2% of Increased U.S. Trustee Fees Held Unconstitutional

The bankruptcy courts are now split three ways on the issue of whether the increase in U.S. Trustee fees applies to chapter 11 cases filed or confirmed before the increase went into effect. The Fifth and Third Circuits will soon consider the issue on direct appeals.

Three courts have held that the increase in fees is either unconstitutional or inapplicable to cases pending when the fees increased. See In re Buffets, LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019); In re Circuit City Stores Inc., 606 B.R. 260 (Bankr. E.D. Va. 2019); and In re Life Partners Holdings Inc., 606 B.R. 277 (Bankr. N.D. Tex. 2019).

Buffets is on direct appeal to the Fifth Circuit. See Hobbs v. Buffets LLC (In re Buffets LLC), 19-50765 (5th Cir.). Briefing in the Fifth Circuit is complete.

Three courts ruled that the increase is neither impermissibly retroactive nor violative of the Constitution. See Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 608 B.R. 96 (Bankr. D. Conn. 2019); In re Exide Techs., 611 B.R. 21 (Bankr. D. Del. 2020); and In re Clayton Gen. Inc., No. 15-64266, 2020 Bankr. Lexis 842 (Bankr. N.D. Ga. Mar. 30, 2020).

In Exide, the parties stipulated to a direct appeal to the Third Circuit. The appeals court is considering the petition for permission to appeal. See Exide Techs. v. Vara (In re Exide Techs.), 20-8023 (3d Cir.).

There is also a class action pending in the U.S. Court of Claims, seeking a refund of overpayments of the fees. There have been no substantive rulings as yet. See Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.).

In his opinion on April 9, Bankruptcy Judge Erik P. Kimball of West Palm Beach, Fla., fashioned a third result. Generally, he agreed with the Exide opinion by Bankruptcy Judge Mary F. Walrath of Delaware that the increase is valid and enforceable.

However, Judge Kimball decided that collecting 2% of the increase violates either the Uniformity or the Contracts Clauses of the Constitution.

The Amended Statute

In the case before Judge Kimball, the chapter 11 debtor confirmed a plan in June 2017 and created a creditor’s trust. The fees payable to the U.S. Trustee Program do not end on confirmation. Rather, the fees continue until the case is closed.

To ensure that taxpayers do not finance the U.S. Trustee Program, Congress revised the U.S. Trustee fees as part of the Bankruptcy Judgeship Act of 2017. Codified at 28 U.S.C. § 1930(a)(6)(B), the fees are raised whenever the balance in the U.S. Trustee System Fund falls below $200 million at the end of any fiscal year through 2022. In December, Congress amended the statute by raising the threshold to $300 million.

Since the fund balance was below the threshold, the fees increased as of Oct. 27, 2017, when the amendment became effective.

In Judge Kimball’s case, the increase was substantial. For six quarters after the increase kicked in, the trust paid almost $175,000. Under the previous fee schedule, the fees would have been less than $49,000. In other words, the increase for the trust was some 350%.

The Motion for a Refund

The trust filed a motion seeking a refund, on the notion that the increase was either unconstitutional or not retroactive, or both.

Judge Kimball said he could not “improve on the analysis by Judge Walrath” in Exide and held that the increase was not retroactive because it only applied to quarters after the increase became effective. Generally speaking, he also found no violation of the Uniformity or Bankruptcy Clauses.

However, Judge Kimball did have a problem with 2% of the increase.

Previously, 100% of the fees were earmarked exclusively for U.S. Trustees, so the program would impose no burden on taxpayers. For the first time, the amended statute diverted 2% to the Treasury for the government’s general purposes. Legislative history said that the 2% was designed to defray the cost of several temporary bankruptcy judgeships.

Here’s the rub. Two states, North Carolina and Alabama, have bankruptcy administrators, not U.S. Trustees. Although the fees are the same, debtors in those states pay fees under 28 U.S.C. § 1930(a)(7), not § 1930(a)(6). The increased fees in those two states only apply to cases begun after the increase went into effect for North Carolina and Alabama on October 1, 2018.

Judge Kimball said it did not matter whether the U.S. Trustee fees were considered taxes or user fees. The Uniformity and Bankruptcy Clauses both require that taxes and bankruptcy laws be uniform throughout the U.S. Because the 2% is not paid in two states, he held that “the fee required under the Amendment is not uniform and thus violates the Constitution.”

Judge Kimball therefore decided that the trust was entitled to a refund of the 2%, amounting to about $3,500.

To read ABI’s reports on Buffets and Exide, click here and here.