This Report summarizes opinions issued on June 6 and 8, 2022 (Part I); and cases granted review on June 6, 2022 (Part II).
Opinion: Siegel v. Fitzgerald, 21-441
Siegel v. Fitzgerald, 21-441. The Court unanimously held that the enactment of a significant fee increase that exempted debtors in two states violated the uniformity requirement of the Bankruptcy Clause. Congress created the Trustee Program to handle the administrative functions previously handled by bankruptcy judges. The program is primarily funded by the quarterly fees paid by Chapter 11 debtors. The program covers 48 states, but Congress allowed North Carolina and Alabama to remain in the previous program, known as the Administrator Program. The Administrator Program is funded by the judiciary’s general budget, although Congress allowed the Judicial Conference to impose fees equal to those for the Trustee Program. In 2017, Congress enacted a temporary fee increase for all pending and new cases in the Trustee Program. The Judicial Conference adopted the same increase for the Administrator Program, but the increase had a later effective date and only applied to new cases. Circuit City Stores filed for bankruptcy in a Trustee Program district; its bankruptcy was still pending when quarterly fees were increased. In the next three quarters, the company’s fees increased from $56,400 to $632,542. The company’s trustee claimed that the fee increase violated the Bankruptcy Clause because it did not apply to the Administrator Program. The bankruptcy court agreed, but the Fourth Circuit reversed, finding that the distinction between the two programs was non-arbitrary. The Court reversed the Fourth Circuit in an opinion by Justice Sotomayor.
The Bankruptcy Clause empowers Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.” The Court rejected the argument that the 2017 increase was merely an administrative act which was not a law “on the subject of Bankruptcies” to which the uniformity requirement applies. The Court observed that the Clause has a broad scope, and its language does not distinguish between substantive and administrative laws. The Court also rejected the argument that historical and modern practice exempts fees from the uniformity requirement. Although Congress has allowed variation for certain matters―including fees―in light of local conditions, the 2017 fee increase “does not confer discretion on bankruptcy districts to set regional policies based on regional needs.” Instead, Congress simply created a dual system in which debtors in 2 states were exempt from a fee increase that applied to debtors in the remaining 48 states, without identifying any material difference between debtors across those states.
The Court has previously addressed the uniformity requirement in three cases. “Taken together, they stand for the proposition that the Bankruptcy Clause offers Congress flexibility, but that does not permit arbitrary geographically disparate treatment of debtors.” Here, the fee increase had two separate effective dates and did not apply to pending cases in Administrator Program districts. This disparity meant that Circuit City paid over $500,000 more in fees compared to an identical debtor in North Carolina or Alabama. The Court concluded that, although Congress understandably sought to remedy a budgetary shortfall in the Trustee Program by increasing the associated fees, that was an insufficient reason for the disparity because there was no legitimate distinction between the states in the Trustee Program and those in Administrator Program. The shortfall existed in only one program because Congress arbitrarily separated bankruptcy districts into two systems with different funding mechanisms. The Bankruptcy Clause “would clearly prohibit Congress from arbitrarily dividing States into two categories and charging different fees to States in different categories unrelated to the needs of, or conditions in, those States. The Clause does not allow Congress to accomplish in two steps what it forbids in one.”
The Court cautioned that it did not address the constitutionality of the dual scheme of the bankruptcy system itself, only the fee arrangements (which Congress has since amended). Nor should the decision “be understood to impair Congress’s authority to structure relief differently for different classes of debtors or to respond to geographically isolated problems.” The Court remanded the case for the lower courts to consider the appropriate remedy.