Are US Trustee’s Increased Quarterly Fees Constitutional?

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Constitutionality (photo by Marilyn Swanson)

By: Donald L Swanson

The Office of the US Trustee administers the bankruptcy system in these United States.  To fund its efforts, the US Trustee receives quarterly fees from Chapter 11 debtors, which fees are a major (and often a problematic) expense for debtor’s to pay.

Back in October 2017, Congress increased the amounts of such fees, effective January 2018.  Since then, challenges have arisen to the legality of such fees and their application.

A Newly-Filed Case

A newly-filed case challenging the increased quarterly fees is SunEdison, Inc. V. United States of America, Adv. Proc. No. 19-01443, filed in the Bankruptcy Court for the Southern District of New York on December 6, 2019. [Fn. 1]

In its Complaint, SunEdison seeks a determination that, (i) its liability for quarterly fees to the US Trustee is governed by the old fee schedule, and (ii) it is entitled to a refund of overpayments made under the new fee schedule, amounting to $1,192,886.

Uniformity Challenge

SunEdison’s Complaint challenges the constitutionality of increased quarterly fees under the uniformity requirement of the U.S. Constitution’s Bankruptcies Clause.  SunEdison’s argument is that the increased fees are applied unequally across the 94 bankruptcy districts.

Here’s what SunEdison alleges for non-uniformity:

  • The US Trustee’s Office oversees the administration of bankruptcy cases in 88 of the 94 judicial districts in the United States;
  • The other 6 judicial districts, located in Alabama and North Carolina, are governed differently: by a Bankruptcy Administrator, instead;
  • In the 88 US Trustee districts, Chapter 11 debtors have had to pay the increased quarterly fees, beginning on the effective date of those increases; and
  • The increased quarterly fees did not apply to Chapter 11 debtors, in the 6 Alabama and North Carolina districts, until their Bankruptcy Administrators adopted such increased fees almost a year later—and the Administrators have applied the increased fees only to cases filed thereafter.

Other Constitutionality Issues

SunEdison’s Complaint also raises these two additional claims of unconstitutionality:

  1. SunEdison’s bankruptcy filing and plan confirmation occurred prior to enactment of the increased quarterly fees, so payment of the increased fees violates due process protections against the retroactive application of a statute; and
  2. The increased quarterly fees are unconstitutional as a user fee because the fee amounts, (i) far exceed the benefit to the user and the cost to provide the service, and (ii) are geographically discriminatory.

Recent Bankruptcy Court Decisions

Recent decisions by bankruptcy courts hold that it is impermissible and/or unconstitutional for the US Trustee to apply the increased quarterly fee amounts to cases pending prior to enactment of the increased fee schedule.

Here is a list of such cases, all of which are on appeal:

  • In re Life Partners Holdings, Inc., 2019 WL 3987707 (Bankr. N.D. Tex. Aug. 22, 2019) (application to pending cases is unconstitutionally non-uniform, and a retroactive application violates Due Process Clause);
  • In re Circuit City Stores, Inc., 2019 WL 3202203 (Bank. E.D. Va. July 15, 2019) (application to pending cases is unconstitutionally non-uniform);
  • In re Buffets, LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019) (application to pending cases is unconstitutionally non-uniform, and a retroactive application violates Due Process Clause);
  • But see, In re Clinton Nurseries, Inc., 2019 WL 4072654, at *12-13 (Bankr. D. Conn. Aug. 28, 2019) (upholding application of increased fees and rejecting non-uniformity).

Conclusion

These quarterly fees issues are interesting.  And the ultimate resolution of such issues is likely to have a significant effect upon bankruptcy cases, generally.  That effect is likely to be felt in both, (i) the amount of quarterly fees Chapter 11 debtors are required to pay, and (ii) the rationale that ultimately prevails for the resolution of such issues and the impact thereof, as precedent, on other issues.

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Footnote 1.  This adversary proceeding is set on an unusual procedural track (see Doc. 3, “Stipulation and Scheduling Order”): (i) USA’s answer date is January 20, (ii) the parties will file cross-motions for summary judgment by February 3, with objections to each due by March 6, and (iii) a hearing on such cross-motions will be held between March 16 and April 10, subject to Court availability.

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