Bankruptcy Update Blog

SCOTUS Grants Certiorari, Remands U.S. Trustee Fee Dispute to Second Circuit

The ramifications of uneven increases to fees in chapter 11 bankruptcies continue to ripple through federal courts. 

As we discussed previously, Congress enacted legislation in 2017 that temporarily increased U.S. Trustee fees chapter 11 debtors had to pay in virtually every district in the U.S.  The increase was meant to offset the costs of the U.S. Trustee program, especially in large bankruptcy cases.  The maximum amount for large debtors increased dramatically, from $30,000 to $250,000 quarterly.

Legal challenges to the increase arose throughout the country, including in the massive Circuit City bankruptcy case.  The trustee there challenged the fee hike because it did not apply in districts that employ Bankruptcy Administrators instead of U.S. Trustees, i.e., those in Alabama and North Carolina.  Because the increase was not applied identically in every district, the Supreme Court ruled that it violated the uniformity requirement in the U.S. Constitution’s Bankruptcy Clause.  Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022).  Per the Bankruptcy Clause, Congress may only establish “uniform Laws on the subject of Bankruptcies throughout the United States.”  U.S. Const. art. I, § 8, cl. 4 (emphasis added).  Because the fee increase was not uniform, it was unconstitutional.  The Supreme Court remanded the matter to the Fourth Circuit to consider what relief was appropriate.

In a May 2021 opinion—before the Supreme Court weighed in—the Second Circuit similarly ruled that the disparate fee increase violated the Bankruptcy Clause’s uniformity requirement.  The court of appeals remanded the case to the bankruptcy court to provide “a refund of the amount of quarterly fees paid in in excess of the amount [the petitioner] would have paid in a [Bankruptcy Administrator] District during the same time period.”  In re Clinton Nurseries, Inc., 998 F.3d 56, 70 (2d Cir. 2021).

In February 2022, the United States petitioned for certiorari after the Second Circuit’s ruling in Clinton Nurseries.  In June, the Supreme Court decided Seigel, addressing the same fundamental question.  Then, on October 11, 2022, the Supreme Court granted the government’s petition for certiorari in Clinton Nurseries.  The Court simultaneously vacated the judgment and remanded the case for further consideration in light of Siegel v. Fitzgerald.  See Harrington v. Clinton Nurseries, Inc., No. 21-1123, 2022 WL 6571659, at *1 (U.S. Oct. 11, 2022).

In Siegel, the Supreme Court remanded to the Fourth Circuit (the circuit where North Carolina is located) to address the range of remedies suggested, from a fee increase for those in Bankruptcy Administrator districts (suggested by the government) to a full refund of U.S. Trustee fees paid (suggested by the debtor’s trustee).  In In re Clinton Nurseries, on the other hand, the Second Circuit simply ordered the bankruptcy court to refund the overpayment over what would have been paid in North Carolina or Alabama.  We’ll see if the Second Circuit reevaluates that approach on remand and how this issue continues to impact bankruptcies throughout the country.