Circuit Split Over Constitutionality Of United States Trustee Fee Increases Picks Up More Steam

Fox Rothschild LLP
Contact

Fox Rothschild LLP

The Snowball effect, the Domino effect, and even the Streisand effect all demonstrate the accretive impact of small changes.  Though without a catchy metaphor, the tendency of Circuit splits to attract new and deviating opinions fits the concept—particularly as applied to the deepening rift between Circuits over the constitutionality of United States Trustee fee increases in the Bankruptcy Judgeship Act of 2017 (the “2017 Amendment”).  A recent ruling from the United States Bankruptcy Court for the Southern District of Ohio brings the United States Court of Appeals for the Sixth Circuit a step closer to addressing the issue over a ninth month period in which quarterly fees differed among bankruptcy cases subject to the United States Trustee Program and the Bankruptcy Administrator Program.  The constitutionality of this brief disparity has already divided the Second, the Fourth, and the Fifth Circuits.

The Judgeship Act of 2017

The administration of bankruptcy cases within the United States is overseen by two programs: the United States Trustee Program and the United States Bankruptcy Administrator Program.  The United States Trustee Program, a branch of the United States Department of Justice, is, by far, the most common administration program and oversees bankruptcy cases in 88 of the 94 federal judicial districts.  The six holdouts—all districts in Alabama and North Carolina—remain under the purview of the Bankruptcy Administrator Program, which is ultimately supervised by the United States Judicial Conference (the “Judicial Conference”).

In 2000, after the Ninth Circuit Court of Appeals ruled unconstitutional the disparate funding sources for the United States Trustee Program and the United States Bankruptcy Administrator Program, Congress amended 28 U.S.C. § 1930(a) to provide for funding of both programs through the collection of quarterly fees.  However, the two provisions in § 1930(a) were slightly different.  Section 1930(a)(6) provided that “a quarterly fee shall be paid to the United States trustee . . . in each case under chapter 11 of title 11 . . . for each quarter (including any fraction thereof) until the case is converted or dismissed, whichever occurs first.” 28 U.S.C. § 1930(a)(6)(A) (emphasis added).  By contrast, section 1930(a)(7) provided that “[i]n districts that are not part of a United States trustee region [i.e. those subject to the Bankruptcy Administrator Program] . . . the Judicial Conference of the United States may require the debtor in a case under chapter 11 of title 11 to pay fees equal to those imposed by paragraph (6) of this subsection.” 28 U.S.C. § 1930(a)(7) (emphasis added).  The permissive language made little difference in practice as the Judicial Conference swiftly adopted the quarterly fee system.

The 2017 Amendment substantially increased quarterly fees in response to declining bankruptcy filings and the resultant decline in quarterly fee revenue.  The 2017 Amendment first became effective for cases pending as of January 1, 2018, regardless of whether they were previously filed.  However, the 2017 Amendment only modified the “quarterly fees payable under section 1930(a)(6) of title 28, United States Code” and did not alter the permissive language of 28 U.S.C. § 1930(a)(7) with respect to Judicial Conference’s authority in districts with the Bankruptcy Administrator Program.  See Bankruptcy Judgeship Act of 2017, Pub. L. No. 115-72, Div. B, § 1004(c), Oct. 26, 2017, 131 Stat. 1232.  The Judicial Conference ultimately adopted the fee increase; however, the increase became effective for Bankruptcy Administrator Program districts in October 1, 2018 and only for cases filed on or after that date.  See Report of the Proceedings of the Judicial Conference of the United States (Sept. 2018) at 11–12, www.uscourts.gov/sites/default/files/2018-09_proceedings.pdf) (accessed July 12, 2021).

Congress ultimately amended § 1930(a)(7) to close the “may” loophole in January 12, 2021.  However, the nine-month gap in quarterly fee costs between districts in the United States Trustee Program and Bankruptcy Administrator Program was wide enough to create a constitutional issue now winding its way through the Circuits.

The Circuit Split

So far, three Circuits have weighed-in on whether the difference in quarterly fees presents a constitutional problem.  In Clinton Nurseries, Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2d Cir. May 24, 2021), the Second Circuit found that the dissimilar cost of quarterly fees among the various districts violated the Bankruptcy Clause of the Constitution.  The Second Circuit held that the “geographical discrepancy” among enforcement—where the increase was required in United States Trustee Program districts and permissive in United States Bankruptcy Administrator districts—failed the constitutional requirement that Congress establish “uniform Laws on the subject of Bankruptcies throughout the United States.”

The Clinton Nurseries decision departed from prior rulings from the Fourth and Fifth Circuits holding that the non-uniform fee increase did not implicate constitutional concerns.  In Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. 2021), and Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. 2020), the Circuits held that the increase did not violate the Due Process Clause or the Bankruptcy Clause of the Constitution.  In Circuit City Stores, Inc., the Fourth Circuit held, in part, that the increase was not the result of arbitrary geographical distinctions based on a debtor’s residence; rather it was as a result of the two distinct bankruptcy administration programs in the United States only one of which (the United States Trustee Program) was experiencing budget shortfalls.  Notably, both decisions from the Fourth Circuit and Fifth Circuit were divided 2-1 with dissents aimed at the constitutionality of the dual administration programs themselves.

The ASPC Corp. Decision

In Pidcock v. United States (In re ASPC Corp.), — B.R. —, 2021 WL 2935845 (Bankr. S.D. Ohio July 13, 2021), the bankruptcy court sided with the Fourth and Fifth Circuits in a challenge the constitutionality of the fee increase.  In ASPC Corp., the debtor filed its bankruptcy case in the intervening period between the effective date of the 2017 Amendment and the Judicial Conference’s adoption of the fee increase.  The postconfirmation creditor trust claimed that the differential in payments violated the Tax Uniformity Clause, the Bankruptcy Clause, and the Takings Clause of the Constitution.  The court rejected each of the three arguments.

First, the court held that the Tax Uniformity Clause does not apply because quarterly fees are “user fees” only payable by those that “use the bankruptcy system.”  As such, quarterly fees do not constitute a tax “[n]or are they duties, imposts, or excises” subject to the Tax Uniformity Clause.

Second, the court found that the Bankruptcy Clause was not violated on two grounds.  The court first concluded that Congress may enact laws addressing geographically isolated problems without violating the Bankruptcy Clause.  The court held that the differences in the United States Trustee Program and the Bankruptcy Administrator Program fell under the category of geographically isolated problems because the underfunding issue the fee increase was intended to address was limited to the United States Trustee Program.  Additionally, the court held that fee increase was not a result of Congressional action.  Instead, the uneven implementation of the fee increase resulted from the Judicial Council’s delay in implementing the fee increase for districts in the Bankruptcy Administrator Program.

Third, the court found that the Takings Clause was not implicated because the statute imposes a mere monetary obligation without regard to an identifiable property interest.  Even if it was implicated, the court held that the fee increase was not so excessive to violate the Takings Clause because it amounted to a fair approximation of the costs of benefits supplied to debtors.

The Road Ahead

On July 27, 2021, the creditor trust filed a notice of appeal in ASPC Corp. and indicated its intention to seek certification for direct review by the United States Court of Appeals for the Sixth Circuit.  The Sixth Circuit’s decision—whether following direct appeal or not—is likely to join a growing body of diverging Circuit-level decisions.  In addition to the Second, the Fourth, and the Fifth Circuits, the Federal Circuit is currently considering a similar challenge in an appeal from Acadiana Management Group LLC v. U.S., 19-496, 151 Fed. Cl. 121 (Ct. Cl. Nov. 30, 2020).

[View source.]

Written by:

Fox Rothschild LLP
Contact
more
less

Fox Rothschild LLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.