Siegel v. Fitzgerald: The Supreme Court declares unconstitutional the increase in administrative fees in the United States | Insights and Events
In its opinion of June 6, 2022 in Siegel versus Fitzgerald, The U.S. Supreme Court has resolved a circuit split and struck down a 2017 law that raised U.S. trustee fees in 48 states — but not Alabama or North Carolina — as unconstitutional under the requirement of consistency of the bankruptcy clause of the Constitution. See Siegel v. Fitzgerald596 United States ___ (2022).
Trust fees in the United States, a history
Proceedings under Chapter 11 of the United States Bankruptcy Code are generally initiated by corporate debtors and often require significant administrative oversight, for example, the organization and appointment of unsecured creditors’ committees; oversee the filing of required schedules; management and selection of trustees where current management is to be replaced. Originally, bankruptcy judges performed these administrative tasks themselves in addition to their more traditional judicial role. To alleviate some of the pressure on bankruptcy judges, in 1978 Congress piloted the U.S. Trustee program, in which the administrative functions of bankruptcy courts were transferred to U.S. trustees, who worked for the U.S. Department of Justice. The pilot program was successful, and in 1986 Congress implemented the U.S. Trustee Program nationwide, expanding it to all federal judicial districts except those in North Carolina and of Alabama (states that raised objections to the program). Alabama and North Carolina eventually adopted a similar system – the bankruptcy administrator program. The main difference between the two systems is that US administrators were appointed and supervised by the Department of Justice, while administrators in the administrator program were appointed and supervised by the local bankruptcy courts themselves. Funding for the two systems was also different, especially in the early years of the Trustee Program. The costs of the U.S. Trustee program were covered by quarterly user fees paid by large corporate debtors while they were bankrupt (calculated as a percentage of the distributions they made). Costs related to the administration program, on the other hand, were initially funded from the general US justice budget. Subsequently, however, Congress authorized the United States Judicial Conference (a national policy-making body for federal courts) to similarly charge fees to corporate debtors in North Carolina and Alabama. And, between 2001 and 2017, these fees were identical to the fees charged in US fiduciary states.
In 2017, funding for the US Trustee program faced a significant shortfall. Congress therefore passed legislation (the 2017 Act) that, effective the first quarter of 2018, significantly increased the fees payable by debtors in states using this program from a maximum of $30,000 per quarter to a maximum of $250,000 per quarter. Fees charged to debtors in both states not using the US trust system were not initially increased, however. And even when they were, in October 2018, the increase was only prospective, for new debtors. However, under the U.S. Trustee program, the increased fee was charged to all debtors who were bankrupt when the 2017 law was enacted, even if their filings predated that date.
A debtor disputes
In 2008, Circuit City filed for bankruptcy in the Eastern District of Virginia. In 2010, the bankruptcy court upheld Circuit City’s plan, which included a winding-up trust and a trustee to collect and liquidate Circuit City’s remaining assets. In accordance with the Bankruptcy Code, the liquidator has paid the fees required of the American trustee. But under the terms of the 2017 law, those fees increased significantly beginning in the first quarter of 2018 — based on the increased fees, Circuit City had to pay $632,542 in total fees, up from the $56,400 $ that he would otherwise have had to pay. Pay. Circuit City objected to this fee increase, arguing that its inconsistent application (with respect to debtors in both states not included in the U.S. trustee program) violated the bankruptcy clause of the U.S. Constitution.
The bankruptcy clause of the Constitution is included in Article I, Section 8. It authorizes Congress to enact “uniform Bankruptcy laws across the United States. US Const., Art. I, § 8, cl. 4. Circuit City argued that because debtors who filed petitions in districts under the administrator program were not subject to the fee increase, the increase was not uniform. The bankruptcy court agreed, finding that beginning January 1, 2018, Circuit City should only be required to pay fees in effect before Congress passed the 2017 law. not decided whether Circuit City could recover overpayments it had made prior to Jan. 1, 2018. The Fourth Circuit overruled, finding that the bankruptcy clause’s uniformity requirement prohibited only “geographic differences “arbitrary”” and the differences in fees caused by the 2017 law were not “arbitrary” since it was only the funding for the US Administrators program that faced a shortfall and not the funding for the program of administrators.
The Supreme Court agrees with the debtor
The Supreme Court overturned the Fourth Circuit’s decision and ruled that the fee hike imposed by the 2017 law violated the uniformity requirement of the bankruptcy clause. First, the Court held that, contrary to the arguments put forward in support of the fee increase, the uniformity requirement applied to both “substantive” and “administrative” bankruptcy laws, pointing out that none of the Court’s precedents suggested a distinction between the two categories. Second, disagreeing with the Fourth Circuit, the Court ruled that the 2017 law was impermissible as “geographically disparate arbitrary treatment of debtors.” This contrasted with the kind of geographically disparate treatment the Court had found authorized by the Bankruptcy Clause, such as when Congress established general policy (for example, debtors are entitled to bankruptcy exemptions for certain types of property) and then left it to the states to define what the policy applies to. In the case of the 2017 law, the Court explained, Congress did not set a general policy which was found to be implemented differently in different states. Instead, it actually charged different fees to different debtors depending on the random state in which they filed. This, the Court held, violated the “uniformity” requirement of the bankruptcy clause.
What is the remedy?
After striking down the 2017 law, the Court left open a key point: the remedy that debtors like Circuit City may be entitled to. Instead, the Court returned this issue to the lower courts for further consideration. Will the federal government be required to reimburse what will amount to millions of dollars in costs? It’s possible. This could ultimately lead to a massive hole in the budget for the US Trustee program, i.e. the same problem that Congress thought it had already solved via the 2017 law itself.