Bankruptcy Update Blog

Supreme Court to Consider Constitutionality of Chapter 11 Fees

Article I, Section 8 of the United States Constitution gives Congress the power to “establish . . .  uniform Laws on the subject of Bankruptcies throughout the United States.”  While Congress has general authority to establish a bankruptcy system, bankruptcy laws must be “uniform.”  But not every aspect of the bankruptcy system is the same across every judicial district.  For instance, while most judicial districts have United States Trustees, which are funded by a special fee charged to debtors, the judicial districts of Alabama and North Carolina instead have Bankruptcy Administrators, which are funded by general appropriations to the judiciary.  These different funding systems have sometimes resulted in differences in fees imposed on debtors between different judicial districts, raising the question of whether different fee obligations for debtors in different judicial districts is consistent with the uniformity requirement.  In Siegel v. Fitzgerald, No. 21-441, the Supreme Court has agreed to consider this question.

For several decades, 88 of the 94 judicial districts in the United States have operated with U.S. Trustees, while six, the six judicial districts in Alabama and North Carolina, operate with Bankruptcy Administrators.  Both sets of officials serve similar functions of impartial case monitoring and supervision, but their funding works differently.  The Bankruptcy Administrator program is funded by the judiciary’s general budget, while the U.S. Trustee program is funded by debtor-paid fees.  One such debtor-paid fee, at issue in Siegel, is the quarterly fee imposed on disbursements that chapter 11 debtors make to creditors.

Originally, debtors in the six Bankruptcy Administrator districts were not required to pay these quarterly fees.  But in 1994, the Ninth Circuit ruled that imposing such quarterly fees in U.S. Trustee districts but not Bankruptcy Administrator districts was unconstitutional under the Constitution’s uniformity requirement.  Congress responded by enacting a new statute providing that, in a Bankruptcy Administrator district, “the Judicial Conference of the United States may require the debtor in a case under chapter 11 of title 11 to pay fees equal to those imposed” in a chapter 11 case in a U.S. Trustee district.  28 U.S.C. § 1930(a)(7) (2020).  The Judicial Conference imposed such a requirement and from 2002 until January 1, 2018, all chapter 11 debtors paid fees according to the same disbursement formula.

In the mid-2010s, bankruptcy filings declined and the U.S. Trustee program was no longer receiving sufficient funds from debtor fees to defray its costs.  To avoid imposing additional burdens on taxpayers, Congress enacted the 2017 Amendment, which temporarily increased the fees imposed on chapter 11 debtors with disbursements of $1,000,000 or more in any quarter, if the fund supporting the U.S. Trustee program has a balance below a certain threshold.  This increase has effect from fiscal year 2018 through fiscal year 2022, and imposes a quarterly fee of the lesser of 1 percent of disbursements or $250,000—a large increase from the prior maximum of $30,000.

The issue in Siegel arises because this fee increase initially only applied to debtors in U.S. Trustee districts.  In September 2018, the Judicial Conference applied the increase to bankruptcy cases filed in Bankruptcy Administrator districts on or after October 1, 2018.  Thus, while debtors in U.S. Trustee districts whose cases were filed before October 1, 2018 owe the increased quarterly fees, debtors in Bankruptcy Administrator districts whose cases were filed in the same period do not.[1] 

Circuit City Stores, Inc., and its affiliates (“Circuit City”) filed for chapter 11 bankruptcy in 2008, in the Eastern District of Virginia, which is a U.S. Trustee district.  The case was pending in January 2018, when the increased fees were imposed under the 2017 Amendment.  The Circuit City trustee, who was overseeing a chapter 11 liquidation plan, initially paid the fees, but after a bankruptcy court in Texas ruled that the 2017 Amendment violated the uniformity requirement of the Bankruptcy Clause and was unconstitutionally retroactive, the Circuit City trustee sought a ruling from the bankruptcy court that the fee obligation was unconstitutional.  The U.S. Trustee opposed the request.

The bankruptcy court sided with the Circuit City trustee, ruling that the increased fees in U.S. Trustee districts violated either the constitutional requirement that bankruptcy laws be uniform or the separate constitutional requirement that taxes be geographically uniform.  The bankruptcy court rejected the Circuit City Trustee’s separate argument that the fees were unconstitutionally retroactive because they applied to cases filed before the 2017 Amendment’s enactment.  Both parties appealed, and sought permission to appeal directly to the Fourth Circuit Court of Appeals (bypassing the district court), which was granted.  The Fourth Circuit reversed the bankruptcy court, ruling that the uniformity requirement only prohibits arbitrary regional differences in bankruptcy laws, but permits Congress to enact legislation that resolves regionally isolated problems.  It also rejected the retroactivity challenge, reasoning that the statute did not have retroactive effect because it only applied to future disbursements.  Judge Quattlebaum dissented, arguing that there was no justification for treating Bankruptcy Administrator districts differently from U.S. Trustee districts as to chapter 11 quarterly fees.

The Circuit City trustee sought Supreme Court review of the Fourth Circuit’s uniformity ruling, noting a circuit split between the Fourth and Fifth Circuits, on the one hand, and the Second Circuit, on the other, which had held the fee differential unconstitutional.  The U.S. Trustee’s response agreed that the question was worthy of Supreme Court review, and noted that the circuit split had deepened, with the Tenth Circuit joining the Second Circuit in invalidating the fee scheme.  The U.S. Trustee’s response also substantively defended the constitutionality of the statute.  The U.S. Trustee made three arguments: first, that the fee statute did not regulate the debtor-creditor relationship and was therefore not subject to the uniformity requirement (an argument the Fourth Circuit had rejected); second, that section 1930(a)(7) was best read to require uniform fees, so there was no uniformity issue; and third, that different fees would be permissible given Congress’s ability under the Bankruptcy Clause to define different classes of debtors and structure relief accordingly.

The Supreme Court granted review on January 10.  The Circuit City trustee filed his merits brief on February 24.  The Circuit City trustee argues that the fee statute is within the Bankruptcy Clause’s broad sweep and thus subject to the uniformity clause, and that Congress could not rely on the distinction between Bankruptcy Administrator and U.S. Trustee districts, a distinction of its own making, to justify treating identical debtors differently based on the location of their filing.  The Circuit City trustee also argues that the Bankruptcy Administrator program itself violates the uniformity requirement and one solution open to the Supreme Court is to strike down that program.

A date for argument has not yet been set but will likely be set for April, with a decision coming by June. 

[1] Resolving this problem for future cases, in January 2021 Congress enacted a statute replacing “may” in section 1930(a)(7) with “shall,” thus providing that the Judicial Conference shall require a chapter 11 debtor in a Bankruptcy Administrator district to pay equal fees to a debtor in a U.S. Trustee district.  But this amendment does not solve the problem for debtors whose cases were filed before October 1, 2018, and remained pending in January 2018.