US Trustee Quarterly Fees Reassessed by 2017 Amendment are not Unconstitutional

Michael F. Pecorella

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

In 2017, Congress enacted certain amendments (the “2017 Amendment”) that increased the quarterly fees to be paid by debtors to the Office of the United States Trustee in larger cases pending under Chapter 11 of the United States Code (the “Bankruptcy Code”).[1] The increased fees became payable to the United States Trustee in all Chapter 11 cases pending in the districts under the supervision of the US Trustee as of January 1, 2018, or commenced thereafter.[2]  However, the increased fees did not become payable in the districts under the supervision of a Bankruptcy Administrator, namely those in Alabama and North Carolina, until after October 1, 2018.[3] In Siegel v. Fitzgerald (In re Circuit City Stores Inc.), the United States Court of Appeals for the Fourth Circuit held that the 2017 Amendment does not violate the Constitutional principles of uniformity despite the divergent timing of the increased fees.[4] In 2008, Circuit City filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code with the Bankruptcy Court for the Eastern District of Virginia.[5] Under Circuit City’s Chapter 11 plan, which was confirmed by the bankruptcy court,  Circuit City’s estate was required to pay “‘fees that become due and payable under 28 U.S.C. § 1930 . . . until the Chapter 11 cases are closed or converted and/or the entry of the final decrees.’”[6] Circuits City’s case was still pending in January of 2018 when the 2017 Amendment, codified in 28 U.S.C § 1930(a)(6)(B), increasing quarterly fees, went into effect.[7]  Thus, the US Trustee requested payment of the new amount.  Circuit City’s estate, following a ruling by a bankruptcy court in the Western District of Texas that the 2017 Amendment was unconstitutional, filed a motion to limit the increased assessed quarterly fees under the 2017 Amendment in the Virginia bankruptcy court.[8]  The Virginia bankruptcy court granted Circuit City’s motion,[9] finding  that the quarterly fees assessed under the 2017 Amendment “contravenes both the Bankruptcy Clause and the Uniformity Clause of the Constitution.”[10] The court however did not find that the 2017 Amendment violated any retroactivity principles of the Constitution.[11] The United States Court of Appeals for the Fourth Circuit granted a request for a direct appeal by Circuit City and the US Trustee given the constitutional issues involved and the lack of controlling precedent.[12]

On appeal, the Fourth Circuit found that the 2017 Amendment did not violate the Uniformity Clause, reversing the bankruptcy court’s opinion.[13] The Fourth Circuit reasoned that the “Uniformity Clause only applies to taxes . . . [and therefore] that clause is inapplicable here.”[14] The court then examined if the 2017 Amendment violates the Bankruptcy Clause, which provides “Congress shall have the power . . . [t]o establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies through the united states”[15],  because of a lack of uniformity.[16] The Court found no such uniformity problem as it relates to the Bankruptcy Clause of the Constitution.[17] The court’s reasoning followed the reasoning of the United States Court of Appeals for the Fifth Circuit, which concluded that even though the 2017 Amendment fees don’t apply to those districts that operate under the Bankruptcy Administrator Program, “Congress . . . was entitled to ‘solve the evil to be remedied with a fee increase in just the underfunded districts.’”[18] The Bankruptcy Clause forbids only “‘arbitrary’ geographic differences” which this was not one.[19] The Court also rejected the argument that the 2017 Amendment was unconstitutionally retroactive because “congress clearly intended for the 2017 Amendment to apply to all disbursements made after it’s effective date, and it intended the amendment to be prospective.[20]

In adopting these three positions, the Fourth Circuit aligned itself with the Fifth Circuit in holding the 2017 Amendment does not present a uniformity problem.[21] Other courts, however, have held that the 2017 Amendment is unconstitutional.[22] Consequently, there is a split among the courts on the constitutionality of the 2017 Amendment.[23]