By: Donald L Swanson
This is bizarre:
- Back in the 1980s, federal politicians in Alabama and North Carolina carve out a special deal for themselves (their bankruptcy funding is by taxpayers), while all other 48 states have a different deal (bankruptcy funding is by debtor fees); and
- This disparity persists in varying degrees for nearly four decades, despite the U.S. Constitution’s requirement of “uniform Laws on the subject of Bankruptcies throughout the United States.”
It’s kind of offensive, actually.
Those two states created a special bankruptcy law for themselves: something that’s better than what every other state in the union has. And they now seem to hold squatter’s rights on that specialness, since they’ve been able to hold onto it for nearly four decades.
How Alabama and North Carolina have been able to achieve their bankruptcy specialness is a remarkable testament to three things:
- Political prowess and power of Tide and Tar Heel politicians (the background story isn’t pretty, I’m told);
- Judicial accident—the only debtors to challenge the system are those paying higher fees (debtors from Alabama and North Carolina aren’t going to challenge their lower-fees specialness), and some courts are loathe to impose a remedy that would upset the Trustee fees system; and
- The Trustee system needs the higher fees to survive—and letting some southern folks have their special deal is, to Trustee folks, a small price to pay.
Petition to U.S. Supreme Court
Finally, however, the matter is before the U.S. Supreme Court on a petition for writ of certiorari, filed September 20, 2021. Hopefully, the Supreme Court will grant certiorari and uphold the Constitution’s requirement of uniformity.
The case is Siegel v. Fitzgerald, Supreme Court Case No. 21-441. It is on appeal from a Fourth Circuit majority opinion (by two judges on a three-judge panel) that upholds the constitutionality of the two-part system, over a strong dissenting opinion from the third judge.
What follows is a summary of the two competing Siegel v. Fitzgerald opinions.
Two-Judge Majority Opinion
88 of our 94 federal judicial districts operate under the supervision of U.S. Trustees. The other 6 districts—in Alabama and North Carolina, exclusively—utilize Bankruptcy Administrators, instead.
These two systems utilize distinct funding sources:
- The federal judiciary’s general budget (i.e., taxpayers) funds the Bankruptcy Administrator system; but
- Bankruptcy debtor fees fund the Trustee system.
The exclusion of Alabama and North Carolina from the Trustee system is initially intended to be temporary, back in the 1980s. But Congress later confirms the special status for these two states.
In 1994, the Ninth Circuit Court of Appeals rules that the bankruptcy specialness for Alabama and North Carolina is unconstitutional under the uniformity requirement of the Constitution’s Bankruptcy Clause.
In a 2002 response (eight years later), Congress authorizes quarterly fees to be imposed on debtors in the Administrator districts, in amounts consistent with fees in the Trustee districts. Thence forward, until 2018, all Chapter 11 debtors pay the same quarterly fees—in all 50 states.
In 2018, however, debtor fees in Trustee districts increase—but debtor fees in Administrator districts do not.
–The Case Begins
A Debtor in a Trustee district, who has to pay higher fees than debtors in Administrator districts, complains that the higher fees are unconstitutional under the Constitution’s requirement of “uniform Laws on the subject of Bankruptcies throughout the United States.”
That’s the beginning of the Siegel v. Fitzgerald case.
–Ruling & Rationale
The case winds up before the Fourth Circuit Court of Appeals, which declares that “no constitutional uniformity problem” exists. That’s because, it says, the two-part system:
- applies uniformly to a defined class of debtors; and
- is geographically uniform.
Uniformity does not mean same treatment. For example:
- a bankruptcy law may be uniform and still recognize the laws of the State in certain particulars, which may lead to different results in different States; and
- Congress may “fashion legislation to resolve geographically isolated problems.”
At least ten bankruptcy courts have addressed this uniformity question: the score is six (constitutional findings) to four (unconstitutional findings).
Congress is authorized to resolve regionally isolated problems. Specifically, when a funding shortfall exists in Trustee districts, increased fees in those districts, alone, are warranted. A distinction is “not arbitrary,” simply because 48 states use the Trustee system with its higher fees and 2 don’t.
[Editorial comment: Such a rationale and conclusion sound like a bunch of nonsense—it’s like the majority judges want a certain result and manufacture a rationale to get there.]
The dissenting opinion begins like this: “Make no mistake about it. We have two types of bankruptcy courts in the United States.”
Then, it explains further:
- Forty-eight states operate as part of the United States Trustee system under which United States Trustees aid the courts in administering and managing bankruptcy cases.
- But two states—Alabama and North Carolina—operate under a different system. They use Bankruptcy Administrators rather than Trustees. And the differences extend beyond titles. Some Chapter 11 debtors in districts that employ the Trustees pay materially more in quarterly fees than similarly situated debtors in districts that employ Bankruptcy Administrators. Those fee differences, in turn, trickle down and reduce the amounts unsecured creditors receive.
- Therefore, many unsecured creditors in the forty-eight states operating under the Trustee system are receiving less of the amounts owed to them than similarly situated unsecured creditors in Alabama and North Carolina.
Then, it reaches these conclusions:
- The Constitution prohibits this lack of uniformity. Article I, Section 8, Clause 4 of the Constitution, known as the Bankruptcy Clause, grants Congress the power to establish “uniform Laws on the subject of Bankruptcies throughout the United States”; and
- Because I believe a faithful application of the Constitution’s Bankruptcy Clause renders the statutory scheme permitting these different quarterly fees unconstitutional, I respectfully dissent from the portion of the majority’s opinion that finds to the contrary.
[Editorial comment: Such rationale and conclusions make perfect sense.]
This is the kind of stuff that makes people cynical.
The Constitution requires uniformity. Yet, politicians in two states managed to create a non-uniform system of their own. And then, they get away with it for nearly four decades. And now, they seem to have some sort of squatter’s rights on their specialness.
Here’s hoping the U.S. Supreme Court takes this case and does what Congress should have done in the first place: require a uniform bankruptcy system throughout these United States.
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Even if the two systems of bankruptcy oversight is problematic, is there a reason you believe that the UST program should be retained rather than the Bankruptcy Administrator program? Isn’t it problematic that the UST program, as part of the Executive Branch, to which a very large proportion of debtors owe money, whether as taxes, student loans, federally-guaranteed mortgages, is expected to be a neutral party regarding obligations of the various participants in bankruptcies? And yes, while under the strictest application of the unitary theory of the federal government, Bankruptcy Administrators as officers of the Judicial Branch hypothetically share the same interest in maximizing returns for the federal government, that conflict is far more attenuated.
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