Confusion Involving Constitutionality of U.S. Trustee Fee Increase

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In 2017, Congress enacted an amendment imposing a sharp increase in quarterly fees owed to the United States Trustee program by many chapter 11 debtors. Expectedly, the constitutionality of that decision has been challenged on several grounds, and there is considerable disagreement among the circuits.

The fee increase became effective as of January 1, 2018 in nearly all states, yet in the two states with Bankruptcy Administrators (North Carolina and Alabama), the fee increase did not take effect until October 2018. In addition to the timing differential, there has been marked disagreement over the application of the amendment in different jurisdictions. In districts having United States Trustees (“UST Districts”), debtors had to pay more in quarterly fees than in districts with Bankruptcy Administrators (“BA Districts”).

On one side of the debate, the Second Circuit has taken the position that the fee increase runs afoul of certain constitutional guarantees on the grounds that the amendment produced a discrepancy in fee increases incurred by debtors in UST Districts versus BA Districts. Based on this finding the Second Circuit concluded that the apparent discrepancy violated the uniformity requirement of the Bankruptcy Clause of the Constitution.

While there is something to be said for the differential application of the fee increase, the Fourth, and Fifth Circuits have upheld the constitutionality of the 2017 amendment. Just recently, in In re ASPC Corp., the United States. Bankruptcy Court for the Southern District of Ohio followed the approach of the Fifth Circuit, holding that U.S. Trustee fees are user fees, not taxes, and are therefore not subject to the Tax Uniformity Clause of the Constitution. With regard to the Bankruptcy Clause, the court agreed with the Second Circuit that the Bankruptcy Clause does apply to the amendment but departed from the Second Circuit in holding that there is no uniformity problem.

In so holding, the ASPC court opined that since underfunding (the problem sought to be solved by the fee increase) only existed in UST Districts, Congress had set out to remedy a geographically isolated issue, posing no uniformity issues under the Bankruptcy Clause. This sets up the Sixth Circuit to opine on the circuit split.

It remains to be seen where the Supreme Court will come out on the issue, but there is the dismissal of a class action case on this issue pending before the Federal Circuit which will almost certainly result in a petition for certiorari. In such circumstances, it is not expected that the Supreme Court will weigh in until Fall 2022 at the earliest.

Special thanks to Zachary Hawkins, summer associate in Nelson Mullins’ Atlanta and D.C. offices, who assisted with drafting this blog post.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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