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Supreme Court Invalidates Chapter 11 Fee Scheme

We have previously written about Siegel v. Fitzgerald, No. 21-441, the Supreme Court case considering the question of whether the 2018 difference in fees between Bankruptcy Administrator judicial districts and U.S. Trustee judicial districts was consistent with the Constitution’s uniformity requirement for bankruptcy laws.  On June 5, the Supreme Court decided the case, ruling that the scheme violated the uniformity requirement, but remanding to the Fourth Circuit to consider the appropriate remedy.

The case arises from the fact that 88 of the 94 judicial districts in the United States operate with U.S. Trustees, while six operate with Bankruptcy Administrators.  The two programs have separate funding sources: the U.S. Trustee program, which is under the auspices of the Department of Justice, is funded by debtor-paid fees while the Bankruptcy Administrator program, which is under the auspices of the federal judiciary, is funded by the judiciary’s general budget.  In 2017, Congress enacted a law temporarily raising fees in U.S. Trustee judicial districts as of January 1, 2018.  The Judicial Conference did not match this fee increase in Bankruptcy Administrator districts until September 2018, and then only as to cases filed on or after October 1, 2018.  The result was that debtors that filed bankruptcy cases before October 2018, but whose cases were still pending as of January 2018 or later, owed different fees depending on the judicial district of filing.

In an opinion by Justice Sotomayor, the Supreme Court concluded that this system of different fees was unconstitutional.  The Court first rejected the government’s argument that the relevant law was about the administration of bankruptcy cases, not about the substance of the debtor-creditor relationship, and therefore the uniformity requirement did not apply.  The Court reasoned that neither the language of the clause nor the Court’s previous decisions drew such a distinction.  In response to the government referencing other examples where bankruptcy procedure varies across districts, the Court explained that these examples involved uniform laws that gave courts local discretion, rather than laws mandating one policy for certain districts and another one for other districts.

Having concluded that the uniformity requirement did apply, the Supreme Court proceeded to hold that the fee scheme violated that requirement.  The Court explained that Court precedent permitted Congress some flexibility in responding to regional problems, but Congress could not simply arbitrarily treat similarly situated debtors differently based on geography.  In response to the government’s argument that the disparate treatment sought to resolve the specific problem of a shortfall of funds for the U.S. Trustee program, the Court noted that the difference between U.S. Trustee districts and Bankruptcy Administrator districts was itself established by Congress, so could not be a basis for disparate treatment.

The parties disputed whether the appropriate remedy was to refund the fees paid or to increase the fees for debtors who had previously paid less in the Bankruptcy Administrator program.  The Court remanded to the Fourth Circuit to consider the appropriate remedy.