In a long-anticipated decision, on June 6, 2022, the Supreme Court unanimously struck down a 2017 increase in U.S. Trustee fees as unconstitutional. The Court held that the increase was a violation of the Constitution’s Bankruptcy Clause,1 which empowers Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.”2 The fees in question were non-uniform—two states do not participate in the U.S. Trustee program and thus had a distinct fee structure. The decision will have interesting and immediate ramifications. It seems likely that debtors, creditors’ committees, liquidating trustees and other case constituents will be analyzing whether their respective U.S. Trustee was overpaid, and whether it is economical to seek a recovery of excess fees paid.
Background
The U.S. Trustee Program (the “Trustee Program”) was created by Congress to oversee the administration of bankruptcy cases and private trustees. Two states, Alabama and North Carolina, do not participate in the Trustee Program, though Bankruptcy Administrators carry out the same tasks through what is known as the Administrator Program. Prior to 2017, the Trustee Program and Administrator Program required all similarly situated chapter 11 debtors to pay similar fees to fund administrative duties. In order to supplement funding for the Trustee Program, as part of a 2017 appropriations bill (the “2017 Act”),3 Congress increased fees from a maximum of $30,000 to a maximum of $250,000 for both pending and newly-filed chapter 11 debtors with disbursements of at least $1 million. On the other hand, the two states in the Administrator Program did not adopt the fee increase until October 2018 pursuant to a Judicial Conference order and applied the increase to newly-filed cases only. Recognizing an issue, Congress amended the statute governing parity of fees between Trustee Program and Administrator Program districts in 2021 that required equal imposition of fees across the two programs. As a result of the delayed fee increase in the Administrator Program, debtors in U.S. Trustee districts may have paid significantly more in quarterly fees than those in Administrator Program districts from January 1, 2018 through January 1, 2021.
Based on the disparity, a number of parties challenged the Trustee Program fee increase as unconstitutional.4 The Supreme Court granted certiorari to consider an appeal arising out of the Fourth Circuit and the bankruptcy of Circuit City. Circuit City had filed suit to recover a $576,142 discrepancy in fees while its chapter 11 cases were pending in the Eastern District of Virginia (a Trustee Program district).5 Bankruptcy Judge Kevin R. Huennekens agreed that the fee increase was nonuniform across districts in violation of the Bankruptcy Clause.6 A divided Fourth Circuit reversed, however, finding that the Bankruptcy Clause only forbids arbitrary geographic differences. The Fourth Circuit ruled that the fee increase was implemented to remedy the dwindling funding of the Trustee Program and thus was not arbitrary.7
The High Court’s Holding
The Supreme Court reversed the Fourth Circuit with Justice Sotomayor writing an opinion for a unanimous bench holding that the fee system was unconstitutional.
First, the Court rejected the U.S. Trustee’s argument that the 2017 Act was not a law on the subject of bankruptcies, but rather an administrative law auxiliary to substantive bankruptcy law. If this were the case, the Act would not be subject to the Bankruptcy Clause and instead could be constitutional under the Necessary and Proper Clause.8 The Court held that the Bankruptcy Clause’s language is broad, and that the uniformity requirement encompasses both substantive and administrative laws relating to bankruptcy.9 The Court explained that it had never suggested that all administrative bankruptcy laws were enacted pursuant to the Necessary and Proper Clause, nor that the Necessary and Proper Clause permitted Congress to circumvent the limitations set by the Bankruptcy Clause.10 The Court concluded that the only subject of the 2017 Act was bankruptcy, and that the Act affected the substance of debtor-creditor relations by decreasing the funds available for payment to creditors as a result of an increase in fees paid out of the estates.11
Second, the Court held that the 2017 Act violated the Bankruptcy Clause’s uniformity requirement. Justice Sotomayor examined the Court’s prior precedents,12 and concluded that “the Bankruptcy Clause offers Congress flexibility, but does not permit arbitrary geographically disparate treatment of debtors.”13 The Court reasoned that “the uniformity requirement allows Congress to account for ‘differences that exist between different parts of the country,’ [but] does not give Congress free rein to subject similarly situated debtors in different States to different fees because it chooses to pay the costs for some, but not others.”14 The Court rejected the U.S. Trustee’s argument that the fee increase disparity was a permissible effort to solve the geographical problem of the dwindling funding of the Trustee Program.15 Justice Sotomayor conceded that the 2017 Act was in response to the regional budgetary shortfall, but stated that the shortfall itself was created because Congress “had arbitrarily separated the districts into two different systems with different cost funding mechanisms[.]”16 Justice Sotomayor reasoned that “the problems prompting [the] disparate treatment in this case . . . stem not from an external and geographically isolated need, but from Congress’ own decision to create a dual bankruptcy system funded through different mechanisms in which only districts in two States could opt into the more favorable fee system for debtors.”17
Lastly, the Court noted that its holding should be applied limitedly and that it was not addressing the constitutionality of the dual scheme of the bankruptcy system itself.18 The Court also stated that its holding did not “impair Congress’ authority to structure relief differently for different classes of debtors or to respond to geographically isolated problems.”19
Takeaway
The Court declined to fashion a remedy in this case, punting to the Fourth Circuit to consider the “host of legal and administrative concerns with each of the remedies proposed, including practicality, feasibility, and equities of each proposal; their costs; and potential waivers by nonobjecting debtors.”20 The Court, however, did make clear that parties who paid quarterly fees to the U.S. Trustee during the period from January 2018 through January 2021 may be entitled to a refund. The petitioner here, the trustee for the liquidating trust established pursuant to Circuit City’s confirmed plan, sought a full refund of the fees it paid during the nonuniform period.21 The Fourth Circuit may reject this remedy if it follows the Second and Tenth Circuits, which have both held that the refund should be the difference between the fees paid and what those fees that would have been paid in an Administrator Program district.22 The Court’s lack of comment on a remedy preserves those prior circuit decisions on the subject and invites litigation from parties seeking refunds—which may take various forms depending on the economic costs or whether the U.S. Trustee decides to deal with these issues using a streamlined mechanism. In any case, just as in Circuit City, this decision could result in a cash infusion to certain bankruptcy estates, which may ultimately increase creditor recoveries in a meaningful way. Many of the cases that occurred in the 2018-2021 time period were lean cases (think retail cases during the pandemic), so fee recovery could be a significant supplement to meager creditor recoveries. On the other hand, it appears as though the Trustee Program will be busy with this issue in the near future, which could stretch resources thin considering other active litigation relating to nonconsensual third party releases and the “Texas Two-Step,” for example.
1 See Siegel v. Fitzgerald, No. 21–441 (June 6, 2022).
2 U.S. Const. Art. 1, Sec. 8, Cl. 4.
3 See Pub L. 115–72, Div. B, 131 Stat. 1229.
4 These challenges resulted in a split of decisions. Compare In re Clinton Nurseries, Inc., 988 F.3d 56 (2d Cir. 2021) (2017 Act is unconstitutional); In re John Q. Hammons Fall 2006, LLC, 15 F.4th 1011 (10th Cir. 2021) (same), with In re Circuit City Stores, Inc., 996 F.3d 156 (4th Cir. 2021) (2017 Act is constitutional); In re Buffets, LLC, 979 F.3d 366 (5th Cir. 2020) (same); United States Tr. Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp.), 22 F.4th 1291 (11th Cir. 2022) (same).
5 Siegel, slip. op. at 5.
6 In re Circuit City Stores, 606 B. R. 260, 270-71 (Bankr. E.D. Va. 2019).
7 Siegel v. Fitzgerald (In re Circuit City Stores, Inc.), 966 F.3d 156, 166 (4th Cir. 2021).
8 Siegel, slip op. at 7.
9 Id. at 6-7.
10 Id. at 7.
11 Id. at 9.
12 See generally Hanover Nat’l Bank v. Moyses, 186 U.S. 181 (1902) (addressing the uniformity requirement in rejecting a challenge to the constitutionality of the Bankruptcy Act of 1898, which permitted individual debtor exemptions); Reg’l Rail Reorganization Act Cases, 419 U.S. 102 (1974) (affirming the constitutionally of the Regional Rail Reorganization Act of 1973, which applied only to rail carriers operating within a defined region of the country); Ry. Labor Executives’ Ass’n v. Gibbons, 455 U.S. 467 (1982) (striking down the Rock Island Railroad Transition and Employee Assistance Act, in which Congress altered the order or priority of claimants in a single railroad’s bankruptcy proceedings).
13 Siegel, slip. op. at 10.
14 Id. at 11 (quoting Reg’l Rail Reorganization Act Cases, 419 U.S. 102, 159 (1974)).
15 Id. at 12-13.
16 Id. at 13.
17 Id.
18 Id. at 14.
19 Id.
20 Id. at 14-15.
21 Id.
22 See In re John Q. Hammons Fall 2006,LLC, 15 F.4th at 1026 (“[W]e remand to the bankruptcy court for a refund of the amount of quarterly fees paid exceeding the amount that Debtors would have owed in a Bankruptcy Administrator district during the same period.”); In re Clinton Nurseries, Inc., 998 F.3d at 69-70 (“To the extent [the debtor] has already paid the unconstitutional fee increase, it is entitled to a refund of the amount in excess of the fees it would have paid in a [Bankruptcy Administrator] District during the same time period.”).
