Supreme Court to Decide Constitutionality of U.S. Trustee Fees in Chapter 11 Cases

Nelson Mullins Riley & Scarborough LLP

Nelson Mullins Riley & Scarborough LLP

The Supreme Court of the United States granted certiorari on Jan. 10, 2022 in a case arising out of the Circuit City bankruptcy regarding certain additional fees imposed on large Chapter 11 debtors. Most Chapter 11 debtors pay quarterly fees to the Office of the United States Trustee (“UST”) pursuant to a schedule set forth in 28 U.S.C. § 1930(a)(6). The UST is the arm of the Department of Justice that oversees the administration of bankruptcy cases in most jurisdictions. However, in two states, Alabama and North Carolina, the bankruptcy cases are not overseen by the UST. Rather, bankruptcy cases in these states are overseen by a bankruptcy administrator, who is part of the judiciary, not the executive branch.

In 2017, Congress increased the amount that large Chapter 11 debtors were required to pay to the UST, initially requiring them to pay the lesser of one percent (1%) or $250,000 per quarter on disbursements over $1,000,000.00. This increase went effective in January 2018 and applied to cases filed before that date that were still pending and any cases filed thereafter. Initially, Congress did not require bankruptcy courts in Alabama and North Carolina to impose the additional fees, with the text of the act reading that such fees “may” be required in those states. Later, this text was amended to replace “may” with “shall” in an attempt to remedy the issues giving rise to the current case before the Supreme Court.

The United States Constitution authorizes Congress to enact “uniform laws on the subject of Bankruptcies throughout the United States.” The question before the Supreme Court is whether these bankruptcy fees are subject to and comply with this clause. The petitioner is the fiduciary appointed under the liquidating plan confirmed in the Circuit City bankruptcy case who is charged with, among other things, paying the UST fees at issue in this appeal. The Circuit City case was pending when the additional fees were imposed. He argues that the fee system violates the Constitution for at least two reasons. First because cases in Alabama and North Carolina were initially exempt from the increased fees and second, when Alabama and North Carolina cases were eventually included in the fee regime, it only applied to cases commenced after the effective date of imposition of such fees thereby creating a non-uniform system which resulted in unequal treatment because cases commenced in Alabama and North Carolina before October 2018 as they would never be required to pay the additional fees.

The UST contends that the fee system is not subject to the Bankruptcy Clause of the Constitution because the fees are not “the subject of Bankruptcies” in that they do not regulate or alter the debtor-creditor relationship. In addition, the UST argues that the best reading of the statute is that Congress intended for uniform fees to be imposed as evidenced by legislative history and the subsequent clarifying amendment which changed “may” to “shall.”

Various circuit courts of appeal have reached different conclusions on this issue. The Fourth Circuit (where the Circuit City case arose) and the Fifth Circuit have concluded the law is constitutional whereas the Second and Tenth Circuits have found the system to be unconstitutional. Given the circuit split, the Supreme Court’s decision to take up this issue is not unusual. In fact, the government did not oppose review of the Fourth Circuit’s decision despite claiming that it was correct. In addition, when the Supreme Court opines on bankruptcy matters, its decisions often have an impact outside of the precise issue being addressed. Some have even questioned whether the dual system of trustee and bankruptcy administrator jurisdictions is itself constitutional. A decision may be reached by late June of 2022.

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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