US Trustee Fee Increase that is not Applicable Uniformly Violates the US Constitution

Malorie Ruggeri

St. John's University School of Law

American Bankruptcy Institute Law Review Staff

 

Article I, Section 8, Clause 4, of the United States Constitution contains the “Bankruptcy Clause,” which vests Congress with the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States.”[1] The Clause’s requirement that the bankruptcy laws be “uniform” is not a strictly construed requirement.[2] Congress reserves the right to draft legislation depending on different regional issues that arise in the bankruptcy system.[3] At the same time, however, the requirement is not sacrosanct.[4]

Congress created the United States Trustee Program (“USTP”) to, among other things, oversee the administration of bankruptcy cases and to promote the integrity and efficiency of the bankruptcy system for the benefit of all creditors, debtors, and the public.[5] Congress, however, has permitted six judicial districts in North Carolina and Alabama to opt out of the USTP.[6] In these districts, the administration of bankruptcy cases is overseen by an alternative program, the “Administrator Program.”[7] The USTP is funded in its entirety by user fees paid to the United States Trustee Fund (“USTF”), which is largely comprised of fees paid by debtors who file cases under Chapter 11 of the Bankruptcy Code.[8]In contrast, the Administrator Program is funded by the judiciary general budget, but Congress did allow the United States Judicial Conference to require debtors in the Administrator Program to pay quarterly fees equal to those imposed in Trustee Program districts.[9]

In 2017, Congress enacted a temporary increase in the fee rates applicable to large Chapter 11 cases to address a shortfall in the USTF that would be applicable to currently pending and newly filed cases, effective October 1, 2018.[10]The Judicial Conference adopted the same fee increase for the six Administrator Program districts in North Carolina and Alabama, also effective October 1, 2018, but only applicable to newly filed cases.[11] In Siegel v. Fitzgerald, a case that emanated from the Circuit City Stores, Inc. bankruptcy case in Virgina, the United States Supreme Court held that Congress’ enactment of a significant fee increase that exempted debtors in two States violated the uniformity requirement of the Bankruptcy Clause.[12]

In 2008, Circuit City Stores, Inc. (“Circuit City”) filed a petition for relief under Chapter 11 of the Bankruptcy Code with the Eastern District of Virginia, a trustee program district.[13] In 2010 the Bankruptcy Court confirmed a joint-liquidation plan for Circuit City, which among other things, [(1) established a trustee to administer Circuit City’s case], and (2) required Circuit City to pay quarterly fees to the USTF while the Chapter 11 case was pending.[14] The case was still pending when Congress enacted the fee increase applicable to Chapter 11 cases, resulting in total fees of $632,542.00, reflecting an increase of $56,400.00 in fees that would have been owed absent the fee increase.[15] Thus, Circuit City’s trustee, filed for relief in the bankruptcy court against the acting local United States Trustee, requesting that Circuit City’s estate pay the rate in effect prior to the 2017 Act and attempting to recover any overpayments made under the 2017 Act.[16] Circuit City’s trustee contended that the fee increase was not uniform across the United States, in that debtors in USTP districts and the Administrator Program districts paid different amounts, in violation of the uniformity requirement of the Bankruptcy Clause.[17]

The Bankruptcy Court of the Eastern District of Virginia agreed with Circuit City’s trustee and directed that the fees due from January 1, 2018 onward, should be paid at the rate in effect prior to Congress’ 2017 Act.[18] The United States Trustee for Region 4 appealed, and the Fourth Circuit reversed the holding of the Bankruptcy Court holding that the fee increase did not violate the Bankruptcy Clause because the increase applied only to debtors in the Trustee Program districts to bolster the dwindling USTF, which funded the Trustee Program alone.[19] Other courts, however, had come to different conclusions. The U.S. Court of Appeals for the Tenth Circuit in In re Mosaic Mgmt. Group, Inc. and the U.S. Court of Appeals for the Second Circuit in In re Buffets, LLC both held that the 2017 Act is constitutional, while the U.S. Court of Appeals for the Eleventh Circuit In re John Q. Hammons Fall 2006 and the U.S. Court of Appeals for the Second Circuit in In re Clinton Nurseries both found the act to be unconstitutional.[20] The Supreme Court granted certiorari to resolve that Circuit split.[21] The Supreme Court reversed and remanded the Fourth Circuit’s decision, holding that Congress’ enactment of a significant fee increase that only applied to debtors in the Trustee Program violated the uniformity requirement of the Bankruptcy Clause for two main reasons.[22]

First, the Supreme Court rejected the U.S. Trustee’s argument that the 2017 Act was not a “law on the subject of bankruptcies” to which the uniformity requirement applies, but instead a law enacted to pursue the Necessary and Proper Clause which can help administer substantive bankruptcy law.[23] The Supreme Court held that nothing in the language of the Bankruptcy Clause suggests a distinction between substantive and administrative bankruptcy law, and moreover, that the court has repeatedly emphasized the language of the Bankruptcy Clause, “the laws on the subject of Bankruptcies” is “broad.”[24] Moreover, the Supreme Court added that the Necessary and Proper Clause has not in the past and does not today permit Congress to circumvent the limitations set forth by the Bankruptcy Clause.[25]

Second, the Supreme Court held that the 2017 Act violated the Bankruptcy Clause because the Bankruptcy Clause does not permit arbitrary geographically disparate treatment of debtors.[26] There are only two instances where geographically distinct treatment of debtors is permissible under the Bankruptcy Clause: (1) if the general operation of the law is uniform, yet yields different results in different states, and (2) if geographically limited bankruptcy laws are in response to a geographically limited problem.[27] However, neither instance is present here. The general operation of the 2017 law was not uniform because the fee increase applied differently to Chapter 11 debtors in different regions.[28]Additionally, this disparity did not stem from a geographically related need, but from Congress’ creation of a dual bankruptcy system which allowed certain districts to opt into a system more favorable for debtors.[29] Therefore, the Court held that Bankruptcy Clause does not permit Congress to treat identical debtors differently based on artificial distinctions Congress itself created.[30]

The Supreme Court has resolved the split among the lower courts regarding whether the 2017 Act is constitutional.  However, the Supreme Court did not impose a remedy for any overpayments.[31] Lastly, the court remanded to the Fourth Circuit the task of deciding the appropriate remedy, including the specific amount of money to be refunded to Circuit City, which currently remains an issue before the courts.[32]  Other courts will not, however, be bound to the Fourth Circuit’s ruling and there may remain a split on the remedy for any overpayments. 




 

 

[1] U.S. Const., Art. I, §8, cl. 1.

[2] See Siegel v. Fitzgerald, 142 S. Ct. 1770, 1776 (2022).

[3] See id. at 1783.

[4] See id. at 1776.

[5] See id.

[6] See id.

[7] See id. at 1777.

[8] See id.

[9] See id.

[10] See id.

[11] See id.

[12] See id. at 1778.

[13] See id. 

[14] See id.

[15] See id.

[16] See id.

[17] See id. at 1783.

[18] See id. at 1778.

[19] See id

[20] See In re Mosaic Mgmt. Group, Inc., 22 F. 4th 1291, 1292 (CA11 2022); see also In re Buffets, LLC, 979 F.3d 366 (CA5 2022); but see In re John Q. Hammons Fall 2006, LLC, 15 F.4th 1011 (CA10 2021); see also In re Clinton Nurseries, Inc. 998 F.3d 56 (CA2 2021).

[21] See Siegel v. Fitzgerald, 142 S. Ct. 1770, 1778 (2022).

[22] See id. at 1779.

[23] See id.

[24] See id. at 1781. 

[25] See id.

[26] See id. at 1782.

[27] See id.

[28] See id.

[29] See id.

[30] See id.

[31] See id.

[32] See id.