United States: Siegel v. Fitzgerald: Supreme Court Rules U.S. Trustee Fee Hike Unconstitutional

In its June 6, 2022 opinion in Siegel v. Fitzgerald, the United States Supreme Court resolved a circuit split and invalidated a 2017 statute that increased U.S. Trustee fees in 48 states—but not Alabama or North Carolina—as unconstitutional under the uniformity requirement of the Constitution's Bankruptcy Clause. See Siegel v. Fitzgerald, 596 U.S. ___ (2022).

U.S. Trustee Fees, a History

Proceedings under Chapter 11 of the United States Bankruptcy Code are typically pursued by corporate debtors and often require significant administrative oversight—e.g., organizing and appointing unsecured creditors' committees; supervising the filing of required schedules; managing and selecting trustees where current management must be replaced. Originally, bankruptcy judges themselves performed these administrative tasks in addition to their more traditional judicial role. To alleviate some of the pressure this put on bankruptcy judges, in 1978, Congress piloted the U.S. Trustee program, in which the administrative functions of the bankruptcy courts were transferred to U.S. Trustees, who worked for the U.S. Department of Justice. The pilot program was successful, and, in 1986, Congress implemented the U.S. Trustee program nationwide, expanding it to all federal judicial districts with the exception of those in North Carolina and Alabama (states that raised objections to the program). Alabama and North Carolina ultimately adopted a similar system—the bankruptcy administrator program. The primary difference between the two systems is that U.S. Trustees were appointed and overseen by the Department of Justice, whereas administrators in the administrator program were appointed and overseen by local bankruptcy courts themselves. The funding for both systems was also different, particularly in the initial years of the administrator program. The costs of the U.S. Trustee program were covered by quarterly user fees paid by large corporate debtors while they were in bankruptcy (calculated based on a percentage of distributions that they made). Fees relating to the administrator program, on the other hand, were initially funded by the U.S. judiciary's general budget. Subsequently, however, Congress authorized the Judicial Conference of the United States (a national policy-making body for the federal courts) to similarly charge fees to corporate debtors in North Carolina and Alabama. And, between 2001 and 2017, those fees were identical to the fees charged in U.S. Trustee states.

In 2017, funding for the U.S. Trustee program faced a significant shortfall. Congress therefore passed an act (the 2017 Act) that, beginning in the first quarter of 2018, significantly raised the fees payable by debtors in states using that program from a maximum of $30,000 per quarter to a maximum of $250,000 per quarter. The fees charged to debtors in the two states not using the U.S. Trustee system, however, were not initially raised. And even when they were, in October 2018, the raise was only prospective, for new debtors. However, within the U.S. Trustee program, the raised fees were charged to all debtors who were in bankruptcy at the time the 2017 Act was enacted, even if their filings preceded that date.

A Debtor Objects

In 2008, Circuit City filed for bankruptcy in the Eastern District of Virginia. In 2010, the bankruptcy court confirmed Circuit City's plan, which included a liquidating trust and trustee responsible for collecting and liquidating Circuit City's remaining assets. In accordance with the Bankruptcy Code, the liquidating trustee paid the requisite U.S. Trustee fees. But under the terms of the 2017 Act, those fees significantly increased beginning in the first quarter of 2018—based on the fee increase, Circuit City was required to pay $632,542 in total fees, as compared to the $56,400 it otherwise would have been required to pay. Circuit City objected to that fee increase, arguing that its non-uniform application (with respect to debtors in the two states not included in the US Trustee program) violated the Bankruptcy Clause of the U.S. Constitution.

The Constitution's Bankruptcy Clause is included in Article I, Section 8. It authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const., Art. I, § 8, cl. 4. Circuit City argued that because debtors who filed petitions in districts under the administrator program were not subject to the fee hike, the increase was not uniform. The bankruptcy court agreed, finding that for January 1, 2018, onward, Circuit City should only be required to pay the fees in place before Congress enacted the 2017 Act. The bankruptcy court did not decide whether Circuit City could recover the overpayments it had made before January 1, 2018. The Fourth Circuit reversed, holding that the uniformity requirement of the Bankruptcy Clause barred only "only 'arbitrary' geographic differences" and the differences in fees caused by the 2017 Act were not "arbitrary" since it was only the funding for the U.S. Trustee program that faced a shortfall and not the funding for the administrator program.

The Supreme Court Agrees with the Debtor

The Supreme Court reversed the Fourth Circuit's decision and held that the fee hike mandated by the 2017 Act violated the uniformity requirement of the Bankruptcy Clause. First, the Court held that, counter to arguments put forth in support of the fee hike, the uniformity requirement applied to both "substantive" and "administrative" bankruptcy laws, emphasizing that none of the Court's precedents suggested a distinction between the two categories. Second, disagreeing with the Fourth Circuit, the Court held that the 2017 Act was impermissible as an "arbitrary geographically disparate treatment of debtors." This was in contrast to the type of geographically disparate treatment that the Court had held was allowed by the Bankruptcy Clause, such as when Congress set a general policy (e.g., debtors are entitled to exemptions from bankruptcy for certain types of property) and then left it up to states to define to what the policy applied. In the case of the 2017 Act, the Court explained, Congress did not set a general policy that happened to be implemented differently in different states. Instead, it effectively charged different debtors different fees based on the happenstance of the state they filed in. That, the Court held, violated the Bankruptcy Clause's "uniformity" requirement.

What's the Remedy?

Having overturned the 2017 Act, the Court did not resolve one key point—the remedy to which debtors like Circuit City may be entitled. Instead, the Court remanded that issue to the lower courts for further consideration. Will the federal government be required to refund what will amount to millions of dollars in fees? It is possible. That ultimately could lead to a massive hole in the U.S. Trustee program's budget—i.e., the very same problem that Congress thought it had already addressed via the 2017 Act itself.

Stay tuned...

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