee, which EOUST did in
April of 2011.
BMS implemented a new payment structure: Its bankruptcy
support and software services would only be sold in
combination with banking services, and it would charge a set
percentage of the funds in the estate's bank account for
these combined services. BMS's competitors have set up
their payment structures in the same manner.
March 31, 2015, Robert Fusari filed a Chapter 7 petition for
bankruptcy. On April 27, 2015, Alan E. Gamza Trustee
("Gamza") was appointed as the Fusari estate's
trustee. On June 8, 2015, Gamza entered into a contract with
BMS, under which Gazma agreed to deposit with Rabobank N.A.
("Rabobank") the funds of the Fusari estate. Gamza
agreed to allow Rabobank to automatically withdraw a monthly
fee from the estate.
deducted $15, 627.98 in fees from the Fusari estate for
combined banking and software services. On May 6, 2016, the
Fusari case settled. On that date, the Bankruptcy Court
entered an order incorporating the terms of the settlement.
The Order required that the residual property of the Fusari
estate revert to and be vested in Fusari.
payments under the Order were made on or before June 1, 2018.
On July 27, 2018, Fusari executed an agreement with Spinner,
under which Spinner acquired the residual property that had
vested in Fusari under the Order.
31, 2018, Spinner filed a one-count antitrust complaint
against BMS. BMS filed a motion to dismiss the complaint,
arguing that (1) Spinner is not a "direct
purchaser" of its product or a proper party to bring
this suit, and therefore lacks antitrust standing; (2) its
lobbying efforts to EOUST are absolutely privileged under the
Noerr-Pennington doctrine; (3) a release provision
in the Bankruptcy Court's May 6, 2016 Order bars this
action; and (4) Spinner has failed to state a claim under
Federal Rule of Civil Procedure 12(b)(6).
reasons state below, Spinner's motion to dismiss the
complaint for lack of antitrust standing is granted.
Bankruptcy Support Services
the filing of a Chapter 7 bankruptcy petition, the Office of
the United States Trustee, a division of the United States
Department of Justice, appoints a trustee from the private
sector to administer the estate. (Compl ¶11). The
trustee is compensated by the estate and is responsible for
collecting and liquidating the debtor's property. (Compl
¶¶ 11-12). The trustee is also required to submit
reports regularly to the Bankruptcy Court. (Compl. ¶12).
Trustees use software to help them meet those reporting
obligations. (Compl. ¶13).
approximately 1987, BMS has provided bankruptcy support
services. (Compl ¶13). BMS is the largest provider of
bankruptcy support services, including software, in the
United States. (Compl ¶4). BMS has more than a fifty
percent share of "the number of Trustees in the United
States." (Compl ¶20). Epiq eDiscovery Solutions,
Inc. ("Epiq") is BMS's largest competitor, with
a thirty percent share, and TrusteSolutions ("TES")
is the second largest competitor of BMS, having a fifteen
percent share. (Compl ¶¶5- 6, 20). BMS developed
the software that is used by bankruptcy trustees, and secured
copyright protection over their software. (Compl ¶¶
15-16). BMS's competitors have developed and maintained
comparable software. (Compl ¶17).
to the financial crisis in 2008, trustees had received
software services directly from the bank that held the
estate's assets. (Compl ¶¶14, 25). BMS
therefore did not directly charge the estate for its
services. (Compl ¶25). Instead of a direct charge, BMS
"would direct the Estate to deposit its fund in a
selected bank." (Compl ¶25). BMS required die
trustees who used its services to deposit the funds of the
estates at "a partner bank of BMS." (Compl
¶20). Before November of 2012, BMS required trustees to
deposits funds at the Bank of New York Mellon. (Compl
the funds of die estate were deposited into BMS's
selected bank, die bank would "earn money from these
deposits" and would pay a fee to die bankruptcy software
provider. (Compl ¶25). The bank paid this fee through a
reduction in the estate's interest income, in essence, by
providing a lower rate of interest on Chapter 7 estate
deposits as compared to commercial clients. (Compl, ¶36,
Ex. A at 2). This allowed die bank to earn money from die
deposit, and the bank would then pay a fee to BMS as well as
interest to the estate. (Id.). It appears that die
process was set up in this manner, instead of a direct charge
because, at the time, the U.S. Trustees' rules governing
Chapter 7 bankruptcy accounts prohibited banks from charging
a fee for their services. (Compl ¶34).
the financial crisis in 2008, interest rates declined, and
consequently, "die amount of money that the bank could
earn from the deposits of Estates also declined, as did die
bank's ability to pay BMS a fee." (Compl ¶26).
Chapter 7 accounts were no longer profitable for banks, who
responded by reducing interest rates and initial
"collateral and administrative charges," and
discouraging trustee deposits. (Compl, Ex. A, at 1). One
major bank responded by ceasing its participation in the
Chapter 7 program entirely. (Id. at 2).
response, BMS, Epiq, and TES requested that die U.S. Trustee
suspend die rule that prohibited banks from charging a fee in
order to allow trustees to pay bank fees from estate
accounts. (Compl ¶35). BMS recognized that the goal of
any proposed solution should take into account certain
"conditions," including that the crisis was
temporary, that banks should receive adequate compensation so
that they remained active participants in Chapter 7 programs,
and that any solution should continue "the historical
process of allocating the cost of the services to the estates
that are the beneficiaries of those services." (Compl,
about November 26, 2010, BMS submitted a letter to the
Executive Offices of the U.S. Trustee, noting the following:
In several conversations with various participant banks, a
number of options have been discussed. Satisfying all of the
conditions presented above, however, left a single structural
option. Although die numbers vary slightly for each bank, die
structure is constant with two key components:
First, since estates do not currently pay for services
(banking and software) through a reduction in their interest
income, have them continue to pay for these services via a
service fee, as a of average deposit balance assessed monthly
on each account.
Second, while there would be a base service fee percentage
the actual percentage applied would vary reflecting changes,
hopefully improvements, in the interest rate market by being
tied to die Effective Federal Funds rate. As die Effective
Federal Funds Rate increases, the service fee would be
reduced, eventually disappearing as bank interest rates
(Compl ¶36). BMS proposed that a monthly fee be
"applied evenly" to all Chapter 7 accounts.
(Compl., Ex. A, at 3). Based on its "conversations with
die banks and independent research regarding bank costs and
profitability targets," BMS "believed that a rate
as low as 3% with die fee adjustment reflecting the actual
[Effective Federal Funds rate (EFF)] may be adequate to
attract the banks to continue their full participation to
include the funding of die software providers." (Compl,
Ex. A at 4).
after BMS drafted this letter, Epiq received and reviewed it,
and provided its own comments to the U.S. Trustee on January
18, 2011. (Compl ¶¶37-38, 76 Ex. B). In preparing
its comments, Epiq reviewed the remarks that had been
"submitted previously by other market participants and
solicited input from all financial institutions with which
Epiq Systems has relationships in the Chapter 7
environment." (Compl, Ex. B). With respect to BMS's
proposal, Epiq indicated that the proposed "structure
would promote future stability for trustees'
activities," and "would be accessed uniformly to
all estate accounts." (Compl ¶37, Ex. B). On or
about January 21, 2011, TES requested that the U.S. Trustee
allow this fee. (Compl ¶¶ 39, 77).
alleges that the November 26, 2010 BMS document is evidence
of a conspiracy because it demonstrates that "BMS had
conversations with various banks participating in the Chapter
7 program, which necessarily included the partner banks of
BMS's horizontal competitors" and "BMS reached
an agreement with at least one of those banks, and therefore
one of BMS's horizontal competitors, to fix the manner of
selling and charging for combined bankruptcy support services
and bankruptcy banking services." (Compl ¶74).
further alleges that "upon information and belief,"
BMS, Epiq, and TES "communicated directly about selling
bankruptcy support services only in combination with
bankruptcy banking services" sometime before the
November 26, 2010 BMS document, and have since been in
regular communication. (Compl ¶¶ 72,
about January 21, 2011, Texas Capital Bank, on its and
TES's behalf, proposed to the U.S. Trustee "that
Estates be charged for combined bankruptcy support
services" and "banking services based upon a
percentage of the amount of money in the Estate." (Compl
¶78). Texas Capital bank stated the following:
Due to the current interest rate environment financial
institutions are able to secure deposits at virtually no
operational cost. The current UST program requires a high
level of operational support, including banking support,
software support and hardware support to bankruptcy trustees
to remain in compliance with the UST requirements to
administer bankruptcy estates that cannot be offset solely by
the value of deposits maintained. Therefore TCB will need to
assess to the bankruptcy estates a monthly Custodial Fee as a
percentage of balances maintained to offset the operational
support provided. Depending on the level of operational
support required and the interest rate environment TCB will
annually adjust the Custodial Fee accordingly.
(Compl ¶78 (emphasis omitted)). Spinner alleges,
"upon information and belief," that Texas Capital
Bank communicated this information "to BMS and Epiq,
either directly or indirectly." (Compl ¶79).
about April 29, 2011, the U.S. Trustee agreed to suspend the
rule that prohibited trustees from paying bank service fees
from estate accounts. (Compl ¶40). It appears that even
though the rule was suspended, the U.S. Trustee did not
specify how the fee should be calculated, assessed, or paid.
alleges that after this rule was suspended, BMS, Epiq, and
TES, "upon information and belief, reaffirmed their
conspiracy to sell Estates bankruptcy services only in
combination with bankruptcy banking services, and to charge
no fee to an Estate for those combined services other than a
percentage of the amount in the bank account of the
Estate." (Compl ¶¶ 41-42).
after April 29, 2011, BMS and "its partner bank entered
into agreements with Trustees that required their Estates to
pay a combined fee for bankruptcy support services and
bankruptcy banking services" based on "a percentage
of the money in the account of the Estate." (Compl
¶43). BMS and its partner bank "then began
deducting as a fee for those combined services a percentage
of the money" in the estates' accounts. (Compl
¶44). BMS "continues to sell bankruptcy support
services only in combination with bankruptcy banking
services, and to charge Estates no fee for those combined
services other than a percentage of the amount in the bank
account of the Estate." (Compl ¶46). Since 2012,
BMS has used Rabobank as is "partner bank," and has
required trustees to deposit the funds of the estate there.
BMS, Epiq, nor TES has charged a fee for bankruptcy support
services "(a) on a per trustee basis, (b) on a per case
basis, or (c) on a per transaction basis." (Compl
¶45). At the time the complaint in this action was
filed, BMS and Rabobank charged fees at the annual rate of
1.75 percent "of the amount on deposit at
Rabobank." (Compl ¶47). Epiq "and its partner
banks charge" a 1.75 percent fee on the amount on
deposit, and TES and "its partner banks charge fees at
the annual rate of 1.9 percent of the amount on deposit at
those banks." (Compl ¶47).
of 2011, BMS stated in a "publicly distributed"
document that the service fee was not negotiable, "[i]n
order to provide equal treatment in all bankruptcy
cases." (Compl ¶91). The "document"
further stated that "the Service Fee is based on a
uniform rate as set forth above and is a condition of
participation in the BMS program." (Compl ¶91).
claims that since late 2011, BMS, Epiq, and TES have
"refused to negotiate fees with Trustees." (Compl
¶92). In a declaration submitted by Coffey of BMS in
In re Nanodynamics, Inc., No. 09-13438 (MJK)
(W.D.N.Y.), dated September 12, 2011, Coffey addressed the
issue of the fee in response to the Court's concerns
regarding the pricing for BMS's services. (Compl
Court expressed concern "that the business model,
pricing, . . . [was] not based on monthly activity [or] on
the burdens upon the service providers, [but was] based
simply upon how many dollars are in an account." (Compl
¶94 (alterations added)). In response, Coffey certified
21. The Court's observation is essentially correct, but
that should not affect the allowance of the BMS Service Fee
as an administrative expense, for at least three reasons. . .
. Where, as here, the trustee in the exercise of his
discretion has determined that the foregoing requirements are
satisfied, I am not aware of anything that requires that a
claim be measured by any particular method, such as the (a)
cost to the provider of providing the service; (b) the amount
of the service actually used by the estate each day; or (c)
the price at which a competitor might be willing to offer a
similar product, albeit with a lower quality of service. If
it were otherwise, then administrative expenses for things
like a trustee's compensation under section 326(a), the
UST's quarterly fees, or even the rent paid by a trustee
for a facility to store estate property, would all be subject
to retrospective revaluation on an individual case basis. I
would submit that under such a regime, few, if any, parties
would be willing to do business with a chapter 7 trustee; BMS
and BNY Mellon certainly would not.
22. Second, the BMS 'flat' percentage fee structure
exists for a reason, much like the rate structures for
trustee compensation, UST quarterly fees, and, say monthly
premises rent, are 'flat fee' based, rather than
being based [on] use or activity levels. The reason is that
no other structure is administratively feasible. BMS and BNY
Mellon do business with hundreds of trustees across the
nation, who collectively handle more than 50, 000
'asset' cases currently (in addition to hundreds of
thousands of 'no asset' cases annually), it would be
utterly impractical for BMS and BNY Mellon to negotiate
hundreds, or thousands, of 'one-off deals' with
individual trustees, based on the facts and circumstances of
each case; the costs of evaluating, negotiating and
monitoring so many unique contracts would by themselves be
prohibitive, to both the trustees and to BMS and BNY Mellon.
While the trustee services business may, if this interest
rate environment continues, ultimately evolve to a different
model, where pricing is based on a set schedule of fees and
charges for numbers and types of transactions, at this point,
that is simply not a business model that BMS and BNY Mellon
are prepared to offer. When and if any other providers are
willing to offer services under such a model, trustees of
course have the ability to terminate their arrangements with
BMS and BNY Mellon on 30 days notice, and to contract with
such providers, to the extent that die trustees believe that
they should do so in accordance with the exercise of their
complaint includes allegations of "circumstantial
evidence" of the alleged conspiracy. (Compl ¶¶
80-102). On Epiq's Form 10K, filed on February 25, 2011
with Securities and Exchange Commission (before the U.S.
Trustee agreed to suspend die rule), Epiq represented that it
does not compete "in the market for bankruptcy support
services based upon price." (Compl ¶¶87-90).
Jill Bauer, the Managing Director of Trustee and Fiduciary
Services for Epiq, executed a declaration on January 12,
2016, confirming that bankruptcy support service providers
competed only in terms of market share, and not in terms of
price. (Compl ¶95).
also alleges that Bankruptcy Courts have questioned whether
trustees "should pay combined fees for bankruptcy
support services and bankruptcy banking services from Estate
accounts." (Compl ¶90; see Compl ¶98
(citing In re Canopy, no. 09-44943 (ERW) (Bankr.
N.D. 111.))). Spinner points to the following ...