Business Law

In re Exide Technologies

The following is a case update written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, analyzing a recent decision of interest:

Reflecting a growing split among bankruptcy courts, a Delaware bankruptcy judge ruled that the statutory amendment which increased quarterly United States Trustee fees by as much as 833% in cases pending at the time of its enactment as well as cases filed thereafter is not impermissibly retroactive, does not amount to a taking, and does not violate the United States Constitution’s Bankruptcy Clause. In re Exide Technologies, ___ B.R. ___, 2020 WL 211400 (Bankr. D. Del. 2020).

To view the full opinion, click here.

FACTS

UST Quarterly Fee Provisions

Under 28 U.S.C. section 1930(a)(6)(A), Chapter 11 debtors must pay quarterly fees to the United States Trustee (UST) “until the case is converted or dismissed, whichever occurs first.” The fee depends on the total amount disbursed in the case each quarter. It ranges from $325 per quarter for cases in which disbursements total less than $15,000 all the way to a ceiling of $30,000 per quarter for cases in which disbursements total more than $30,000,000.

On October 26, 2017, Congress amended (the “2017 Amendment”) Section 1930(a)(6), by adding the following provision:

(B)       During each of fiscal years 2018 through 2022, if the balance in the United States Trustee System Fund as of September 30 of the most recent full fiscal year is less than $200,000,000, the quarterly fee payable for a quarter in which disbursements equal or exceed $1,000,000 shall be the lesser of 1 percent of such disbursements or $250,000.

On September 30, 2017, the balance of funds in the UST System Fund dipped below the minimum threshold set by Congress. As a result, starting January 1, 2018, two months after the 2017 Amendment was codified, the UST started collecting fees based on the 2017 Amendment in Chapter 11 cases pending on that date and in cases filed thereafter.

Unlike all other states in this country where bankruptcy cases are overseen by the UST Program, in Alabama and North Carolina bankruptcy cases are overseen by the Bankruptcy Administrator (BA) Program, which is managed by the federal judicial branch as opposed to the U.S. Department of Justice.

Because BA Program districts did not charge quarterly fees early in their existence, and in response to a ruling by the 9th Circuit Court of Appeals that it would be unconstitutional for the UST Program to charge such fees when the BA Program did not, in 2000 Congress codified Section 1930(a)(7), which states in relevant part,

In districts that are not part of a United States trustee region as defined in section 581 of this title, 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 by paragraph (6) of this subsection. Such fees shall be deposited as offsetting receipts to the fund established under section 1931 of this title and shall remain available until expended. (Emphasis added.)

The Judicial Conference of the United States has mandated imposition of fees in BA districts that are equal to those imposed by the UST Program. Thus, when Congress codified the 2017 Amendment, the Judicial Conference adopted a similar fee provision for BA districts. However, unlike the UST Program which imposed the new fees on all cases pending on or filed after January 1, 2018, the BA Program imposed the fee increase only in cases filed on or after October 1, 2018.

Quarterly Fees Charged In The Exide Technologies Case:

Exide Technologies (Exide) filed for bankruptcy under Chapter 11 in June 2013. It confirmed a plan of reorganization in March 2015, which became effective the next month. The plan requires Exide to pay UST quarterly fees under Section 1930 “until the Chapter 11 Case is closed by entry of the Final Decree.” Relying on the 2017 Amendment, starting January 2018 the UST increased Exide’s quarterly fees from $30,000 to $250,000, an increase of 833%.

In June 2019, Exide filed a motion (the “Motion”) asking the court to reduce the quarterly fees charged by the UST to the fees applicable when the plan was confirmed, namely $30,000. The Motion relied on a variety of statutory and constitutional arguments, which were disputed by the UST. The latter further argued that the relief desired by Exide could only be achieved through an adversary proceeding, a procedural step which the Court found unnecessary.

REASONING

The Court first rejected Exide’s argument that the 2017 Amendment does not apply to cases filed prior to January 1, 2018. While it did not expressly state that it applies to pending cases, the Court concluded that the fee increase is triggered by the amount and timing of disbursements and the level of funds in the UST trust fund. Thus, the dates a Chapter 11 case was filed and plan confirmed are not relevant to whether the 2017 Amendment applies in any given case.

The Court was unpersuaded by Exide’s argument that the UST’s application of the 2017 Amendment was arbitrary and violated the 5th Amendment’s Due Process Clause. It concluded that the amendment is not a retroactive statute, because it only increases fees for distributions made post-enactment date. The fact that Exide and its creditors did not anticipate the quarterly fee increase when the plan was confirmed does not mean that the amendment violates Exide’s due process. Moreover, even if the amendment were deemed retroactive, it does not violate the 5th Amendment because its retroactive application is supported by “a legitimate legislative purpose furthered by rational means.” Congress enacted Section 1930(a)(6) with the goal of making the UST Program self-funding through collection of user fees. Due to declining bankruptcy filings and fee collections over the past seven years, Congress had a legitimate legislative purpose of stemming revenue losses and preserving the self-funded nature of the UST Program.

The Court noted that Congress’ decision to impose higher fees on only large Chapter 11 cases is rationally related to a legitimate legislative purpose. Congress could rationally conclude that larger cases require more UST resources than smaller cases. The Court was also not concerned that 2% of the fees collected will go into the U.S. Treasury’s general fund, rather than the UST fund. It noted that the increased fees were intended to partially cover the costs of 18 new bankruptcy judgeships created by the 2017 Amendment, also a legitimate legislative purpose.

The Court next rejected Exide’s argument that the increased quarterly fees were excessive user fees constituting the taking of property in violation of the 5th Amendment. It found that the increased fees reflect a “fair approximation of the cost of benefits supplied” by the government. It cited to a case in which the U.S. Supreme Court held that a 1.5% ad valorem fee was not clearly excessive so as to be an impermissible taking.

Exide further argued that the increased fees were excessive because it did not receive benefits from the UST post-confirmation. The Court noted that there is no requirement that the UST provide any services to Exide, as long as it makes them available.

The Court finally rejected the argument that the 2017 Amendment violates the requirement in the U.S. Constitution’s Bankruptcy Clause that Congress enact “uniform laws on the subject of bankruptcies.” Exide argued that the new quarterly fees were not applied evenly in UST and BA districts.

The Court agreed that Section 1930(a)(6) is a law on the subject of bankruptcies and therefore must be applied uniformly. A law must be uniform as to a defined class of debtors and geographically. The Court found that the higher fees were applied uniformly in all cases filed in UST-administered cases. There is no requirement that the BA districts impose the higher fees in the same manner as the UST-run districts, as Congress may treat different regions in the country differently to address geographically isolated problems.

On January 17, 2020, Exile filed a Notice of Appeal.

AUTHOR’S COMMENTS

As acknowledged by Judge Walrath, application of the 2017 Amendment has resulted in a split of views among bankruptcy courts:

  1. In re Buffets, LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019) (Chief Judge Ronald B. King rules that 2017 Amendment violates uniformity provisions of Bankruptcy Clause);
  2. In re Circuit City Stores, Inc., 2019 WL 3202203 (Bank. E.D. Va. July 15, 2019) (Judge Kevin R. Huennekens holds 2017 Amendment unconstitutional for lacking uniformity as to cases pending before October 2018);
  3. In re Life Partners Holdings, Inc., 2019 WL 3987707 (Bankr. N.D. Tex. Aug. 22, 2019) (Judge Mark X. Mullin holds that 2017 Amendment does not apply to cases filed before amendment was enacted on October 26, 2017; even if the statutory amendment applied to pending Chapter 11 cases the statute is unconstitutionally non-uniform; and even if the statutory amendment is constitutionally uniform its application to cases filed prior to its enactment would violate the Due Process Clause);
  4. In re Clinton Nurseries, Inc., 2019 WL 4072654, at *12-13 (Bankr. D. Conn. Aug. 28, 2019) (Judge James J. Tancredi holds that 2017 Amendment does not violate uniformity provision of Bankruptcy Clause).

A number of bankruptcy courts presented with this issue have disallowed application of the 2017 Amendment on other grounds, suggesting sympathy for debtors who were caught off guard by the large quarterly fee increases in cases filed before 2018. (see In re Reddy Ice Holdings, Inc., 2020 WL 401794 (Bankr. N.D. Tex. Jan. 23, 2020) (court rules that UST waived right to impose higher fees when it did not object to conditional reopening of case closed prior to 2018 for benefit of certain creditors); In re MBF Inspection Services, Inc., 609 B.R. 889 (Bank. N.M. Dist. Dec. 24, 2019) (court overrules UST objections and agrees to enter final decree closing case to avoid higher UST fees).

Debtors and creditors may be most aggrieved in cases where plans were confirmed before January 2018, where creditors voted to confirm plans in reliance on payment projections provided in disclosure statements. As to these creditors, imposing increases of up to 833% in quarterly fees appears to represent an unconstitutional retroactive statute. These creditors have no option to change their votes as to their plans.

Similarly, the lack in uniformity in the application of the 2017 Amendment between the BA-run districts and the UST-run districts appears to raise legitimate questions based on the Bankruptcy Clause.

Finally, the 2017 Amendment is triggered by the balance of funds in the United States Trustee System Fund “as of September 30 of the most recent full fiscal year.” It isn’t clear whether this means that a balance of $199 million, or any amount below $200 million, will suffice to raise the quarterly fees for all Chapter 11 cases making distributions above $1 million for the next 12 months.

Also, query whether the UST Program has the discretion to determine on any given day whether the balance in the System Fund would dip below $200 million? Under 28 U.S. Code § 589a (c), the “[a]mounts in the Fund which are not currently needed for the purposes specified in subsection (a) shall be kept on deposit or invested in obligations of, or guaranteed by, the United States.” (Emphasis added.) If funds in the System Fund are invested outside the fund, are they accounted for in the calculation of funds on hand as of September 30?

For practitioners who wish to protect creditor distributions, perhaps the best take-away from this case is that they should request final decrees and case closures as soon as practicable. This will conclude obligations to pay UST quarterly fees.

These materials were written by Uzzi O. Raanan, a partner at Danning, Gill, Israel & Krasnoff, LLP, located in Los Angeles, California, who is a member of the ad hoc group and the representative from the Business Law Section (BLS) to the CLA’s Board of Representatives. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.

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