Circuit Courts Divided over Whether U.S. Trustee Fee Increase Is Constitutional

The U.S. Trustee Program (USTP), an arm of the Department of Justice that provides oversight for bankruptcies in all but two states, is funded by fees charged to debtors (U.S. Trustee fees). In Alabama and North Carolina, a Bankruptcy Administrator program, run by the Judicial Conference of the United States, provides a similar function and charges its own fees (Bankruptcy Administrator fees). Congress initially provided that the Bankruptcy Administrator districts would eventually become U.S. Trustee districts, but the division is now permanent.

The 2018 Fee Increase

In 2017, subject to certain conditions, Congress increased the U.S. Trustee fees for debtors with quarterly disbursements of over $1 million to offset an anticipated shortfall in funding for the USTP. Among other changes, the maximum quarterly U.S. Trustee fee was raised from $30,000 to $250,000, and the maximum charge was triggered by disbursements of $25 million rather than $30 million. Some judicial districts applied the increased U.S. Trustee fees to all cases pending as of Jan. 1, 2018. The Judicial Conference raised Bankruptcy Administrator fees only for cases filed on or after Oct. 1, 2018.

The Legal Challenges

Debtors and liquidating trusts challenged the increased U.S. Trustee fees, predominantly on two grounds. First, uniformity: Debtors who filed their cases before Oct. 1, 2018, paid increased fees unless they filed in Alabama or North Carolina. This, they argued, violated the Constitution’s requirement that taxes and bankruptcy laws be uniform.[1] Second, retroactivity: Debtors who filed bankruptcy before the fee increase was announced argued that they were not given notice of the upcoming fees in violation of the Due Process Clause of the Fifth Amendment.

Results have been mixed among the lower courts. In the past year, three circuit courts have reached the merits of these issues. Fourth and Fifth Circuit panels unanimously rejected the retroactivity argument and held 2-1 that the increased U.S. Trustee fees satisfied the uniformity requirement. In contrast, the Second Circuit unanimously held that the increased U.S. Trustee fees violated the uniformity requirement.

The Fifth Circuit addressed the issue first.[2] In that case, the debtor restaurants had confirmed their plan of reorganization before the U.S. Trustee fee increase went into effect. The debtors in that case first argued that they did not qualify for the enhanced fees because they made less than $1 million in disbursements under their plan of reorganization per quarter; nearly all of their disbursements were the operating expenses of the reorganized debtors, including wages, food and supplies. The Fifth Circuit rejected this argument, reasoning that since “disbursements” included operating expenses while the debtor was in bankruptcy, the same term should include operating expenses after the debtor had emerged from bankruptcy.[3] The court next concluded that the U.S. Trustee fees were triggered by future disbursements by a debtor, not the past filing of a bankruptcy; thus, while they might have upset expectations, they were prospective rather than retroactive fees.[4] On uniformity, the Fifth Circuit held that the U.S. Trustee fees were (1) a user fee, not a tax; and (2) uniform because the distinctions among fees were not geographically based. On the latter point, the court reasoned that Congress reacted to a fiscal problem in the USTP with a fix directed at that program. The geographic impact was secondary.

Judge Clement dissented on this last point. In her view, the Bankruptcy Administrator and U.S. Trustee programs existed separately only because of geographic concerns: the objections of Alabama and North Carolina officials to joining the USTP. There were not different circumstances in those states justifying different treatment, so it was argued that a change to the U.S. Trustee fees without a change to the Bankruptcy Administrator fees had a primary geographic impact. She would have followed a Ninth Circuit precedent that in her view held that the exclusion of Alabama and North Carolina from the USTP was unconstitutional and would have reduced the U.S. Trustee fees to equal the Bankruptcy Administrator fees as a remedy.[5]

The Fourth Circuit case, Siegel v. Fitzgerald (In re Circuit City Stores Inc.), involved the operations of a liquidating trust under a plan confirmed in 2010.[6] The U.S. Trustee fees assessed in the first three quarters of 2018 nearly matched the fees charged during the first seven years of the case.[7] The Fourth Circuit majority generally followed Buffets on both the uniformity and retroactivity issues. Judge Quattlebaum dissented on the uniformity issue, reasoning, like Judge Clement, that “[j]ustifying the differences here on the fact that the Trustee Program districts face the budgetary problems ... ignores the fact that those districts only face the budgetary problems because Congress treated them differently in the first place.... And Congress did that purely based on geography.”[8] He also would have rejected arguments from the U.S. Trustee that “non-substantive” provisions do not require uniformity, and that 28 U.S.C. § 1930(a)(7), which provided that the Judicial Conference “may require” the Bankruptcy Administrator Fees to equal the U.S. Trustee fees, in fact required the Judicial Conference to adopt equal fees. Judge Quattlebaum recognized that the Bankruptcy Administration Improvement Act of 2020, which revised 28 U.S.C. § 1930(a)(7) to provide that the Judicial Conference “shall require” the same fees as the U.S. Trustee fees, may resolve constitutional issues for new debtors.

The Second Circuit unanimously held that the increased U.S. Trustee fees violated the uniformity requirement for largely the same reasons as the partial dissents to the prior cases.[9] In addition to those reasons, the Second Circuit acknowledged that a truly “geographically isolated problem” could be solved through geographically limited legislation consistent with the Bankruptcy Clause, but it must “apply uniformly to a defined class of debtors[.]”[10] The U.S. Trustee fee increase failed this test because the law applied to debtors who made more than $1 million in quarterly disbursements without any finding that no such debtors existed in North Carolina or Alabama. The Second Circuit distinguished a Supreme Court case authorizing geographic limitations on railroad reorganizations where every relevant debtor at the time of enactment, and for the next 180 days, had filed within the relevant geographic area.[11]

Conclusion

In conclusion, there is still a significant split in authority at the circuit court level over whether debtors who filed for bankruptcy before Oct. 1, 2018, can be subjected to the increased U.S. Trustee fees. The increased fees are applicable in the Fourth and Fifth Circuits, but not in the Second Circuit. Parties should pay attention to these fees when planning disbursements in bankruptcy.