Although the U.S. Supreme Court will resolve the circuit split this spring, the Eleventh Circuit broke the tie among the circuits by upholding the constitutionality of the 2018 increase in fees paid to the U.S. Trustee system that was not immediately applicable in two states with Bankruptcy Administrators.
The Eleventh Circuit’s January 14 opinion gives the Supreme Court a new theory for finding no constitutional offense: “Congress properly enacted a law in 2017 understanding it would increase fees for all districts.”
There was a dissent in the Eleventh Circuit that was characterized as a concurrence. The dissenting judge believes that the uniformity aspect of the Bankruptcy Clause was offended, but he concurred with the result, reasoning that the debtor was not entitled to a remedy.
The Fee Increase
Effective on January 1, 2018, Congress increased the fees paid by chapter 11 debtors to the U.S. Trustee system. The increase was significant. For the largest companies reorganizing in chapter 11, the maximum quarterly fee rose from $30,000 to $250,000.
The fee increase in U.S. Trustee districts became effective on January 1, 2018, and was applicable to pending cases. The fee increase in the Bankruptcy Administrator districts did not come into effect for nine months and did not apply to pending cases, only to newly filed cases.
In the appeal to the Eleventh Circuit, the chapter 11 debtor had confirmed a plan before the increase came into effect. The assets had been turned over to a liquidating trust to pay creditors and administer the remaining estate.
The increase paid by the liquidating trust was $125,000, or 3.5 times more than the fees would have been under the “old” fee schedule. The liquidating trustee sued to recover the increase, contending that the increase violated the Bankruptcy Clause because the increase did not become effective until nine months later in the two states with Bankruptcy Administrators rather than U.S. Trustees.
The bankruptcy court decided that the increase was constitutional, generally speaking, but was unconstitutionally nonuniform as to the 2% of the fees that Congress appropriated for “national purposes.”
Both sides appealed, and the Eleventh Circuit granted a direct appeal, overstepping an interim appeal to the district court.
The ‘Cert’ Grant
The Supreme Court granted certiorari to the Fourth Circuit on January 10 to resolve the circuit split on the constitutionality of the 2018 increase. See Siegel v. Fitzgerald, 21-441 (Sup. Ct.) (cert. granted Jan. 10, 2022). To read ABI’s report on the grant of certiorari, click here.
Like the Fourth Circuit, whose decision will be reviewed in Siegel, the Fifth Circuit found no constitutional infirmity. 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 reports, click here and here.
Two other circuits 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.
Oral argument in the Supreme Court has not yet been scheduled, but the case will likely be heard in April, allowing the justices to issue a decision before the end of the term in late June.
The Eleventh Circuit’s New Theory
It was not immediately apparent to this writer why the Eleventh Circuit chose to take sides on a split to be resolved by the Supreme Court within a few months. As we will discuss below, the Atlanta-based appeals court offered a different rationale for upholding the constitutionality of the increase.
However, the 76-page opinion of the court by Circuit Judge R. Lanier Anderson, III began on the usual trajectory. First, he held that the increase did not offend substantive due process. He reasoned that vested rights were not impaired, constitutionally speaking.
Next, Judge Anderson knocked down the idea that the increase was impermissibly retroactive. Like other courts, he said that the increase applied only to disbursements made after enactment of the increase. He then ruled that the increase pertained to “user fees,” not taxes, thus obviating any argument that the increase was a nonuniform tax.
Like every other circuit court, Judge Anderson held that the increase was a bankruptcy law, subject to the strictures of the Bankruptcy Clause.
Before he examined the uniformity aspect of the increase, Judge Anderson was careful to say that the debtor had not argued that the dual system of U.S. Trustees and Bankruptcy Administrators was unconstitutional in itself. He thus left open the argument that the fee increase was unconstitutional because the dual system is unconstitutional.
Judge Anderson held “that the 2017 Amendment is uniform and fully complies with the requirements of the Bankruptcy Clause because the flexibility inherent in the Clause cautions us against a strict inquiry that would make dispositive Congress’ use of two different statutory vehicles to impose quarterly fees.”
Judge Anderson noted that the Supreme Court had found only one law to violate the Bankruptcy Clause. The clause, he said, “is thus understood to prohibit private bankruptcy bills, as [Ry. Lab. Execs.’ Ass’n v. Gibbons, 455 U.S. 457 (1982)] makes clear, as well as restrictions based on regionalism that do not address a geographically isolated problem.” Again citing Gibbons, he said “that the Bankruptcy Clause imposes its limited constraint on congressional power.”
Consequently, Judge Anderson said that “the flexibility of the Bankruptcy Clause permits Congress to choose how to provide for the implementation of a uniform law.”
Judge Anderson therefore held “that the uniformity requirement does not require that Congress increase fees by mandating them in all districts in the country.” The delayed increase in Bankruptcy Administrator districts did not violate the Bankruptcy Clause because “Congress enacted the 2017 Amendment with the understanding that the quarterly fees would be increased uniformly across all bankruptcy districts” once the Judicial Conference got around to raising the fees in Bankruptcy Administrator districts.
Judge Anderson buttressed his conclusion by referencing the disparity in state exemptions, which the Supreme Court has held to entail no violation of the Bankruptcy Clause. He said that the “disparity [in exemptions] was not only expressly and knowingly authorized by Congress, the disparity is ongoing and permanent.”
By analogy to exemptions, Judger Anderson said, “it follows, a fortiori, that there is no violation of the uniformity requirement in the instant context.”
Having found that the disparate increase was permissible given the flexibility in the Bankruptcy Clause, Judge Anderson saw no reason to decide whether the increase was a permissible response to “the geographically isolated problem exception.”
Affirming the bankruptcy court by ruling that the increase itself was constitutional, Judge Anderson held that the bankruptcy court erred in deciding that the disparate fee was unconstitutional to the extent of the 2% earmarked for “national purposes.”
Concurrence by Judge Jordan
Circuit Judge Adalberto Jordan wrote a two-page concurrence, noting there was no constitutional challenge to the dual system of Bankruptcy Administrators and U.S. Trustees. He speculated that the Second and Tenth Circuits “may have relied in part on their suspicions about the constitutionality of the dual bankruptcy system.”
Judge Jordan joined in Judge Anderson’s opinion “in full” because there was “no challenge here to the existence of the two different bankruptcy systems in the United States.”
Concurrence (Dissent) by Judge Brasher
Circuit Judge Andrew L. Brasher wrote a six-page concurrence in the judgment that reads like a dissent.
“I believe that the substantial variance in fees as between the Trustee and Bankruptcy Administrator districts amounts to an unconstitutional lack of uniformity,” Judge Brasher said. In his opinion, “the flexibility principle is not so broad that it covers meaningfully reducing payments to creditors based purely on the location of the pending bankruptcy case . . . . I believe that the substantial variance in fees as between the Trustee and Bankruptcy Administrator districts amounts to an unconstitutional lack of uniformity.”
Judge Brasher nonetheless concurred in the result given his belief that the debtor was not entitled to the remedy it sought: a refund of the overpayment. In his view, the “proposed remedy contravenes the intent of Congress.”
That is to say, Congress intended to raise the fees throughout the country, but giving the debtor a refund would be contrary to the intent of Congress.
Judge Brasher said that the debtor should have joined the Judicial Conference as a defendant, because the Judicial Conference was responsible for setting the fee in Bankruptcy Administrator districts. Because the Judicial Conference was not a defendant, Judge Brasher said that the debtor was “left without a remedy.”
Although the U.S. Supreme Court will resolve the circuit split this spring, the Eleventh Circuit broke the tie among the circuits by upholding the constitutionality of the 2018 increase in fees paid to the U.S. Trustee system that was not immediately applicable in two states with Bankruptcy Administrators.
The Eleventh Circuit’s January 14 opinion gives the Supreme Court a new theory for finding no constitutional offense: “Congress properly enacted a law in 2017 understanding it would increase fees for all districts.”
There was a dissent in the Eleventh Circuit that was characterized as a concurrence. The dissenting judge believes that the uniformity aspect of the Bankruptcy Clause was offended, but he concurred with the result, reasoning that the debtor was not entitled to a remedy.