SCOTUS Set to Resolve Circuit Split on Constitutionality of Chapter 11 Quarterly Fee Differences

February 25, 2022

The US Supreme Court tends to hear a couple of bankruptcy cases per term. Most of these cases deal with interpreting provisions of the Bankruptcy Code. However, every few years or so, the Supreme Court decides a constitutional issue in bankruptcy. Some are agita-inducing (Northern Pipeline, Stern), some less so (Katz). The upcoming case is a little more nuanced, but could have major consequences.

In 2017, Congress increased many of the Chapter 11 quarterly fees paid to the US Trustee under 28 USC § 1930(a)(6), which went into effect on January 1, 2018 in the 88 districts that the US Trustee supervises and applied to all debtors. (The US Trustee Program, a part of the Department of Justice, is funded largely based upon quarterly fees.)

Six districts in Alabama and North Carolina have never been part of the US Trustee Program. Cases there are supervised by bankruptcy administrators, who operate under the judicial branch. Chapter 11 debtors in these districts also pay quarterly fees under 28 USC § 1930(a)(7), which provided (at the time) that “the Judicial Conference of the United States may require the debtor in a case under chapter 11 of title 11 to pay fees equal to those imposed by” § 1930(a)(6). (Congress later updated the word “may” to “shall.”) The Judicial Conference, however, did not impose the increased fees until October 1, 2018, and did not apply them to debtors that had cases pending before that date.

The Constitution provides that Congress has the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” Pointing to the disparity between fees in US Trustee and bankruptcy administrator districts for the first nine months of 2018, Chapter 11 debtors in US Trustee districts around the country began challenging the amended fees as unconstitutionally nonuniform. Three circuits have held the fee increase constitutional; two have not.

The Supreme Court granted certiorari in the Circuit City case on January 10, so the Court is set to resolve the circuit split over whether the fee increase violates the Bankruptcy Clause. Maybe. The Court could end up considering an argument that the US Trustee has made but no court has adopted to date: that § 1930 is not a law on the subject of bankruptcies. A loss for the government could mean the return of hundreds of millions of dollars in quarterly fees.

Lurking in the background is an issue that no court has decided: whether the dual system of US Trustees and bankruptcy administrators itself violates the Bankruptcy Clause.

Stay tuned.