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Authored By: Katie Larsen
Member, American Journal of Trial Advocacy
Fees collected from debtors who have filed bankruptcy fund the Justice Department’s U.S. Trustee (UST) Program, which oversees the administration of bankruptcy cases in 48 states.[1] The exception to the rule is Alabama and North Carolina, as Congress established the bankruptcy administration (BA) program to administer and monitor cases in the six judicial districts in those states in 1986.;[2] Starting in 2018, Congress amended the Bankruptcy Judgeship Act[3] to increase U.S. Trustee Program quarterly fees for all debtors who file bankruptcy within the UST program.[4] Districts operating under the BA system in Alabama and North Carolina did not match the fee increase until eight months after it went into effect for all other debtors.[5] This created a lack of uniformity, and now debtors are challenging the geographical fee disparity as unconstitutional and seeking refunds of the extra money they paid.[6]
This issue has split federal appeals courts, but this split may soon be resolved as the Supreme Court has granted a writ of certiorari in Siegal v. Fitzgerald.[7] The specific issue that split the appeals courts and that is to be decided by the Supreme Court is “whether the Bankruptcy Judgeship Act violates the uniformity requirement of the Constitution’s Bankruptcy clause by increasing quarterly fees solely in districts under the [UST] Program and not those under the [BA] Program.”[8] The Tenth and Second Circuits held that the lack of uniformity in the fee hike violates the Constitution.[9] The Fourth and Fifth Circuits held that the lack of uniformity fit an exception and therefore, the disparity was Constitutional.[10]
Circuit Split:
In re: Clinton Nursery,[11] The United States Court of Appeals for the Second Circuit held that the increase in fees was unconstitutional because it violated the uniformity requirement of the Bankruptcy Clause.[12] Additionally, the court found that the “exception” relied upon by the Fourth and Fifth Circuit fails to account for the similarity of Chapter 11 debtors.[13] The case originated when Clinton Nurseries (Clinton) filed Chapter 11 in 2017 in the District of Connecticut, a UST district.[14] Clinton paid fees per the increase outlined in the 2017 Amendment before the fee increase was applied in the BA districts.[15] Clinton challenged the increased UST quarterly fees because it had to pay significantly more than similarly situated debtors in Alabama and North Carolina.[16] The Bankruptcy court initially denied Clinton’s challenge finding that the amendment was “uniform on its face.” citing the “geographically isolated problem” exception to the rule that Bankruptcy law must be uniform.[17] The exception was addressed by the Supreme Court in Blanchette v. Connecticut,[18] approving special laws for bankrupt railroads in a specific region.[19] Blanchette is also the basis on which the Fourth and Fifth Circuits upheld the constitutionality of the fee increase.[20] However, this Court held that the other circuits “overlooked a critical distinction.” in their analysis.[21]
In Blanchette, the Court held that Congress might “take into account differences that exist between different parts of the country, and…fashion legislation to resolve geographically isolated problems.”.[22] However, the Court in Gibbons later clarified that “[t]o survive scrutiny under the Bankruptcy Clause, a law must at least apply uniformly to a defined class of debtors.”[23] In Blanchette, the statute applied only to bankrupt railroad companies, and there were no debtors located outside the statutorily designated region.[24] In contrast, the Court pointed out that the amendments fee increase applies to the class of debtors whose disbursements exceed $1 million; there is no evidence to suggest that debtors of the same broad class do not exist in the BA district.[25] The problem avoided in Blanchette is now unavoidable as two debtors, identical in all respects except for the geographical location in which they filed bankruptcy, are being charged different fees.[26] The Second Circuit remanded the case and ruled that Clinton Nurseries is entitled to a refund of all the extra fees it paid over and above what it would have paid in a BA district during the same period.[27]
The United States Court of Appeals for the Tenth Circuit joined the Second Circuit with its ruling in In re: John Q. Hammons, holding that the fee disparity violated the Constitution’s Bankruptcy Clause, which requires uniformity.[28] In June of 2016, multiple debtors associated with John Q. Hammons Hotel and Resorts filed chapter 11 bankruptcy in the District of Kansas, a UST district.[29] The Court noted that the debtors could have chosen to file in a BA district because of its many business locations.[30] On appeal, 76 debtors associated with John Q. Hammons Hotels & Resorts argued that they overpaid the U.S. Trustee by $2.5 million.[31] Like the Second Circuit, this Court rejected the analogy to Blanchard, finding the reasoning relied on by the Fourth and Fifth Circuits flawed.[32] The Court held the 2017 Amendment unconstitutionally nonuniform, “because it allows higher quarterly disbursement fees on Chapter 11 debtors in Trustee districts than charged to equivalent debtors in Bankruptcy Administrator districts.”.[33] In the ruling, the Court rejected the Trustee’s argument that the class of debtors at issue are exclusively UST district debtors and that the Trustee Program underfunding is a geographically isolated problem warranting geographic-specific legislation.[34] The Court added, “No one disputes that political maneuvering, not bankruptcy-policy considerations, led to the dual bankruptcy-administration system (which we’re not criticizing, but simply noting in analyzing uniformity).”[35] In dissent, Judge Robert E. Bacharach attributed the two separate bankruptcy systems to “politics” adding, that the debtors only challenged the fees and not the dual system.[36] The Tenth Circuit Court of Appeals acknowledged that the Fourth and Fifth Circuits had upheld the Amendment against a Bankruptcy Clause challenge.[37] But it agreed with the Second Circuit’s “well-reasoned and unanimous ruling to the contrary.”.[38]
In Henry Hobbs jr. v. Buffets LLC, The United States Court of Appeals for the Fifth Circuit addressed the claim that the delayed implementation of increased fees in the non-Trustee districts means that the fee amendment failed to “establish … uniform Laws on the subject of Bankruptcies throughout the United States”.[39] This Court found that the fee increase by statutory amendment did not violate the uniformity requirement by increasing quarterly fees payable only in the juridical districts that were subject to the UST program.[40] The Court considered the case before it to be analogous to the situation Congress addressed in Blanchard, “Just as it did in addressing the failure of railroads in the industrial heartland, Congress confronted the problem of an underfunded Trustee Program where it found it: in the Trustee districts”.[41] The court acknowledged that the change does make it more expensive for a debtor in Texas to go through bankruptcy than it would for a debtor from North Carolina, but noted it is not an arbitrary distinction, it is a product of the use of the UST program.[42] The court went on to explain that the fee increase for large debtors in UST districts was Congress’s way of remedying a shortfall in funding for the UST Program.[43] Only debtors in UST districts use trustees, so Congress reasoned they could solve the issue by increasing fees in the underfunded districts, to fund the same districts.[44]
The United States Court of Appeals for the Fourth Circuit joined the Fifth Circuit, with their decision In re: Circuit City[45], holding that the increased fee did not violate the Constitution’s Uniformity clause because the requirement only “forbids only arbitrary regional differences in the provisions of the Bankruptcy Code”.[46] The Circuit City trustee convinced the Virginia Bankruptcy court overseeing the case that the UST program increased fees were improper because they were not uniformly applied.[47] The Fourth Circuit held that the fee hike may have made it more expensive to administer a bankruptcy case outside of North Carolina and Alabama, but the distinction is not arbitrary.[48] The Court reversed the Bankruptcy courts finding that the fees violate constitutional uniformity rules and held: Congress provided a solid fiscal justification for its challenged action, to ensure that the U.S. Trustee Program is sufficiently funded by its debtors rather than by the taxpayers.[49]
On January 10th, 2022, the Supreme Court granted a petition for a writ of certiorari in Siegel v. Fitzgerald[50], to decide “whether the Bankruptcy Judgeship Act violates the uniformity requirement of the Bankruptcy Clause by increasing quarterly fees solely in U.S. Trustee districts.” and resolve the Circuit split.[51] If the Supreme Court finds the fee increase unconstitutional and in violation of the uniformity requirement, the UST program may have to return as much as $100 million.[52]
[1] In re Cir. City Stores, Inc., 606 B.R. 260, 263 (Bankr. E.D. Va. 2019), aff’d in part, rev’d in part and remanded, 996 F.3d 264 (4th Cir. 2021).
[2] Id. Although Congress initially intended the U.S. Trustee program to operate nationwide, the BA Districts continue to function separately within the BA program.
[3] 28 U.S.C. § 1930(a)(6)(B) (2018)).
[4] Id.
[5] Id.
[6] Id. at 268.
[7] In re Cir. City Stores, Inc., 996 F.3d 156, 159 (4th Cir. 2021), cert. granted sub nom. Siegel v. Fitzgerald, 21-441, 2022 WL 89272 (U.S. Jan. 10, 2022).
[8] Alfred H. SIEGEL, Trustee of the Circuit City Stores, Inc. Liquidating Trust, Petitioner, v. John P. FITZGERALD, III, Acting United States Trustee for Region 4., 2021 WL 4311889 (U.S.)
[9] In re Clinton Nurseries, Inc., 998 F.3d 56 (2d. Cir. 2021); In re John Q. Hammons Fall 2006, LLC, 618 B.R. 519, 525 (Bankr. D. Kan. 2020), rev’d and remanded, 15 F.4th 1011 (10th Cir. 2021)
[10] Matter of Buffets, L.L.C., 979 F.3d 366, 371 (5th Cir. 2020); In re Cir. City Stores, Inc., 606 B.R. 260, 263 (Bankr. E.D. Va. 2019), aff’d in part, rev’d in part and remanded, 996 F.3d 264 (4th Cir. 2021).
[11] In re Clinton Nurseries, Inc., 998 F.3d 56 (2d. Cir. 2021).
[12] Id. at 68-70.
[13] Id.
[14] Id. at 59.
[15] Id.
[16] Id.
[17] Id. at 62.
[18] Blanchette v. Connecticut Gen. Ins. Corps., 419 U.S. 102 (1974).
[19] Id.
[20] Matter of Buffets, L.L.C., 979 F.3d 366, 371 (5th Cir. 2020); In re Cir. City Stores, Inc., 606 B.R. 260, 263 (Bankr. E.D. Va. 2019), aff’d in part, rev’d in part and remanded, 996 F.3d 264 (4th Cir. 2021).
[21] In re Clinton, 998 F.3d 68 (2d. Cir. 2021).
[22] Blanchette, 419 U.S. at 159.
[23] Ry. Labor Execs.’ Ass’n v. Gibbons, 455 U.S. 457, 71 L.Ed.2d 335 (1982).
[24] Blanchette, 419 U.S. at 159-60.
[25] In re Clinton, 998 F.3d 68-69 (2d. Cir. 2021).
[26] Id. at 69.
[27] Id. at 70.
[28] In re John Q. Hammons Fall 2006, LLC, 15 F.4th 1011, 1016 (10th Cir. 2021)
[29] Id. at 1018.
[30] Id.
[31] Id.
[32] Id.
[33] Id. at 1023.
[34] Id. at 1025.
[35] Id.
[36] Id. at 1024-27.
[37] Cir. City Stores, 996 F.3d at 165; Buffets, 979 F.3d at 378–79.
[38] Clinton Nurseries, 998 F.3d at 69–70.
[39] Matter of Buffets, L.L.C., 979 F.3d 366, 371 (5th Cir. 2020); quoting U.S. Const. art. I, § 8, cl.4.
[40] Matter of Buffets, L.L.C., 979 F.3d 366, 371 (5th Cir. 2020).
[41] Id. at 379.
[42] Id.
[43] Id.
[44] Id.
[45] In re Cir. City Stores, Inc., 606 B.R. 260, 263 (Bankr. E.D. Va. 2019), aff’d in part, rev’d in part and remanded, 996 F.3d 264 (4th Cir. 2021).
[46] Id. at 378.
[47] Id at 372.
[48] Id. at 378.
[49] Id. at 371.
[50] Siegel v. Fitzgerald, 21-441, 2022 WL 89272, at *1 (U.S. Jan. 10, 2022).
[51] Id.
[52] Alfred H. SIEGEL, Trustee of the Circuit City Stores, Inc. Liquidating Trust, Petitioner, v. John P. FITZGERALD, III, Acting United States Trustee for Region 4., 2021 WL 4311889 (U.S.)
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