The Supreme Court heard oral argument on April 18 in a case 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).
The government conceded at oral argument that the fees were up to seven times higher for several months in the two states with Bankruptcy Administrators. Still, the government contended that the fees were not substantive but were procedural and therefore did not offend the uniformity aspects of the Bankruptcy Clause.
If the Court were to decide there was a constitutional violation, the government argued that the proper relief would not be refunds to the debtors in 48 states who paid more. Rather, the government contended that the proper relief would require debtors in the two states to reopen their cases and pay the higher fees by requiring disgorgement from creditors who had been paid more because the fees were lower.
In sum, the justices seemed to force the government into illogical positions. Chief Justice John G. Roberts, Jr. did not appear to be buying the government’s argument about the procedural nature of the fees. He said that cash “is a big deal in bankruptcy” and that higher fees would influence where a company files for bankruptcy.
Because the size of the fees “really makes a difference to people in bankruptcy,” the Chief Justice told the government that the case was “different than the sort of procedural example” that the Solicitor General had given.
The Split
In Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. April 29, 2021), the Fourth Circuit found no constitutional violation even though the debtor had paid substantially higher fees to the U.S. Trustee System. To read ABI’s report on the Fourth Circuit opinion, click here.
In January, the Supreme Court granted the petition for certiorari filed by the liquidating trustee of Circuit City after the Solicitor General recommended that the Court resolve the circuit split.
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 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.
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. See Acadiana Management Group LLC v. U.S., 19-496, 151 Fed. Cl. 121 (Ct. Cl. Nov. 30, 2020). The Federal Circuit has postponed oral argument pending the Supreme Court’s decision in Circuit City. For ABI’s report on Acadiana, click here.
A Rocky Start for the Debtor
Daniel L. Geyser from Haynes & Boone LLP argued in the Supreme Court on behalf of Circuit City, the petitioner. It did not go well initially for Mr. Geyser, but that’s not unusual. Sometimes, the justices ask unfriendly questions like devil’s advocates.
Arguing for the government, Deputy Solicitor General Curtis E. Gannon had a more difficult time. In questioning Mr. Gannon, the justices seemed more focused on the proper relief, possibly leading an observer to conclude that some justices were inclined to find a constitutional violation.
The constitutionality of the dual systems of U.S. Trustees and Bankruptcy Administrators loomed over the proceedings. For example, Justice Elena Kagan asked a question based on an assumption that the dual systems are constitutional. If they are permissible, she said, “doesn’t [the different fee structure] have to be constitutional as well?”
Mr. Geyser took the position that the dual systems offend the Constitution, but he questioned whether any litigant could ever show a sufficiently concrete injury to warrant appellate standing.
Some questions from Justice Sotomayor suggested that she might be on the government’s side, but then she said, “What I have a problem with is creating a system permanently that lets taxpayers assume costs for two states but doesn’t give the other 48 [states] a choice.”
Justice Brett M. Kavanaugh was the first to mention a theme taken up by other justices when he said that the differing fees “seems to have been a mistake.” He was referring to the assumption by Congress that the Judicial Conference would immediately raise the fees in the Bankruptcy Administrator districts. As it turned out, the Judicial Conference did not raise the fees for several months, and then only for newly filed cases.
If there was a mistake, it would not have been entirely the fault of the Judicial Conference because the statute says that the Judicial Conference “may” raise the fees in its districts.
The government took the position that the dual systems are constitutional and that the differing fees are therefore constitutional. If the Court were to disagree, the government argued that refunds would not be the proper remedy.
The government argued that the fees were not a substantive bankruptcy law required to be uniform. Justice Kagan jumped on the government, saying, “But this is a top-down imposition of a fee structure that predictably can’t help but disadvantage both debtors and creditors . . . in 48 states as compared to two states.”
Later, Justice Kagan said to the government’s lawyer, “You haven’t really given a reason why this [dual fee structure] is rational.”
Focusing on remedy, the Chief Justice said, “I’d be surprised if the government thought it could go and claw back from all [the debtors in the two states] rather than equalize by giving back the [higher] fees” in the U.S. Trustee districts. Suggesting the fees were not simply procedural, he said that money “is a big deal in bankruptcy.”
The Chief Justice ended the proceedings by saying, “The case is submitted.” The Court will issue a decision before the end of the term, probably in June.
To listen to an audio recording of argument, click here.
The Supreme Court heard oral argument on April 18 in a case 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).
The government conceded at oral argument that the fees were up to seven times higher for several months in the two states with Bankruptcy Administrators. Still, the government contended that the fees were not substantive but were procedural and therefore did not offend the uniformity aspects of the Bankruptcy Clause.
If the Court were to decide there was a constitutional violation, the government argued that the proper relief would not be refunds to the debtors in 48 states who paid more. Rather, the government contended that the proper relief would require debtors in the two states to reopen their cases and pay the higher fees by requiring disgorgement from creditors who had been paid more because the fees were lower.
In sum, the justices seemed to force the government into illogical positions. Chief Justice John G. Roberts, Jr. did not appear to be buying the government’s argument about the procedural nature of the fees. He said that cash “is a big deal in bankruptcy” and that higher fees would influence where a company files for bankruptcy.
Because the size of the fees “really makes a difference to people in bankruptcy,” the Chief Justice told the government that the case was “different than the sort of procedural example” that the Solicitor General had given