U.S. Supreme Court Bankruptcy Roundup

• Published date: 05 April 2022
• Subject Matter: Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Trials & Appeals & Compensation
• Law Firm: Jones Day
• Author: Mr Mark Douglas and Jane Rue Wittstein

Supreme Court to Resolve Circuit Split on Constitutionality of U.S. Trustee Fee Hike

This Term, the U.S. Supreme Court accepted certiorari in Siegel v. Fitzgerald (In re Circuit City Stores, Inc.), 996 F.3d 156 (4th Cir. 2021), cert. granted, No. 21-441 (U.S. Jan. 10, 2022), in order to resolve the growing circuit split over the constitutionality of the 2017 amendment to 28 U.S.C. ' 1930(a)(6) ("2017 Amendment"), which greatly increased quarterly fees charged by the United States Trustee ("UST") in large chapter 11 cases. The 2017 Amendment, enacted initially as a temporary measure as part of a large appropriations bill to redress projected UST budget shortfalls, replaced the prior scale that capped quarterly fees at $30,000 for disbursements over $30 million with a new scale that assessed a 1% fee on disbursements of $1 million or more up to a cap of $250,000 for quarterly disbursements of at least $25 million. See Additional Supplemental Appropriations for Disaster Relief Requirements Act, 2017, at Division B, Bankruptcy Judgeship Act of 2017, Pub. L. No. 115-72, ' 1004, 131 Stat. 1224, 1232 (Oct. 26, 2017).

In the 88 judicial districts ("UST districts") that are part of the UST program (a division of the U.S. Department of Justice, part of the Executive Branch), the UST charged the increased quarterly fees in both new and pending cases effective January 1, 2018. However, in the six North Carolina and Alabama judicial districts ("BA districts") with Bankruptcy Administrators ("BAs") overseeing the administration of bankruptcy cases (managed by the Administrative Office of the United States Courts, and supervised by the Judicial Conference of the United States, part of the Judicial Branch), the Judicial Conference did not adopt the fee increase until September 2018, and then only for new cases filed on or after October 1, 2018.

While the 2017 Amendment has also been challenged on statutory retroactivity, due process, and excessive user fee grounds, the sole issue currently pending before the Supreme Court is whether the disparity in quarterly fees for cases filed before October 1, 2018, based on the judicial district in which a debtor's case was pending, violates Congress's constitutional authority to "establish ... uniform Laws on the subject of Bankruptcies throughout the United States." U.S. Const. art. I, ' 8, cl. 4 ("Bankruptcy Clause"). To date, five federal circuit courts of appeals have addressed this important constitutional issue with respect to the 2017 Amendment, each on a direct appeal from the bankruptcy court.

The Circuit Split. In both the Fourth and Fifth Circuits, a majority of a three-judge panel upheld the 2017 Amendment on the basis that the fees were uniform within UST districts and within BA districts, while a dissenting judge objected on the basis that the lack of nationwide geographical uniformity violated the Bankruptcy Clause. See Siegel, 996 F.3d 156; Hobbs v. Buffets, L.L.C. (In re Buffets, L.L.C.), 979 F.3d 366 (5th Cir. 2020).

The Second Circuit weighed in next, where a three-judge panel unanimously rejected the rationale adopted by the majority in Siegel and Hobbs, and held that the 2017 Amendment "was unconstitutionally nonuniform on its face" because it mandated a fee increase in UST districts but only permitted a fee increase in BA districts. See In re Clinton Nurseries, Inc., 998 F.3d 56, 70 (2d Cir. 2021), cert. pending sub nom. Harrington v. Clinton Nurseries, Inc., No. 21-1123 (U.S. Feb. 14, 2022). The government sought rehearing en banc of the Second Circuit's Clinton Nurseries decision, which was denied in September 2021.

In October 2021, the majority of a split Tenth Circuit panel joined the Second Circuit in holding that the 2017 Amendment is impermissibly nonuniform because the same fees were not required in BA districts by the terms of the 2017 Amendment. See John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 15 F.4th 1011 (10th Cir. 2021), cert. pending sub nom. Office of the United States Trustee v. John Q. Hammons Fall 2006, LLC, No. 21-1078 (U.S. Feb. 2, 2022). The short dissent in John Q. Hammons took the position that the debtor's challenge to geographically nonuniform fees should be rejected because the debtors challenged only the 2017 Amendment, and not the dual UST/BA system as a whole.

In January 2022, an Eleventh Circuit panel found the 2017 Amendment constitutional, based not on the rationale expressed in Buffets and Siegel (uniformity within UST districts and within BA districts), but on its view that the Judicial Conference's decision not to increase the fees in BA districts until the fourth quarter of 2018 (and then only prospectively) did not render the 2017 Amendment violative of the uniformity requirement of the Bankruptcy Clause. See United States Trustee Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp., Inc.), 22 F.4th 1291 (11th Cir. 2022). In a separate concurrence, one judge agreed with the Second and Tenth Circuits that the 2017 Amendment was unconstitutionally nonuniform but found that refunding fees in the UST districts would be "at odds with Congress's...