Disagreeing with the Fifth Circuit and most lower courts, District Judge John W. Holcomb of Riverside, Calif., held that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program is unconstitutional and not applicable to pending cases.
Siding with the dissenter in the Fifth Circuit, Judge Holcomb even said in his April 1 opinion that the division of the country into U.S. Trustee and Bankruptcy Administrator districts in itself is a violation of the Bankruptcy Clause of the Constitution.
Typical Facts in Pending Cases
The facts before Judge Holcomb were similar to those in cases where other debtors challenged the steep increase in fees for the U.S. Trustee Program.
The debtor filed a chapter 11 petition in May 2016 and had been paying about $13,000 a quarter to the U.S. Trustee. When the increase came into effect as of January 1, 2018, the fee jumped to an average of some $87,500 per quarter for 2018 until the case ended in a structured dismissal in 2019.
To recover the $600,000 difference between the old rate and the new rate, the debtor sued in district court after dismissal of the bankruptcy case, contending that the increase was not retroactive. Even if the statute made the increase retroactive, the debtor argued that the existence of the parallel U.S. Trustee and Bankruptcy Administrator districts made the increase unconstitutional because the fees were not uniform.
The debtor won on both counts, and more. The opinion by Judge Holcomb is the most thorough so far in parsing the issues.
The U.S. Trustee Fee Increase
To ensure that taxpayers do not finance the U.S. Trustee Program, Congress raised 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 quarterly fee increased as of January 1, 2018, obliging the debtor to pay almost $600,000 more than would have been owing under the old fee schedule.
For some companies, the increase could be 1,250%. The increase was particularly steep for companies with low margins but high sales volumes, because the fee is measured by the debtor’s “disbursements.”
The increase did not apply in the two states that continue using 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.
During the time when the increase was in effect, Judge Holcomb said that the debtor’s net loss was about $500,000. In other words, the debtor would have been profitable were it not for the increase.
The Increase Wasn’t Retroactive
Citing rules of statutory construction, Judge Holcomb decided that the increase was not retroactive in view of the statute’s own language. In significant part, he relied on words in the statute not considered by other courts, such as the Fifth Circuit in Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. Nov. 3, 2020).
The only circuit court to reach the question so far, the Fifth Circuit held 2/1 in Buffets that the increase was not unconstitutional. To read ABI’s report on Buffets, click here.
Section 1930(a)(6)(B) provides that the “parties commencing a case under title 11 shall pay to the clerk . . . the following filing fees: . . . a quarterly fee . . . to the United States trustee . . . , in each case under chapter 11 of title 11, other than under subchapter V, for each quarter . . . .” According to Judge Holcomb, no court upholding the increase considered the significance of the words “commencing a case.”
Judge Holcomb found fault with the statute’s failure to state clearly that the increase was applicable to pending cases. Indeed, he interpreted the statutory language to mean that the increase was not applicable to pending cases.
Judge Holcomb said that “commencing a case . . . is the conduct to which liability attaches.” Therefore, he said, “whether the 2017 Amendment applies to a particular case depends upon when the case was commenced, not when the disbursements are made (because the disbursements are already contemplated by the statute at the time of filing).” The “plain text of the statute,” he said, “can reasonably be interpreted as applying only to cases commenced on or after the enactment date.”
Judge Holcomb noted that Congress cleared up the ambiguity regarding retroactivity when amending Section 1930(a)(6) once again in 2020 in the Bankruptcy Administration Improvement Act of 2020, Pub. L. No. 116-325, January 12, 2021, 134 Stat. 5085. He said there was “no such express command [to make the increase retroactive] with respect to the applicability of the 2017 Amendment to pending cases.”
Given the “most logical reading of [Section 1930],” Judge Holcomb held “that the schedule of quarterly fees in any particular Chapter 11 case is determined as of the date that the case is commenced, and that fee schedule applies for the duration of the case.” For these reasons and others, he “respectfully disagree[d] with the reasoning of other courts.”
Constitutionality
Even if the statute were interpreted to apply the increase to pending cases, Judge Holcomb held that the statute was unconstitutional under the Bankruptcy Clause of the Constitution, because the increase did not apply to pending cases in Bankruptcy Administrator districts.
Debtors in pending cases are “experiencing geographic discrimination without any explanation from Congress,” Judge Holcomb said. “Accordingly, the 2017 Amendment cannot constitutionally be applied to pending cases outside of [Bankruptcy Administrator districts], and the 2017 Amendment remains unconstitutionally non-uniform as applied to pending cases.”
Although Judge Holcomb held that the increase violated the Bankruptcy Clause for a lack of uniformity, he found no violation of the Due Process or Equal Protection Clauses.
St. Angelo Redux
The Ninth Circuit held in 1995 that Congress’ decision to impose quarterly fees in U.S. Trustee districts, but not in Bankruptcy Administrator districts, violated the Bankruptcy Clause of the Constitution. St. Angelo v. Victoria Farms Inc., 38 F.3d 1525 (9th Cir. 1994), amended by 46 F.3d 969 (9th Cir. 1995).
Judge Holcomb understood “the panel majority in St. Angelo [as holding] that the disparate programs in [U.S. Trustee] Districts and [Bankruptcy Administrator] Districts established by Congress, without justification, violated the Bankruptcy Clause.” The problem in St. Angelo was remedied when Congress called on the Judicial Conference to exact the same fees in Bankruptcy Administrator districts.
Judge Holcomb said that “the constitutional infirmity identified in St. Angelo, which had been dormant since the early 2000s, again became an active problem” when Section 1930 was amended in 2017.
Judge Holcomb appeared to say that the establishment of the parallel systems in itself is a violation of the Bankruptcy Clause when he said that he “would hold that the 2017 Amendment and the division of the country into [U.S. Trustee] Districts and [Bankruptcy Administrator] Districts violates the Bankruptcy Clause.”
He is not alone in believing that the dual system is unconstitutional.
Dissenting in the Fifth Circuit’s Buffets opinion, Circuit Judge Edith Brown Clement was persuaded by St. Angelo and said she “would hold that the permanent division of the country into [U.S. Trustee] districts and [Bankruptcy Administrator] districts violates the Bankruptcy Clause.” Buffets, supra, 979 F.3d at 384.
The Pending Appeals
The Fifth Circuit is the only the appeals court to rule so far on the retroactivity and constitutionality of the increase.
A similar appeal was argued on December 8 in the Fourth Circuit and is sub judice. 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.
On November 30, the U.S. Court of Federal Claims adopted the Fifth Circuit’s analysis in Buffets and upheld the constitutionality of the 2017 increase. See Acadiana Management Group LLC v. U.S., 151 Fed. Cl. 121 (Ct. Cl. Nov. 30, 2020). A petition for reconsideration is pending. To read ABI’s report, click here.
Disagreeing with the Fifth Circuit and most lower courts, District Judge John W. Holcomb of Riverside, Calif., held that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program is unconstitutional and not applicable to pending cases.
Siding with the dissenter in the Fifth Circuit, Judge Holcomb even said in his April 1 opinion that the division of the country into U.S. Trustee and Bankruptcy Administrator districts in itself is a violation of the Bankruptcy Clause of the Constitution.
Typical Facts in Pending Cases
The facts before Judge Holcomb were similar to those in cases where other debtors challenged the steep increase in fees for the U.S. Trustee Program.
The debtor filed a chapter 11 petition in May 2016 and had been paying about $13,000 a quarter to the U.S. Trustee. When the increase came into effect as of January 1, 2018, the fee jumped to an average of some $87,500 per quarter for 2018 until the case ended in a structured dismissal in 2019.
To recover the $600,000 difference between the old rate and the new rate, the debtor sued in district court after dismissal of the bankruptcy case, contending that the increase was not retroactive. Even if the statute made the increase retroactive, the debtor argued that the existence of the parallel U.S. Trustee and Bankruptcy Administrator districts made the increase unconstitutional because the fees were not uniform.
The debtor won on both counts, and more. The opinion by Judge Holcomb is the most thorough so far in parsing the issues.