The U.S. Court of Federal Claims adopted the analysis of the Fifth Circuit in upholding the constitutionality of the 2017 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program. See Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. Nov. 3, 2020).
More particularly, Court of Claims Judge Patricia Elaine Campbell-Smith found no violation of the Uniformity Clause of the Constitution, even though the debtors paid higher fees to the U.S. Trustee system than they would have paid had their cases been pending in Alabama or North Carolina, the two states where bankruptcy courts use bankruptcy administrators rather than U.S. Trustees.
At the appellate level, the last hope for debtors to recover some of the fees they paid will be argued on Tuesday, December 8, in the Fourth Circuit. See Fitzgerald v. Siegel, 19-2240 (4th Cir.). With regard to the Fourth Circuit appeal, click here to read ABI’s report about the decision by Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., finding constitutional violations. Judge Huennekens adopted the reasoning of Bankruptcy Judge Ronald B. King of San Antonio, who was reversed by the Fifth Circuit in Buffets. To read ABI’s report on Buffets, click here.
The U.S. Trustee Fee Increase
To prevent taxpayers from funding the U.S. Trustee Program, Congress revised the U.S. Trustee fees as part of the Bankruptcy Judgeship Act of 2017. Codified at 27 U.S.C. § 1930(a)(6)(B), the fee increases whenever the balance in the U.S. Trustee System Fund falls below $200 million at the end of any fiscal year through 2022.
Since the fund balance was below the threshold, the fee increased as of Oct. 27, 2017, when the amendment became effective. For some companies, the increase was as much as 1,250%. The increase applied to debtors with pending cases, not only to companies that filed chapter 11 petitions after the increase.
The increase did not apply in the two states that use bankruptcy administrators rather than U.S. Trustees. For those districts, the Judicial Conference increased the fees as of October 2018, about nine months after the increase became effective in the other 48 states. Furthermore, the increase in Alabama and North Carolina did not apply to pending cases.
Two named plaintiffs would have paid $350,000 less had their cases been pending in administrator districts. Latching onto the difference, the debtors mounted a class action in the Court of Claims, contending that the increase was unconstitutional. On behalf of similarly situated debtors, they sought a refund of overpayments.
The government filed a motion to dismiss that Judge Campbell-Smith granted in her 14-page opinion on November 30.
Fifth Circuit’s Logic Prevails
After dealing with preliminary issues regarding the jurisdiction of the Court of Claims, Judge Campbell-Smith adopted the Fifth Circuit’s rationale in Buffets, which she called “persuasive legal guidance.” She said that “Congress acted within its authority to craft a law taking into account regional differences — the [U.S. Trustee] and [bankruptcy administrator] jurisdictions — and applying the solution to only the affected jurisdictions.”
Siding with the Fifth Circuit, Judge Campbell-Smith held that the increase was “not a violation of the uniformity requirement of the Bankruptcy Clause of the Constitution or the Due Process clause.” She based her conclusion in significant part on the debtor’s failure to argue that “the division of the bankruptcy program into [U.S. Trustee] and [bankruptcy administrator] districts is unconstitutional.” She noted that the debtors in the Fifth Circuit likewise did not attack the constitutionality of the dual system.
With regard to the Due Process Clause, Judge Campbell-Smith again agreed with the Fifth Circuit. The increase, she said, did “not implicate or affect a past right.” Like an increase in real estate taxes after someone buys a home, she said that the rise in fees only upset the debtors’ expectation about future liabilities.
Because the increase did not violate the Constitution, there was no “illegal exaction claim” and therefore no violation of the Tucker Act, 28 U.S.C. § 1491. Judge Campbell-Smith dismissed the complaint.
Observation
According to Judge Campbell-Smith and the Fifth Circuit, the debtors did not argue that the dual systems themselves violated the Constitution. If creating two systems was a valid exercise of congressional power, it is difficult to comprehend why the Constitution would require having identical fees in both systems.
If debtors are to succeed, perhaps they need to attack the constitutionality of the dual systems.
The U.S. Court of Federal Claims adopted the analysis of the Fifth Circuit in upholding the constitutionality of the 2017 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program. See Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. Nov. 3, 2020).
More particularly, Court of Claims Judge Patricia Elaine Campbell-Smith found no violation of the Uniformity Clause of the Constitution, even though the debtors paid higher fees to the U.S. Trustee system than they would have paid had their cases been pending in Alabama or North Carolina, the two states where bankruptcy courts use bankruptcy administrators rather than U.S. Trustees.
At the appellate level, the last hope for debtors to recover some of the fees they paid will be argued on Tuesday, December 8, in the Fourth Circuit. See Fitzgerald v. Siegel, 19-2240 (4th Cir.). With regard to the Fourth Circuit appeal, click here to read ABI’s report about the decision by Bankruptcy Judge Kevin R. Huennekens of Richmond, Va., finding constitutional violations. Judge Huennekens adopted the reasoning of Bankruptcy Judge Ronald B. King of San Antonio, who was reversed by the Fifth Circuit in Buffets.