Constitutionality of U.S. Trustee v. Administrator Programs (Siegel v. Fitzgerald)

The United States of America is asking the U.S. Supreme Court to rule on the constitutionality of having U.S. Trustees in 88 judicial districts and Bankruptcy Administrators in 6 judicial districts.

What follows is a summary of the U.S. Trustee’s explanation of the constitutionality issue in a brief before the U.S. Supreme Court on a petition for writ of certiorari in Siegel v. Fitzgerald, Acting U.S. Trustee for Region 4, Supreme Court Case No. 21-441.

Some History

US Trustees promote the integrity and efficiency of the bankruptcy system, by serving as bankruptcy watch-dogs.

US Trustees began as a pilot program in 18 judicial districts in 1978. Congress expanded it to 88 of the 94 federal judicial districts in 1986.

The other six districts—in Alabama and North Carolina—were permitted to use Bankruptcy Administrators for the same purposes.

Congress originally provided that the six districts in Alabama and North Carolina would join the US Trustees Program no later than 1992. But it later postponed that deadline—then eliminated it altogether.

A Distinction

The Trustee and Administrator programs have (i) similar-but-different structures, and (ii) distinct funding sources. The Judiciary’s “general budget” (i.e., the taxpayer) funds the Administrator program; whereas, Congress designed the Trustee Program to be “self-funding” and “paid for by the users of the bankruptcy system—not by the taxpayer.”

For a period of time, quarterly fees in Administrator districts were the same as corresponding fees in Trustee districts—this helped skirt uniformity issues for a while. So, Congress authorized the indefinite continuation of the Administrator program in Alabama and North Carolina.

A Problem Develops

In the mid-2010s, payments of quarterly fees decrease dramatically because case filings are down. The result is: costs of the Trustee program can no longer be met by quarterly fees. So:

Congress increases quarterly fees in larger Chapter 11 cases, by substantial amounts, for pending and future cases; but
quarterly fees in the two Administrator states do not increase for a while—when the increase finally does happen, it’s only as to cases filed thereafter.

Unconstitutionality Rulings

In response, some courts declare such circumstances to be unconstitutional, finding that Congress authorized different fees in Administrator and Trustee districts.

In response to such declarations, Congress amends the operative statute by changing a “may” to “shall”: in Administrator districts the “Judicial Conference of the United States shall require the debtor . . . to pay fees equal to those“ in Trustee districts.

The Pending Case

Circuit City operated a chain of stores selling consumer electronics. Circuit City files Chapter 11 in a Trustee district and achieves confirmation of a plan.

The confirmed plan requires Circuit City to pay quarterly fees until the plan is concluded. The plan had not yet concluded when the increased quarterly fees, authorized by Congress, take effect.

Circuit City initially pays the higher fees, but then It balks and claims the higher fees are unconstitutionally non-uniform, since debtors in Administrator districts pay less.

Bankruptcy Court Ruling

The bankruptcy court:

agrees with Circuit City, ruling that differing quarterly fees for Trustee and Administrator programs is “unconstitutionally non-uniform”; and
provides as the remedy that quarterly fees owed by Circuit City will be determined under the “prior version of the statute.”

Court of Appeals—Two-Judge Majority Ruling

Both parties appeal directly to the Court of Appeals.

A two-judge majority finds the law in question to be constitutionally sound because:

the Bankruptcy Clause’s “uniformity requirement does not deny Congress the power to enact legislation that resolves regionally isolated problems”;
Congress confronted the U.S. Trustee problem, and “reasonably solved” it “with fee increases in the underfunded districts”;
Even if Congress failed to give an adequate justification for its early decision to allow separate Trustee and Administrator districts, the current law “does not suffer from any such shortcoming” because it is supported by “a solid fiscal justification”;
the Bankruptcy Clause is not implicated because the law in question is not a substantive bankruptcy law; and
any discrepancy in impact between Trustee and Administrator districts is “a byproduct of implementation efforts, rather than unlawful congressional action.”

Court of Appeals—Dissent

The dissenting judge at the Court of Appeals concludes that the quarterly fees statute is not uniform because:

the word “may” in the operative statute impermissibly allows disparate fees; and
different fee collections, between the two types of districts, cannot be justified by the “unique budgetary challenges” facing each program, because allowing Alabama and North Carolina to operate “in the first place” with Administrators, instead of U.S. Trustees, is itself arbitrary.

Conclusion

The U.S. government, of course, comes down on the side of maintaining the status quo and preserving its right to recover higher fees.

It will be interesting to see what happens on this.

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