Supreme Court Alert: Supreme Court Finds U.S. Trustee Fee Increase Unconstitutional

06.24.2022
Alert

In a decision rendered on June 6, 2022, Justice Sotomayor authored the Supreme Court’s unanimous decision in the case Siegel v. Fitzgerald, holding that a statutory increase in United States Trustee’s fees violated the “uniformity” requirement of the Bankruptcy Clause set forth in Article I, § 7, cl. 4 of the United States Constitution, which empowers Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.”[1] 

As the Court explained, Congress implemented the United States Trustee Program, whereby the United States Trustee’s Office monitors bankruptcy cases.[2]  Federal districts in North Carolina and Alabama, however, opted out of the program, each state choosing instead to have a state-wide bankruptcy administrator monitor bankruptcy cases (the “Administrator Program”).[3]  While the Trustee Program and the Administrator Program conduct the same core administrative functions, the two programs  are funded differently.  The Trustee Program is funded entirely by quarterly fees paid by debtors to the United States Trustee System Fund pursuant to 28 U.S.C. § 1930(a); the Administrator Program is funded by the general judiciary budget of its relevant jurisdictions.[4] 

In 2017, Congress amended 28 U.S.C. § 1930(a) to impose a statutory fee increase in large chapter 11 cases in Trustee Program jurisdictions, which took effect in 2018 and resulted in some debtors paying over eight times more in trustee fees per quarter.[5]  Pursuant to a standing order adopted in 2001, the Administrator Program jurisdictions could choose to adopt fee increases equal to those imposed in Trustee Program jurisdictions, but were not required to do so.[6]  Ultimately, the Administrator Program jurisdictions adopted the new fee increase, but only applied it to newly filed cases.[7]  In contrast, the fee increase applied to all pending and newly filed cases in Trustee Program jurisdictions.[8]  In 2021, Congress amended 28 U.S.C. § 1930(a) to require the Trustee Program and Administrator Program jurisdictions to adopt the same quarterly fee structure.[9]  Nonetheless, between 2018 and 2021, many debtors in Trustee Program jurisdictions were required to pay significantly higher quarterly fees than similarly situated debtors in Administrator Program jurisdictions. 

The Supreme Court granted certiorari to resolve a split that had developed in the lower courts over the constitutionality of the 2017 amendment.[10]  The United States raised two arguments in support of the 2017 amendment: 1) the Bankruptcy Clause’s uniformity requirement did not apply because the amendment “was not a law ‘on the subject of Bankruptcies,’” and was instead an administrative law; and 2) because the increase was to rectify a budgetary shortfall specific only to Trustee Program jurisdictions, the fee increases rightfully only applied to those jurisdictions.[11]  The Supreme Court disagreed.  First, the Court held that there was no distinction between substantive and administrative law in applying the Bankruptcy Clause’s uniformity requirement.[12]  The Court opined that the only subject of the amendment is bankruptcy, and “increasing mandatory fees paid out of the debtor’s estate decreases the funds available for payment to creditors.  As a result, the obligations between creditors and debtors are changed.”[13]  Secondly, the Court held that the imposition of the fees resulted in an impermissible “arbitrary, disparate treatment of similarly situated debtors based on geography.”[14]  That nonuniform free increase, the Court held, violated the uniformity agreement.[15]

Rather than fashioning a remedy, the Court remanded the matter to the Fourth Circuit to determine an appropriate remedy to be applied to debtors who paid quarterly fees in Trustee Program jurisdictions between 2018 and 2021.

For more information regarding this Alert, please contact members of Caplin & Drysdale’s Bankruptcy and Complex Litigation Groups.

Attorneys

[1] See Siegel v. Fitzgerald, No. 21-441, 2022 WL 1914098 (U.S. June 6, 2022)

[2] Id. at *3.

[3] Id.

[4] Id. at *4.

[5] See Pub. L. 115–72, Div. B, 131 Stat. 1229.

[6] See Siegel, 2022 WL 1914098, at *4.

[7] Id.

[8] Id.

[9] See Pub. L. 116–325, 134 Stat. 5088.

[10] The Second and Tenth Circuits both held that the 2017 amendment violated the uniformity requirement.  See In re Clinton Nurseries, Inc., 998 F.3d 56 (2d Cir. 2021); In re John Q. Hammons Fall 2006, LLC, 15 F.4th 1011, 1016 (10th Cir. 2021).  In the Fourth, Fifth and Eleventh Circuits, however, courts found that there was no Constitutional violation.  See United States Tr. Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp.), 22 F.4th 1291, 1327 (11th Cir. 2022); In re Circuit City Stores, Inc., 996 F.3d 156, 160 (4th Cir. 2021); In re Buffets, LLC, 979 F.3d 366 (5th Cir. 2020).  While the Third Circuit has not ruled on this issue, the Delaware Bankruptcy Court in Exide seemed to agree with the Fourth, Fifth and Eleventh Circuits in finding no Constitutional violation. In re Exide Techs., 611 B.R. 21, 26 (Bankr. D. Del. 2020) (Walrath, J.).

[11] See Siegel, 2022 WL 1914098, at *6 - *7.

[12] Id. at *6.

[13] Id.

[14] Id. at *8.

[15] Id.

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