Delaware Judge Upholds U.S. Trustee Fee Increase in Pending Cases

Delving into a controversy where the courts are divided, Bankruptcy Judge Mary F. Walrath of Delaware held that the increased fees payable by chapter 11 debtors for the U.S. Trustee system are not impermissibly retroactive and do not violate the Due Process and Bankruptcy Clauses of the U.S. Constitution.

The increased fees, which became effective in January 2018, are no small matter. Exide Technologies, the debtor in Judge Walrath’s case, had been paying $30,000 a quarter. After the increase, the quarterly fee rose to $250,000.

The questions confronted by Judge Walrath will likely be decided this year in a direct appeal to the Fifth Circuit. Hobbs v. Buffets LLC (In re Buffets LLC), 19-50765 (5th Cir.). The reply briefs in Buffets will be filed in early February. A date for argument has not been set.

In Buffets, Bankruptcy Judge Ronald B. King of San Antonio held that the increase in fees must not apply to pending cases because the amended statute increasing the fees, 27 U.S.C. § 1930(a)(6)(B), is not retroactive. Judge King went on to hold that the statute violates the Bankruptcy, Uniformity, and Due Process Clauses of the Constitution. In re Buffets LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019).

In addition, a class action was filed in April 2019 in the U.S. Court of Claims seeking a refund of increased U.S. Trustee fees paid by chapter 11 debtors whose cases were pending when the increase came into effect. Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.). The complaint alleges that the increased fees are unconstitutional as applied. The government filed a motion to dismiss and is scheduled to submit its reply brief at the end of January.

Judge Walrath’s Case

Exide, the debtor in Judge Walrath’s case, confirmed a chapter 11 plan in March 2015. The statute, Section 1930(a)(6)(B), was amended more than two years later, compelling Exide to increase its quarterly fee payments in the first calendar quarter of 2018.

The debtor filed a motion asking Judge Walrath to lower the fee to the amount the company was paying at the time of confirmation. In her 34-page opinion on January 9, Judge Walrath denied the motion.

Judge Walrath said there is a split, citing Buffets for barring imposition of the increase retroactively. She also cited In re Life Partners Holdings Inc., 15-40289, 2019 BL 482329, 2019 WL 3987707 (Bankr. N.D. Tex. Aug. 22, 2019), for holding that retroactive application of the increase violates due process. To read ABI’s reports on Buffets and Life Partners, click here and here.

Unlike the two judges in Texas, Judge Walrath found no fault with the amended statute. In allowing imposition of the increase in pending cases, she made five holdings:

1. The 2017 amendment is not a retroactive statute because it applies only to disbursements made after enactment;
2. Even though the increase may not have been anticipated by the debtor or its creditors, that’s not enough to make the statute a violation of the Due Process Clause;
3. Even if the increase is retroactive, the increase does not violate due process because Congress had a legitimate legislative purpose in ensuring that the U.S. Trustee system is self-funded;
4. The quarterly fee is a permissible user fee and not an excessive, unconstitutional taking; and
5. The increase does not violate the “uniformity” aspect of the Bankruptcy Clause of the Constitution because the increase is applied only to bankruptcy cases. Furthermore, the delay in imposing the increase in the two states with bankruptcy administrators was a result of implementation of the statute, not a consequence of legislative action.

Judge Walrath in substance ruled that the debtor must pay the increase. We will report if the debtor seeks a direct appeal to the Third Circuit.