The U.S. Supreme Court agreed to resolve a circuit split and decide whether the increase in fees payable to the U.S. Trustee system in 2018 violated the uniformity aspect of the Bankruptcy Clause of the Constitution because it was not immediately applicable in the two states that have Bankruptcy Administrators rather than U.S. Trustees. See Siegel v. Fitzgerald, 21-441 (Sup. Ct.) (cert. granted Jan. 10, 2022).
Oral argument is yet to be scheduled but will likely occur in April, allowing the justices to issue a decision before the term ends in late June.
The Split and the ‘Cert Grant’
The Court granted the petition for certiorari filed by the liquidating trustee of Circuit City Stores Inc. The Circuit City trustee will be asking the justices to overturn the decision by the Fourth Circuit that found no constitutional violation. See Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. April 29, 2021). To read ABI’s report on the Fourth Circuit opinion, click here.
The chances of a grant of certiorari increased immeasurably in December when the U.S. Solicitor General urged the justices to resolve the circuit split. Needless to say, the government believes there was no constitutional infirmity.
In addition to the Fourth Circuit, the Fifth Circuit saw no lack of constitutional uniformity, even though chapter 11 debtors in two states were paying less for a time. 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.
On the three-judge panels in both the Fourth and Fifth Circuits, one judge in each circuit dissented, believing that the differing fees were unconstitutional.
Two other circuits that found violations of the Bankruptcy Clause. See Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2d Cir. May 24, 2021); and John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 20-3203, 2021 BL 380406 (10th Cir. Oct. 5, 2021). To read ABI’s reports on Clinton Nurseries and Hammons Fall, click here and here. Both decisions were unanimous.
Although the circuits are evenly spilt, five circuit judges saw a constitutional defect while four did not.
The decision by the Supreme Court in Circuit City will resolve a similar appeal now pending in the Federal Circuit. The Court of Federal Claims adopted the analysis of the Fifth Circuit, finding no constitutional violation and dismissing a class action seeking refunds for chapter 11 debtors who were paying more.
The debtor-plaintiff appealed and is asking the Federal Circuit to reinstate the class action, which could mean refunds for chapter 11 debtors nationwide whose cases were filed before the increase went into effect in Bankruptcy Administrator districts. See Acadiana Management Group LLC v. U.S., 19-496, 151 Fed. Cl. 121 (Ct. Cl. Nov. 30, 2020). Oral argument in the Federal Circuit is scheduled for February 7. For ABI’s report on Acadiana, click here.
The Underlying Facts
The Court will resolve the circuit split that arose from the increase in fees in U.S. Trustee districts that became effective as of January 1, 2018. The increase was significant. For the largest companies reorganizing in chapter 11, the maximum quarterly fee rose from $30,000 to $250,000.
Challenges arose throughout the country because the increase did not become effective until nine months later in Alabama and North Carolina, where there are Bankruptcy Administrators rather than U.S. Trustees.
The Legal Issues to Be Decided
The government contends that the Bankruptcy Clause does not apply because the fees are governed by 28 U.S.C. § 1930(a)(6), not the Bankruptcy Code. To the government’s way of thinking, Section 1930 is not a “law of the subject of Bankruptcies.” Rather, the Solicitor General has said it is a user fee.
The government’s argument under Section 1930 was rejected even by the circuits that found the increase otherwise constitutionally valid.
When the justices rule, they may primarily focus on Regional Rail Reorganization Act Cases, 419 U.S. 102 (1974), where the Supreme Court upheld a railroad reorganization law that applied only to railroads in a specific region of the country where Congress saw financial problems.
Will the justices follow Regional Rail and say that the funding disparity responded to a regional problem without constitutional significance?
What the Decision Might Mean
Whenever the Supreme Court rules in a bankruptcy case, the decision always raises more questions than it answers.
The Court’s opinion regarding fees may shed light on the lingering question about the constitutionality of the dual system of U.S. Trustees and Bankruptcy Administrators.
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).
Most recently, a district judge in California read St. Angelo to mean that the parallel systems in themselves are a violation of the Bankruptcy Clause. See USA Sales Inc. v. Office of the U.S. Trustee, 532 F. Supp. 3d 921 (C.D. Cal. April 1, 2021). To read ABI’s report, click here.
The California judge is not alone. 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.
If the Supreme Court finds no defect in the dual-fee system, the implications for bankruptcy may be few. If the high court finds a lack of constitutional uniformity, there may be ramifications in bankruptcy beyond the dual system itself. For instance, what about panel trustees and standing trustees? Are debtors entitled to have trustees who are employed and controlled directly by the government?
Historically, uniformity has not been an issue that arises frequently in bankruptcy. It has more often been an issue regarding taxation. Whatever the Supreme Court says about uniformity in the bankruptcy context may spawn disputes regarding uniformity in taxation.
The U.S. Supreme Court agreed to resolve a circuit split and decide whether the increase in fees payable to the U.S. Trustee system in 2018 violated the uniformity aspect of the Bankruptcy Clause of the Constitution because it was not immediately applicable in the two states that have Bankruptcy Administrators rather than U.S. Trustees. See Siegel v. Fitzgerald, 21-441 (Sup. Ct.) (cert. granted Jan. 10, 2022).
Oral argument is yet to be scheduled but will likely occur in April, allowing the justices to issue a decision before the term ends in late June.
The Split and the ‘Cert Grant’
The Court granted the petition for certiorari filed by the liquidating trustee of Circuit City Stores Inc. The Circuit City trustee will be asking the justices to overturn the decision by the Fourth Circuit that found no constitutional violation. See Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. April 29, 2021).