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DOJ Bankruptcy Watchdog Fee Hike Improper, Supreme Court Rules (2)

June 6, 2022, 2:17 PMUpdated: June 6, 2022, 3:53 PM

Congress’ 2017 increase in Justice Department fees paid by bankrupt companies violated a uniformity requirement in the Constitution’s Bankruptcy Clause because it didn’t apply in two states, the US Supreme Court said.

The hike in debtors’ quarterly fees payable to the US Trustee’s Office, the Justice Department’s bankruptcy watchdog, was impermissible and must be rectified, the high court said in a unanimous decision Monday. The case arises out of an appeal from the Chapter 11 case for electronics retailer Circuit City.

Congress raised the fees starting in 2018 from a maximum of $30,000 to a maximum of $250,000—depending on how much the debtors’ estate paid in creditor disbursements that quarter—to address a U.S. Trustee budget shortfall.

The hike didn’t take effect in Alabama or North Carolina because bankruptcy cases there aren’t policed by the US Trustee. A bankruptcy administrator, overseen by the Judicial Conference of the United States, monitors cases in the two states.

The decision helps resolve the legal status of approximately $324 million in quarterly fees charged to debtors under the 2017 amendment, according to a U.S. Trustee filing in the Circuit City case.

Disputes over the fee disparity have been raised in several other Chapter 11 cases, creating split decisions among the federal circuit courts. The Tenth and Second circuits have found that the lack of uniformity violates the Constitution, while the Fourth and Fifth circuits said the fee hike could stand.

Alfred Siegel, the trustee for Circuit City’s estate, brought the fight to the Supreme Court after the U.S. Court of Appeals for the Fourth Circuit upheld the hike. Circuit City’s estate has been paying creditor distributions for over a decade following its 2008 bankruptcy.

Siegel argued in his petition that the US Trustee’s Office would have to pay more than $100 million in refunds to debtors if the Supreme Court justices invalidated the fees. The Circuit City estate alone paid about $575,000 more in fees over the first three quarters of 2018 than it would have without the increase or if its case were in Alabama or North Carolina, Siegel said.

“The Clause does not permit Congress to treat identical debtors differently based on artificial distinctions Congress itself created,” the court said in an opinion written by Justice Sonia Sotomayor.

During the oral arguments in April, the nine justices questioned why the distinction even exists. The justices specified Monday that the decision doesn’t “address the constitutionality of the dual scheme of the bankruptcy system itself, only Congress’ decision to impose different fee arrangements in those two systems.”

The justices remanded the proceedings back to the U.S. Court of Appeals for the Fourth Circuit to determine the appropriate remedy and decide whether the debtor should be refunded for the fees it paid during the “nonuniform period.”

The case is Siegel v. Fitzgerald, U.S., No. 21-441, 6/6/22.

(Updated with additional reporting.)

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com