Another Circuit Upholds the 2018 Increase in U.S. Trustee Fees

Siding with the majority in the split decision by the Fifth Circuit, the Fourth Circuit ruled 2/1 on April 29 that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program applies to pending cases and violates neither the Due Process nor the Bankruptcy Clauses of the U.S. Constitution.

In dissent, Fourth Circuit Judge A. Marvin Quattlebaum, Jr. would have held the increase to be unconstitutional because some debtors in two states pay lower fees. Although the issue was not before him, Judge Quattlebaum’s dissent seems to say that the division of the country into U.S. Trustee and Bankruptcy Administrator districts is unconstitutional in itself.

The Large 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.

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. Perhaps more significantly, the increase in Alabama and North Carolina did not apply to pending cases.

Electronics retailer Circuit City had confirmed a liquidating chapter 11 plan in Virginia in 2010. The increase in 2018 obliged Circuit City’s liquidating trust to pay $575,000 more than would have been owing under the old fee schedule.

After a bankruptcy court in Texas ruled that the increase was unconstitutional and not applicable to pending cases, Circuit City sued, making the arguments that prevailed in Texas.

In July 2019, the bankruptcy court in Virginia ruled in favor of Circuit City and held that the increase was not retroactive and did not apply to pending cases. In addition, the bankruptcy court decided that the increase was unconstitutional. In re Circuit City Stores Inc., 08-35653, 2019 BL 264824, 2019 Bankr. Lexis 2121 (Bankr. E.D. Va. July 15, 2019). To read ABI’s discussion of the bankruptcy court opinion, click here.

Both sides appealed, and the Fourth Circuit granted a direct appeal, overstepping an intermediate appeal to the district court. While the appeal was pending, the Fifth Circuit reversed the Texas bankruptcy court in a 2/1 opinion, holding that the increase applied to pending cases and did not offend the constitution. See Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. Nov. 3, 2020). To read ABI’s discussion of Buffets, click here.

The Fourth Circuit’s Majority Opinion

Fourth Circuit Judge Robert B. King handed down the opinion for the majority. In substance, he agreed with the Fifth Circuit’s Buffets opinion. He said that the uniformity aspect of the Bankruptcy Clause does not “straightjacket” Congress by forbidding distinctions among classes of debtors. He said that “most courts” do not see a uniformity problem with the fee increase, although debtors with pending cases in two states do not pay the increase.

Like the Fifth Circuit, Judge King did not believe that the statute made arbitrary geographic distinctions based on the residence of the debtor. Rather, he said, the distinction is the result of Virginia’s use of the U.S. Trustee system.

Judge King explained that fees rose in U.S. Trustee districts to solve the program’s self-funding shortfall. There was not a similar problem in Bankruptcy Administrator districts where funding is from the judiciary’s general budget. He thus held that the increase did not violate the uniformity mandates of either the Due Process or Bankruptcy Clauses.

Circuit City had cross-appealed the bankruptcy court’s conclusion that the increase applied to pending cases.

Judge King first decided that Congress meant for the increase to apply to all cases, “without regard to the case’s filing date.” In his view, the increase was not retroactive because it “plainly applies only to future disbursements, which are triggered by a debtor’s conduct occurring after the effective date.” [Emphasis in original.]

Judge King said that the “increase merely upsets debtors’ ‘expectations as to amounts owed based on future distributions’” quoting Buffets, supra, 979 F.3d at 375. Debtors, he said, “reasonably expected to pay fees pursuant to some formula.”

The appeals court’s majority reversed in part and affirmed in part, ruling that the increase was constitutional and not impermissibly retroactive.

The Dissent

The dissent by Judge Quattlebaum bears reading by constitutional law buffs. Why? Because he and Fifth Circuit Judge Edith Brown Clement have all but said that the dual U.S. Trustee/Bankruptcy Administrator system is unconstitutional. Judge Clement was the dissenter in Buffets.

“Make no mistake about it,” Judge Quattlebaum said in opening his dissent. We “have two bankruptcy courts in the U.S.,” because two states have Bankruptcy Administrators. Given that the fees are lower for debtors whose cases were already pending in the two Bankruptcy Administrator states, he said that “many unsecured creditors in [48 states with U.S. Trustees] are receiving less of the amounts owed to them than similarly situated creditors in Alabama and North Carolina.”

The two systems, Judge Quattlebaum said, are “candidly and unapologetically nonuniform. And the quarterly fees that Chapter 11 debtors pay in the Trustee Program and the Bankruptcy Administrator system are also non-uniform.”

Judge Quattlebaum pointed out how the U.S. Trustee system is funded by debtors, while the Bankruptcy Administrators’ budgets come from the appropriations for the judiciary. He rejected the contention that there is no constitutional problem because uniformity only applies to substantive bankruptcy laws.

In Judge Quattlebaum’s view, causing similarly situated creditors to receive less in U.S. Trustee districts is “sufficiently substantive to implicate the Bankruptcy Clause.” He also rejected the notion that the fees are nonetheless uniform. To illustrate his point, he cited the Bankruptcy Administration Improvement Act of 2020, Pub. L. 116-325, 134 Stat. 5085 (2021), which became law on January 12, 2021.

The change in January used the word “shall” to mandate the increase in Bankruptcy Administrator districts. Previously, Section 1930 had used the word “may.”

“While [the amendment] likely ameliorates the uniformity issue going forward, it does not eliminate the problem in the as-applied challenge before us,” Judge Quattlebaum said.

“Indeed,” according to Judge Quattlebaum, “the difference in bankruptcy systems is arbitrary and financially damages unsecured creditors in every state other than Alabama and North Carolina.” While “the constitutionality of the two types of bankruptcy systems is not before the court, I would nonetheless hold that the amended quarterly fee statute, as applied to [Circuit City], violates the Bankruptcy Clause.”

If it were up to him, Judge Quattlebaum would have found “the amended quarterly fee statute [to be] unconstitutionally non-uniform.”

The Pending Appeals

In split decisions, the Fourth and Fifth Circuits have now upheld the fee increase both as a matter of constitutional law and statutory interpretation.

On November 30, the U.S. Court of Federal Claims adopted the Fifth Circuit’s analysis in Buffets and upheld the constitutionality of the increase in a class action. 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.

However, District Judge John W. Holcomb of Riverside, Calif., held on April 1 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. USA Sales Inc. v. Office of the U.S. Trustee, 19-02133, 2021 BL 121542 (C.D. Cal. April 1, 2021). To read ABI’s report, click here.

Judge Holcomb stayed his judgment pending appeal. The time for appeal expires around the middle of May.

There is reason to believe that the Ninth Circuit might affirm USA Sales. In 1995, the Ninth Circuit held 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).

Congress soon thereafter required the judiciary impose the same fees in Bankruptcy Administrator districts. St. Angelo then became moot, until Congress again upset the uniformity applecart by raising the fees in 2018.

If the Ninth Circuit upholds USA Sales based on St. Angelo, there will be a split of circuits and nifty questions presented to the Supreme Court on petitions for certiorari. It is within the realm of possibility that the dual U.S. Trustee/Bankruptcy Administrator systems will be found unconstitutional.

Granted, there may be a uniformity problem regarding fees for debtors with pending cases. But is there a uniformity problem because a debtor has a different government adversary in two states?

The Supreme Court may think long and hard before issuing a uniformity opinion for bankruptcy that could have wide repercussions elsewhere.