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:
In a unanimous opinion authored by Justice Sonia Sotomayor, the United States Supreme Court held that a 2017 congressional attempt to temporarily increase quarterly fees charged in large Chapter 11 bankruptcy cases is subject to the United States Constitution Bankruptcy Clause’s uniformity requirement and that the act violated the Constitution’s uniformity mandate. See Siegel v. Fitzgerald, ____ S.Ct. ___, 2022 WL 1914098 (2022).
To read the full opinion, click.
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 six federal judicial districts located 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.)
In 2001, the Judicial Conference of the United States issued a standing order directing BA districts to charge the same fees as those imposed by the UST Program. Nevertheless, when Congress codified the 2017 Amendment, the six BA districts did not immediately implement the new fee schedule. Thus, on September 13, 2018, in a meeting presided over by the Chief Justice of the United States Supreme Court, the Judicial Conference ordered the BA districts on an expedited basis to implement the new fee structure.
However, unlike the UST Program which imposed the new fees on all cases pending on or filed after January 1, 2018, for an unexplained reason the Judicial Council ordered the new fees to be charged in “cases filed on or after” October 1, 2018. This created a gap period during which the fees charged in certain large Chapter 11 cases pending in the BA judicial districts were significantly lower than those assessed in the UST Program districts.
In 2020, after a few courts held that the 2017 Amendment violated the Bankruptcy Clause’s uniformity requirement, Congress amended Section 1930(a)(7) to replace the permissive “may” with “shall,” ensuring that all fees charged in the UST Program and BA districts were the same going forward. The amendment was signed into law on January 12, 2021, and included legislative findings that the revision was intended to, “confirm the longstanding intention of Congress that quarterly fee requirements remain consistent across all Federal judicial districts.”
The Quarterly Fees in the Circuit City Stores, Inc. Case
In 2008, Circuit City Stores, Inc. (“Debtor”) filed for bankruptcy under Chapter 11 of the Bankruptcy Code in the Eastern District of Virginia, which is administered by the UST Program. The Debtor’s liquidation plan (“Plan”) was confirmed by the bankruptcy court in 2010, and is overseen by liquidation trustee Alfred H. Siegel (“Trustee”). Under the Plan, the Trustee was required to pay the UST quarterly fees until that case was closed or converted. The year the Plan was confirmed the maximum quarterly fee was $30,000.
The Circuit City case was still pending in January 2018, when the UST Program started to collect fees based on the 2017 Amendment. The fees were charged in all cases filed or pending as of January 2018. In the first three quarters of 2018, the Trustee paid $632,542 in total fees, rather than the $56,400 he would have paid pre-2017 Amendment.
The Trustee ultimately challenged the increased fees in the bankruptcy court overseeing the case, arguing that the higher fees were not applied uniformly across the UST Program and BA districts. The trial court agreed, holding that the Trustee would only be required to pay the pre-2017 Amendment fees. The court reserved the question whether the Trustee was entitled to receive a refund on alleged overpayments made in 2018.
On a direct appeal to the Fourth Circuit Court of Appeals, under 28 U.S.C. section 158(d)(2), a divided panel reversed the lower court’s ruling that the 2017 Amendment was unconstitutionally nonuniform. Noting that the uniformity requirement “forbids only arbitrary regional differences in the provisions of the Bankruptcy Code,” the appellate court concluded that Congress did not draw arbitrary distinctions between debtors and creditors based on their places of residence. Rather, Congress codified the 2017 Amendment to solve the UST Program’s funding shortage, which was not a problem in the BA districts.
Judge Quattlebaum dissented. He initially questioned the decision to allow two different bankruptcy systems, e.g., the BA districts and UST Program districts, and commented that the “two systems are  candidly and unapologetically nonuniform.” He then analyzed and rejected the UST’s arguments that the fee statute in question was not a substantive law that is subject to the Bankruptcy Clause’s uniformity requirements, that the laws applicable to the UST Program and BA districts are in fact uniform based on the language in Section 1930(a)(6)(B) and (a)(7), and that the differences in the way the 2017 Amendment was applied in the two districts was not geographically based. The dissenting judge concluded that the 2017 Amendment violated the Bankruptcy Clause’s uniformity requirement.
The Trustee filed a Petition for Writ of Certiorari in the Supreme Court, which granted the petition on January 10, 2022 to resolve a split in the lower courts as to the constitutionality of the 2017 Amendment.
In a unanimous opinion authored by Justice Sotomayor, the Supreme Court reversed the Fourth Circuit’s ruling, holding that the 2017 Amendment violated the Bankruptcy Clause’s uniformity requirement.
The Court initially considered whether the Bankruptcy Clause’s uniformity requirement applied to the 2017 Amendment, concluding that it did. The UST argued that the 2017 Amendment’s fees provision is not a law “on the subject of Bankruptcy,” and did not alter the substance of the debtor-creditor relationship. The Court disagreed, noting that the Bankruptcy Clause does not distinguish between substantive and administrative laws. It further noted that the term “laws on the subject of Bankruptcies” is broad, and includes “nothing less than the ‘subject of the relations between [a] debtor and his creditors.’” The Court further noted that all courts that considered this issue, including those that found the 2017 Amendment constitutional, agreed that the Bankruptcy Clause applied to the 2017 Amendment.
The Court therefore analyzed whether the 2017 Amendment complied with the Bankruptcy Clause. Agreeing that Congress has some flexibility to address geographical differences through different laws applied to the nation’s regions, the Court found that Congress cannot do so through “arbitrary geographically disparate treatment of debtors.” Justice Sotomayor discussed the only three cases where the Court previously considered the uniformity requirement. In two of these cases, Congress had addressed unique, isolated problems that arose in specific regions of the country, but not in the entire country. In the third case, the Court struck down legislation that singled out a debtor and did not apply to other similarly situated debtors engaged in bankruptcy proceedings.
Finding that the 2017 Amendment was not geographically uniform, the Court analyzed whether the disparate treatment was based on a permissible purpose for the different treatment. It rejected the argument that the disparities were intended to solve a specific geographical problem, namely the funding shortfalls experienced by the UST Program. It noted that these shortfalls were self-imposed by Congress, which arbitrarily separated the UST Program and BA districts and funded them using “an artificial funding distinction that Congress itself created.”
The Court clarified that it was not addressing whether the dual system involving the UST Program and BA districts is constitutional. It further assured Congress that it may still codify laws that treat classes of debtors differently or that respond to geographically isolated challenges. It remanded the case to the Fourth Circuit to address the remedies available to the parties in light of this ruling.
It is hard to argue with a unanimous ruling by the United States Supreme Court. However, the decision leaves some questions unaddressed. For example, why did it not matter that Congress did not intend the 2017 Amendment to impose nonuniform fees in the BA and UST Program districts? Aware that Section 1930(a)(7) authorized the Judicial Conference to impose fees identical to the UST Program fees, and that it had in fact issued a standing order requiring all BA districts to match UST Program fees, why couldn’t Congress reasonably rely on the Judicial Conference to maintain uniform fees in the BA districts? Did the BA districts’ failure to comply with the Judicial Conference’s standing order mean that the 2017 Amendment was unconstitutional, or that it was poorly implemented in the BA districts?
The different fees imposed by the two district systems were a result of the BA districts’ failure to raise their fees to comply with the 2017 Amendment, and the Judicial Conference’s failure to address this issue until September 2018, about nine months after the UST Program implemented the new fees. Did the Judicial Conference create the discrepancy that resulted in the Supreme Court’s ruling that the 2017 Amendment is not constitutional?
Also unresolved are the remedies available following this ruling. Should debtors in UST Program districts, where apparently 97% of Chapter 11 cases are filed, receive refunds of the increased payments they made because of the 2017 Amendment? Should debtors in the BA districts be required to pay the higher fees going back to January 2018? Now that Congress addressed the discrepancy between the fees charged in the UST Program districts and the BA districts, by changing “may” to “shall,” can the higher fees imposed by the 2017 Amendment be reimposed on both judicial district systems? If so, would the Court’s ruling impact only fees imposed between January 2018 and January 2021? Does it matter that both judicial district systems charged the same fees for all Chapter 11 cases filed as of October 2018? Should those fees stand?
Additionally, is the fact that the UST Program interpreted the 2017 Amendment to apply to all pending cases, including those filed before the 2017 Amendment went into effect, and the Judicial Conference concluded that the new fees would not apply retroactively, a reason to conclude that the 2017 Amendment violated the uniformity requirement in the Bankruptcy Clause? Was this discrepancy a function of differing interpretations of a statute which was not intended to create nonuniform treatment of similarly situated debtors, which means that courts should have attempted to reconcile the differing interpretations rather than consider whether the 2017 Amendment violated the uniformity provision? In Footnote 2, the Court appears to reject this argument, suggesting that Congress’ decision in the year 2000 to use the word “may” instead of “shall” in Section 1930(a)(7) was the linchpin of the unconstitutionality of the 2017 Amendment.
Finally, this case raises questions as to whether the Judicial Conference is the proper overseer of the bankruptcy process in the Alabama and North Carolina judicial districts. Perhaps the time has come to consolidate all 94 judicial districts into the UST Program.
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.