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U.S. Supreme Court Holds 2017 U.S. Trustee Fee Increase Is Unconstitutional

By Karl Johnson posted 06-21-2022 22:26

  
 BANKRUPTCY BULLETIN
Contributing Editor: Eleanor J. Vincent, Stoel Rives LLP

 

In Siegel v. Fitzgerald, 596 U.S. ___, 2022 WL 1914098 (2022), the U.S. Supreme Court unanimously held that a temporary increase in U.S. Trustee (“UST”) quarterly fees enacted by Congress in 2017 violated the uniformity requirement of the Constitution’s Bankruptcy Clause because it did not apply in the same way in the six districts under the Administrator Program.

The temporary increase applied to both new and pending cases in UST districts (funded by user fees) beginning the first quarter of 2018 through the end of 2022.  In the six judicial districts with a taxpayer funded Administrator Program, the increase in fees applied only to new cases, but not pending cases, beginning October 1, 2018. In other words, the increase started 9 months later and applied to a smaller set of cases.  

The chapter 11 plan for Circuit City was confirmed in 2010 and provided that UST quarterly fees would be paid until the chapter 11 cases closed or converted. Because the case was in a UST district, quarterly fees totaled $632,542 during the first three quarters of 2018. Without the increase, or if the case had been in an Administrator Program district, the quarterly fees would have been only $56,400.00.

The trustee for the Circuit City Stores, Inc. Liquidating Trust challenged the constitutionality of the increase on the basis that it was not uniform across judicial districts. The bankruptcy court agreed and directed the trustee to pay the prior rate for the fees due from January 1, 2018, forward. The Fourth Circuit reversed, but the panel was divided. The U.S. Supreme Court granted certiorari to resolve a circuit split regarding the constitutionality of the  fee increase.

The Constitution authorizes Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” U.S. Const. art. I, § 8, cl. 4. The UST argued that the uniformity requirement did not apply to the 2017 fee increase because it is not substantive, but rather administrative. The Court disagreed, noting that the Bankruptcy Clause does not distinguish between substantive and administrative laws, nor had the Court made such a distinction. Furthermore, the Court found that the fee increase did indeed have a substantive impact, as it decreased the funds available for distribution to creditors.

The UST next argued that bankruptcy fees are exempt from the uniformity requirement under historical practice, noting that the Bankruptcy Act of 1800 allowed districts to establish fees “in view of local needs and conditions.” The Court was not persuaded, finding the 2017 fee increase to be materially different. In particular, the fee increase did not confer discretion on districts to set policies in accordance with their regional needs. Instead, Congress had simply exempted six judicial districts from the fee increase without an identified material difference between the debtors in Administrator Program districts and the debtors in UST Program districts.

The Court found that the 2017 fee increase was not geographically uniform because the increase applied differently to debtors in different judicial districts. The Court noted that while the Bankruptcy Clause provides Congress some flexibility, it does not permit “the arbitrary, disparate treatment of similarly situated debtors based on geography.” While the disparity at issue resulted from an effort to resolve the UST Program’s funding shortfall, the Court noted that the shortfall resulted not from a geographically isolated need, but instead from Congress’s arbitrary creation of a dual system of bankruptcy administration. The Court held that the Bankruptcy Clause does not permit such differential treatment of bankruptcy debtors based on artificial distinctions.

Thus, the Court held that the temporary UST fee increase violated the Bankruptcy Clause’s uniformity requirement. The Court remanded to the Fourth Circuit Court to consider the proper remedy.

Co-Editors in Chief
Karl J. JohnsonTaft Stettinius & Hollister LLP
David M. TanabeWinthrop & Weinstine, P.A.

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