U.S. Trustee Fee Program Ruled Unconstitutional

August 24, 2022

By Clinton E. Cutler

On June 6, 2022, the U.S. Supreme Court released its decision in Siegel v. Fitzgerald, No. 21-441. At issue in the case was whether a temporary fee increase for funding of the U.S. Trustee (UST) program was constitutional. These fees were paid by debtors in chapter 11 cases pending or filed between 2018 to 2021. The Court ruled that the fee increase was not constitutional because the increase did not apply uniformly to all cases, thereby violating the uniformity requirement of the Bankruptcy Clause of the Constitution. According to the Executive Office of the U.S. Trustee, the amount of fees collected under the legislation was over $300 million.

Advisors to debtors, trustees or liquidating trustees with pending cases during this period may want to examine whether fees paid during the period exceeded amounts that would have otherwise been paid to determine if a remedy should be pursued.

Background and Ruling

 The UST program was created in part to relieve bankruptcy judges from handling administrative functions under the prior Bankruptcy Act. The legislation establishing the program contemplated that it would be self-funded out of fees paid by debtors in chapter 11 cases pursuant to a schedule of fees established in the legislation. The UST program is in effect in all judicial districts of the United States and its territories, except for six judicial districts of North Carolina and Alabama. Those districts utilize a different administrative scheme under a system called the Administrator Program.

Bankruptcy Administrators have the same core functions as U.S. Trustees but are funded differently. Fees for Bankruptcy Administrators are established not by Congress, but rather determined by the Judicial Conference. Prior to 2021, the Conference usually followed the same fee schedule as adopted by Congress. However, there have been differences. In 2021, for instance, Congress passed legislation mandating that the fees match the fees charged under the UST program.

In 2017, Congress enacted a temporary fee increase to be in effect in larger chapter 11 cases to address a shortfall in funding of the UST program. The legislation provided that the fee increase was to be in effect from the first quarter of 2018 to 2022 and applied to currently pending and newly filed cases. In subsequent legislation, the fee increase was rescinded in 2021. The legislation did not affect the fees charged under the Bankruptcy Administrator program, although the Judicial Conference did adopt the 2017 fee increase effective on October 1, 2018 —the new fee schedule, however, only applied to newly filed cases.

The petitioner in the case before the Supreme Court was the liquidating trustee of the Circuit City debtors, whose cases were filed in 2008 in Virginia. The cases were still pending on the docket at the effective date of the fee increase. Due to the fee increase, the liquidating trustee had paid more than $500,000 of additional fees under the new fee schedule. This money otherwise would have gone to the recovery for creditors in the case. The liquidating trustee challenged the fee increase before the Bankruptcy Court, arguing that the legislation enacting the fee increase was unconstitutional because it violated the Constitution’s requirement that Congress enact “uniform” laws affecting bankruptcy. Since there was a different fee schedule for the judicial districts where Bankruptcy Administrators were used, the liquidating trustee argued that the law was not uniform.

The Bankruptcy Court agreed with this analysis and ordered that the liquidating trustee was only required to pay the fees that would have been charged under the prior fee schedule. The Bankruptcy Court explicitly reserved the issue of whether the trustee could recover the additional payments made under the new schedule. The U.S. Trustee appealed to the Fourth Circuit Court of Appeals. The Fourth Circuit Court of Appeals reversed, finding there was no violation of the uniformity requirement of the Constitution because the fees only applied to UST fee program districts and were used solely to fund the U.S. Trustee Program. The liquidating trustee appealed to the Supreme Court.

In its analysis, the Court determined first that the legislation enacting the fee increase was subject to the Bankruptcy Clause of the Constitution. From there, the Court had to determine if the law was non-uniform. The Court surveyed past decisions of the Supreme Court and lower courts and reasoned that Congress could take into account differences in bankruptcy law due to differences in different regions of the country, but that there were limits to how far Congress could go in enacting non-uniform bankruptcy laws. For example, the Court noted that Congress could not enact laws on arbitrary, disparate treatment of similarly situated debtors based solely on the geographic location of the debtor but could make distinctions among different classes of debtors.

Given that the statute made an arbitrary distinction between areas where the UST program was in effect from areas where the Bankruptcy Administrator system was also in effect, the court concluded the statute was a violation of the uniformity clause.

Implications

 Interestingly, the Court declined to order a remedy. Instead, the Supreme Court remanded the case to the Fourth Circuit to determine a recourse. The UST’s executive office has suggested that the appropriate remedy is for debtors in administrator districts to retroactively pay higher fees to equalize the payments. It is difficult to see how that would work absent further legislation or action by the Judicial Conference. Moreover, two Circuit Courts have ruled that the appropriate remedy is to determine the amount of the overpayment and order a refund by the U.S. Trustee of the excess fees. See In re John Q. Hammons Fall 2006, LLC, 15 F.4th 1011, 1026 (10th Cir. 2021; In re Clinton Nurseries, Inc., 998 F.3d 69–70 (2d Cir. 2021). These cases were unaffected by the Supreme Court ruling.

Note that U.S. Trustee fees were paid out of the estate property during the case pre-confirmation. Any returned fees probably would have to be distributed to creditors, but a confirmed plan may have vested the estate property in a reorganized debtor or in a liquidating trust, which assumes the obligation to make distributions to creditors. Where there is a confirmed plan, the vesting language of the plan will be important in determining who is entitled to the excess fees.

Finally, there may be questions of entitlement to a refund in cases where the fees were paid without protest. Parties opposing a refund will likely argue that there has been a waiver or estoppel by the debtor paying the fees without protest. Undoubtedly, these issues will be explored as remedies are considered.

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