Supreme Court to review constitutionality of Chapter 11 charges | Patterson Belknap Webb & Tyler LLP

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Article I, Section 8 of the United States Constitution gives Congress the power “to establish . . . Uniform bankruptcy laws throughout the United States. Although Congress has the general power to establish a bankruptcy system, bankruptcy laws must be “uniform.” But not all aspects of the bankruptcy system are the same in all judicial districts. For example, while most judicial districts have trustees in the United States, who are funded by special fees charged to debtors, the judicial districts of Alabama and North Carolina instead have bankruptcy administrators, who are funded by general appropriations to the judiciary. These different financing systems have sometimes resulted in differences in the fees imposed on debtors between different judicial districts, which raises the question of whether different fee obligations for debtors in different judicial districts are compatible with the requirement of ‘uniformity. In Siegel versus Fitzgeraldno. 21-441, the Supreme Court agreed to examine this question.

For several decades, 88 of the 94 judicial districts in the United States operated with American trustees, while six, the six judicial districts in Alabama and North Carolina, operated with bankruptcy administrators. Both sets of officials perform similar functions of impartial follow-up and oversight of cases, but their funding works differently. The bankruptcy administrator program is funded by the general court system budget, while the US trustee program is funded by fees paid by the debtor. One of these commissions paid by the debtor, at issue in Siegelis the quarterly commission charged on disbursements that Chapter 11 debtors make to creditors.

Originally, debtors in the six bankruptcy administrator districts were not required to pay this quarterly fee. But in 1994, the Ninth Circuit ruled that the imposition of such quarterly fees in U.S. trustee districts, but not in bankruptcy administrator districts, was unconstitutional under the Constitution’s uniformity requirement. . Congress responded by enacting a new law providing that, in a bankruptcy administrator’s district, “the United States Judicial Conference may require the debtor in a matter under Chapter 11 of Title 11 to pay costs equal to those assessed” in a Chapter 11 matter in a U.S. fiduciary district. 28 USC § 1930(a)(7) (2020). The Judicial Conference imposed such a requirement and from 2002 to January 1, 2018, all Chapter 11 debtors paid fees under the same disbursement formula.

By the mid-2010s, bankruptcy filings declined, and the U.S. trustee program was no longer receiving enough funds from debtor fees to cover its costs. To avoid imposing additional burdens on taxpayers, Congress enacted the 2017 Amendment, which temporarily increased the charges imposed on Chapter 11 debtors with disbursements of $1,000,000 or more in a quarter. if the fund supporting the US Trustee program has a balance below a certain threshold. This increase applies from fiscal year 2018 to fiscal year 2022 and imposes a quarterly fee of the lesser of 1% of disbursements or $250,000, a large increase from the previous maximum of $30,000.

The question in Siegel arises because this fee increase initially applied only to debtors in the U.S. Trustee Districts. In September 2018, the Judicial Conference applied the increase to bankruptcy cases filed in bankruptcy administration districts on or after October 1, 2018. in bankruptcy administrator districts whose records were filed during the same period, this is not the case.[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 US trust district. The case was pending in January 2018, when the fee increase was imposed under the 2017 Amendment. Circuit City’s trustee, who was overseeing a Chapter 11 liquidation plan, initially paid the fees, but After a Texas bankruptcy court ruled that the 2017 amendment violated the bankruptcy clause’s uniformity requirement and was unconstitutionally retroactive, the Circuit City trustee sought a bankruptcy court ruling that the royalty requirement was unconstitutional. The US administrator opposed the request.

The bankruptcy court sided with the Circuit City trustee, ruling that the fee increase in U.S. trustee districts violated either the constitutional requirement of uniformity of bankruptcy laws or the separate constitutional requirement that taxes should be geographically uniform. The bankruptcy court rejected the Circuit City trustee’s separate argument that the charges were unconstitutionally retroactive because they applied to cases filed before the 2017 Amendment was enacted. requested leave to appeal directly to the Court of Appeals for the Fourth Circuit (bypassing the district court), which was granted. Fourth Circuit reverses bankruptcy court, ruling uniformity requirement only prohibits arbitrary regional differences in bankruptcy laws, but allows Congress to pass legislation that resolves regionally isolated issues . He also rejected the retroactivity challenge, finding that the law had no retroactive effect as 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 with respect to quarterly Chapter 11 fees.

Circuit City administrator requested Supreme Court review of Fourth Circuit uniformity ruling, noting split circuit between Fourth and Fifth Circuits, on one hand, and Second Circuit, on the other , which had ruled the difference in fees unconstitutional. The U.S. Administrator’s response agreed that the issue merited Supreme Court consideration and noted that the split in the Circuit had deepened, with the Tenth Circuit joining the Second Circuit in invalidating the fee system. The US Trustee’s response also substantially defended the constitutionality of the law. The U.S. Trustee made three arguments: first, that the Costs Act did not regulate the debtor-creditor relationship and was therefore not subject to the uniformity requirement (an argument which the Fourth Circuit had rejected); second, that section 1930(a)(7) was best interpreted as requiring uniform fees, so that there was no problem of uniformity; and third, that different fees would be permitted given Congress’s ability under the bankruptcy clause to define different classes of debtors and structure relief accordingly.

The Supreme Court granted a review on January 10. The Circuit City trustee filed its factum on the merits on February 24. Circuit City’s trustee argues that the law of costs falls within the scope of the bankruptcy clause and is therefore subject to the uniformity clause, and that Congress could not rely on the distinction between bankruptcy administrator and US trustee districts, a distinction of his own making, to justify the different treatment of identical debtors based on where they are filed. Circuit City’s trustee also argues that the bankruptcy administrator’s program itself violates the uniformity requirement and that a remedy open to the Supreme Court is to strike down that program.

A date for oral argument has yet to be set but will likely be for April, with a decision to come by June.


[1] Resolving this issue for future cases, in January 2021, Congress enacted legislation replacing “may” in section 1930(a)(7) with “shall”, thereby providing that the Judicial Conference must requiring a Chapter 11 debtor in a bankruptcy administrator district to pay fees equal to a debtor in a US trustee district. But this amendment does not solve the problem for debtors whose files were filed before October 1, 2018, and were still pending in January 2018.

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