Justices Question Fixes for U.S. Trustee Bankruptcy Fee Disparity

The U.S. Supreme Court wrestled with how to address debtors’ Chapter 11 fee disparities that stem from systemic quirks existing in only two states.

The nine justices heard arguments Monday in Siegel v. Fitzgerald, a case that challenges the constitutionality of a 2017 hike in the U.S. Trustee’s fees, charged to companies in Chapter 11. The increase seeks to address a shortfall in the budget for the U.S. Trustee Program, a Justice Department unit that oversees bankruptcy cases.

The case focuses on a narrow question about how the U.S. Trustee fee hike is not applied uniformly throughout all 50 states, a byproduct of two states’ bankruptcy oversight systems that differ from others. But the justices took interest in why a distinction even exists.

The fee increase, passed by Congress, didn’t take effect in Alabama or North Carolina because bankruptcy cases there aren’t monitored by the U.S. Trustee. In the two states, a bankruptcy administrator, overseen by the Judicial Conference of the United States, polices bankruptcies, rather than the U.S. Trustee.

The U.S. Trustee’s Office would have to pay more than $100 million in refunds to debtors if the Supreme Court justices invalidated the fees, according to the petition filed by Alfred Siegel, the trustee liquidating Circuit City’s estate in the U.S. Bankruptcy Court for the Eastern District of Virginia.

Justice Clarence Thomas opened the court’s questions by asking if the problem stems from the difference in fees or that there are two different types of bankruptcy districts.

Chief Justice John Roberts followed with a similar question: “What’s the reason? Why are there two different systems?”

The issue involves a four-year hike in the quarterly fees bankrupt debtors pay to the U.S. Trustee’s Office to administer their cases. 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 disbursements that quarter.

A similar hike affecting Chapter 11 debtors in Alabama and North Carolina didn’t go into effect until later in 2018, and didn’t apply to companies that filed for bankruptcy before that date.

Trustees in several large Chapter 11 bankruptcies around the country have challenged the U.S. Trustee fee hike’s disparate effect, arguing that it violates the Uniformity Clause of the Constitution.

Refund Sought

Federal law has allowed two different oversight regimes to exist, but the Constitution requires that bankruptcy laws be uniform across all districts, said Haynes and Boone LLP’s Daniel Geyser, an attorney for Siegel. To fix the issue, the Supreme Court should find the 2017 legal change unconstitutional and fully return fees paid under the law, he said.

But if the court agrees with Siegel that the disparate fees violated the Constitution, there could be more than one remedy.

“It seems a strange case to order refunds rather than to require additional payments,” said Justice Brett Kavanaugh.

But Justice Neil Gorsuch later questioned whether a party has any reason to raise a complaint if there’s no prospect for retrospective relief.

The dispute has led to a split among the federal appeals courts. The Tenth and Second circuits have found that the lack of uniformity violates the Constitution. The Fourth and Fifth circuits said the fee hike could stand.

Siegel brought the fight to the Supreme Court after the U.S. Court of Appeals for the Fourth Circuit upheld the rule.

Regional U.S. Trustee John P. Fitzgerald III joined Siegel’s request, saying the issue needs to be resolved by the Supreme Court. The high court’s “review would also resolve the legal status of approximately $324 million in quarterly fees imposed under the 2017 amendment,” the U.S. Trustee said.

The case is Siegel v. Fitzgerald, U.S., No. 21-441, oral arguments 4/18/22.