Alabama & North Carolina — A Bankruptcy World Of Their Own (USA Sales v. U.S. Trustee)

By: Donald L Swanson

Alabama and North Carolina are interesting places.

But in the world of bankruptcy, Alabama and North Carolina are truly special—seriously!!

These two states have carved out a bankruptcy world of their own—a world that’s different from every other state and all the territories in the Union!  How they did it, is undoubtedly a tale of prowess and power wielded by U.S. Representatives and Senators from those two states over multiple decades. 

Even more remarkable is this: Alabama and North Carolina have managed to hold onto their special bankruptcy world in the federal courts, despite a constitutional requirement for “uniform” bankruptcy laws.  And get this: they’ve done so without ever appearing as a party in a case challenging their special bankruptcy world.

Not only is this remarkable—it’s inexplicable!!  

Some History [Fn. 1]

In 1978, Congress launches a U.S. Trustee pilot program, under the new Bankruptcy Code, to assist bankruptcy judges with the administrative functions of bankruptcy. The pilot program is successful, and, in 1986, Congress makes the program permanent.  

However, Alabama and North Carolina extricate their own bankruptcy courts from the permanent program and set up their own Alabama/Carolina program, instead.  By doing so, they achieve a huge-and-special benefit that no one else has:

  • the Alabama/Carolina program is funded through the Judiciary’s general budget, while
  • the program in every other state and territory is funded from fees paid by Chapter 11 debtors.  

Initially, Alabama/Carolina debtors do not pay quarterly fees—unlike debtors everywhere else.  

But in 1995, the Ninth Circuit Court of Appeals [note: neither Alabama nor North Carolina is in the Ninth Circuit] holds that that the Alabama/Carolina exemption from quarterly fees violates the Constitution’s uniformity requirement for bankruptcy laws.

In response, Congress authorizes the Alabama/Carolina program to charge quarterly fees “equal to those imposed” everywhere else [again: how do the Alabama/Carolina politicians in Congress pull this special status off?!]. Shortly thereafter, the Alabama/Carolina program adopts the same fees that apply everywhere else.

Then, due to a decline in bankruptcy filings during the early 2000s, debtor fees are no longer sufficient to fund the U.S. Trustee program.  So, in late 2017, Congress substantially increases the debtor fee amounts for U.S. Trustee cases [i.e., for all cases everywhere, except in Alabama/Carolina]. 

The Alabama/Carolina program, however, achieves special treatment . . . again.  That’s because they, (i) do not adopt the higher fee schedule until September 2018, and (ii) limit the higher fees to cases filed after the fees increased.  Whereas, all Chapter 11 debtors everywhere else—in all other states and territories—are assessed the increased fees immediately and even in cases filed before the 2017 fee increase.

Unconstitutional—U.S. District Court in Central California

On April Fools Day, 2021, a federal court in California considers, anew, disparities between the U.S. Trustee program and Alabama/Carolina program.

The opinion is USA Sales, Inc., v. Office of the United States Trustee, Case No. 5:19-cv-02133, District Court for Central California (issued April 1, 2021, Doc. 49).

The matter on appeal concerns the obligation of a Chapter 11 debtor to pay increased quarterly fees to the United States Trustee under the 2017 amendment.  Such fees for USA Sales increased from $13,000 per quarter before the 2017 amendment to $87,500 per quarter in 2018 and 2019.

The opinion addresses two questions:

  1. Does the fee increase apply to Chapter 11 cases filed before enactment of the increase?
  2. If so, are the new fee amounts unconstitutional, as applied to USA Sales?

The opinion reaches these conclusions:

  1. Statutory language increasing the fee amounts does not apply to Chapter 11 cases filed before the amendment date.  That’s because, (i) amendment language does not direct that it be applied retroactively, and (ii) the act of “commencing a case” is the conduct to which fee liability attaches.  
  2. Alternatively, the 2017 amendment is a non-uniform law on the subject of bankruptcies and unconstitutional.  That’s because, (i) the U.S. Constitution empowers Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States,” and (ii) the special fee arrangements for Alabama/Carolina cases is not uniform with the fees charged everywhere else.

The opinion is, currently, stayed pending appeal (see Doc. 53), but an appeal has yet to be filed. An appeal from this ruling would be heard by the Ninth Circuit Court of Appeals, which previously found a disparate fee structure for Alabama/Carolina cases to be unconstitutional (see St. Angelo v. Victoria Farms, Inc., 38 F.3d 1325 (9th Cir. 1994)).

Constitutional—Fifth & Fourth Circuit Courts of Appeals

On November 3, 2020, the Fifth Circuit Court of Appeals reaches an exactly-opposite conclusion.  On a two judge opinion, with a strong dissent, it upholds the constitutionality of the Alabama/Carolina program, with its disparate fee structure.  The opinion is Hobbs v. Buffets, L.L.C. (In re Buffets, L.L.C., dba Old Country Buffet), Case No. 19-50765 (5th Cir., decided November 3, 2020). 

Similarly, on April 29, 2021, the Fourth Circuit Court of Appeals also reaches an exactly-opposite conclusion. Also on a two judge opinion, with a strong dissent, it upholds the constitutionality of the Alabama/Carolina program, with its disparate fee structure. The opinion is Siegel v. Fitzgerald (In re Circuit City Stores, Inc.), Case No. 19-2240 (4th Cir., decided April 29, 2021).

How such rulings can occur is amazing—the analytical gymnastics to get there seem strained, and the dissent arguments appear to be intuitively obvious. 

Conclusion

It will be interesting to see how all of this works out.

As to predictions:

  • Opinions declaring the Alabama/Carolina fee disparities to be unconstitutional are intuitively obvious; but
  • The Alabama/Carolina staying power is impressive and cannot be discounted.

——————-

Footnote 1.  Historical information in this section is from the USA Sales opinion cited herein.

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