We already have a circuit split on the constitutionality of the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program. The Second Circuit found a violation of the Bankruptcy Clause of the Constitution because the increase did not apply immediately to debtors in two states with bankruptcy administrators.
The Fourth and Fifth Circuits see no constitutional infirmity.
Bankruptcy Judge John E. Hoffman, Jr. of Columbus, Ohio, joined the fray by finding no constitutional violation in his July 13 opinion. The debtor should apply for a direct appeal to the Sixth Circuit, thus allowing the Cincinnati-based appeals court to stake out a position before the Supreme Court rules on the split.
The three Second Circuit judges in Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2d Cir. May 24, 2021), are not the only circuit-level jurists to find a constitutional violation. Dissenters in both the Fourth and Fifth Circuits would have found constitutional transgressions. See Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. April 29, 2021), and Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. Nov. 3, 2020). To read ABI’s discussion of Circuit City and Buffets, click here and here. To read ABI’s report on Clinton Nurseries, click here.
Even if the Supreme Court grants certiorari to resolve the split, the high court may not hear the case before the term to begin in October 2022. Why? Because the U.S. Trustee in Clinton Nurseries has been granted an extension until August 9 for filing a petition for panel rehearing and rehearing en banc.
Although the Second Circuit disposes of rehearing petitions with alacrity, the last briefs on a certiorari petition may not be filed early enough in the winter of 2021-2022 to allow oral argument before the term ends in June 2021.
There is also a class action pending in the Court of Federal Claims, where the judge adopted the analysis of the Fifth Circuit and dismissed. See Acadiana Management Group LLC v. U.S., 19-496, 151 Fed. Cl. 121 (Ct. Cl. Nov. 30, 2020). The case is on appeal to the Federal Circuit. For ABI’s report on Acadiana, click here.
Because the outcome of the class action will have a substantial economic effect on hundreds of chapter 11 cases throughout the country, this writer hopes (and expects) that the Supreme Court will grant certiorari. This writer predicts that the Court will tackle the issue and hold oral argument in the fall of 2022.
Judge Hoffman’s Case
The increase in fees for the U.S. Trustee system came into effect for the quarter beginning January 1, 2018. In the two states with bankruptcy administrators, the increase did not come into effect until October 2018.
The chronology in the case before Judge Hoffman was different, because the debtor filed a chapter 11 petition after the increase became effective in U.S. Trustee districts but before the increase in bankruptcy administrator districts. Judge Hoffman’s debtor was therefore not in a position to argue that Congress did not intend for the increase to apply to pending cases.
The debtor confirmed a plan in January 2019. The trustee for the creditor’s trust filed an adversary proceeding contending that the increase offended both the Tax Uniformity Clause, the uniformity aspects of the Bankruptcy Clause and the Takings Clause of the U.S. Constitution. The creditor’s trust claimed that the debtor had been required to pay $254,000 more than it would under the “old” fee schedule.
Regarding the Tax Uniformity Clause, Judge Hoffman adopted the approach of the Fifth Circuit. He held that the U.S. Trustee fees are user fees, not taxes. Because the tax clause only applies to taxes, the debtor’s argument failed.
Regarding the Bankruptcy Clause, Judge Hoffman noted how all courts agree that the fee statute is a law on the subject of bankruptcies, making the clause applicable.
However, Judge Hoffman took sides with the majority to find no uniformity problem, because the Supreme Court has held that the uniformity clause is “geographical and not personal.” Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188 (1902).
Judge Hoffman said that Congress was solving a geographically isolated problem because underfunding only existed in U.S. Trustee districts. Furthermore, he said that the delay in the increase in bankruptcy administrator districts resulted from a failure of implementation or a delay in implementation occasioned by the Judicial Conference.
Judge Hoffman therefore held that “actions that were or were not taken as part of the implementation of the statute do not make the statute non-uniform.”
Citing controlling Sixth Circuit authority, Judge Hoffman ended his opinion by finding no violation of the Takings Clause of the Fifth Amendment. His circuit has held that the clause does not apply to a challenge to the imposition of a monetary obligation.
On the Takings Clause, Judge Hoffman said that every court to consider the question had reached the same conclusion.
On cross motions for summary judgment, Judge Hoffman granted summary judgment in favor of the U.S. Trustee and found no constitutional violation.
We already have a circuit split on the constitutionality of the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee Program. The Second Circuit found a violation of the Bankruptcy Clause of the Constitution because the increase did not apply immediately to debtors in two states with bankruptcy administrators.
The Fourth and Fifth Circuits see no constitutional infirmity.
Bankruptcy Judge John E. Hoffman, Jr. of Columbus, Ohio, joined the fray by finding no constitutional violation in his July 13 opinion. The debtor should apply for a direct appeal to the Sixth Circuit, thus allowing the Cincinnati-based appeals court to stake out a position before the Supreme Court rules on the split.