By: Donald L Swanson
It seems like a small thing: Chapter 11 debtors in two states paying lower quarterly fees than
Chapter 11 debtors in the other 48 states.
What’s the big deal?
Alabama and North Carolina throw a political hissy fit, three or four decades ago. They want
their own Bankruptcy Administrator system (not the U.S. Trustee system established everywhere else). And they are rewarded. The reward includes lower quarterly fees.
Where’s the harm in lower quarterly fees? What follows is an attempt to:
- identify some of the harms/costs of the lower fees (i.e., unconstitutionality, wasted judicial and legislative resources, and a high cost remedy); and
- suggest remedies that provide accountability for the two states that caused the problem.
For starters, the lower fees violate the U.S. Constitution—specifically, the uniformity
requirement in its Bankruptcy Clause. The U.S. Supreme Court in Siegel v. Fitzgerald (Case No.
21-441, decided June 6, 2022), explains:
- “The question in this case is whether Congress’ enactment of a significant fee increase that exempted debtors in two States violated the uniformity requirement. Here, it did.”
But instead of imposing a remedy for the violation, the Supreme Court remands the remedy
- “The court below . . . has not yet had an opportunity to address . . . the proper remedy. Mindful that we are a court of review, not of first view, . . . this Court remands for the Fourth Circuit to consider these questions in the first instance.”
In light of high harm/costs involved, the Fourth Circuit’s remedy needs to, (i) identify those who
caused the problem (i.e., the states of Alabama and North Carolina), and (ii) assure that those who
caused the problem are accountable.
The costs of unconstitutionality include wasted judicial and legislative resources . . . twice.
While Alabama and North Carolina have been enjoying their unconstitutional lower fee benefits, judicial and legislative resources have been wasted, across the land. Consider these wastes:
- their special deal is declared unconstitutional nearly three decades ago, by the Ninth Circuit Court of Appeals in St. Angelo v. Victoria Farms, Inc., 38 F. 3d 156 (9th Cir. 1994); and
- the St. Angelo ruling induces remedial action by Congress, with no accountability for Alabama or North Carolina (they weren’t even involved in the litigation).
Then, Alabama and North Carolina do it again—they create the very same lower fees problem [again!] that St. Angelo declares unconstitutional and that Congress had to fix.
Second round litigation on the same constitutionality issue results in a 2-1 circuit conflict, split panels on multiple circuits, and sharply divided lower courts (see Petition for Writ of Certiorari in Siegel v. Fitzgerald, at 17). Specifically:
- “The Fourth and Fifth Circuits have now upheld the law (over strong dissents)”;
- “the Second Circuit has expressly rejected those decisions”;
- “The conflict is now entrenched”;
- the law in question “is unconstitutional in some parts of the country but not others”; and
- “debtors nationwide are left uncertain about the validity of the Act’s quarterly fees—with massive amounts at stake” (id.).
And Congress has to step in [again!] to remedy [again!] the very same lower fees problem!!!
This time, of course, the U.S. Supreme Court weighs-in, through Siegel v. Fitzgerald, and agrees with the Ninth Circuit’s prior analysis—declaring the lower fees unconstitutional. But the Supreme Court leaves various questions unresolved, with a remedy remand.
All of these wasted resources are the direct consequence of that political hissy fit, decades ago, by Alabama and North Carolina—which they repeated.
Those two states are the ones responsible. But they have never been held accountable—heck, they haven’t even been involved in any of the litigation over their special deal. That’s because litigating debtors are trying to get the same special deal—not trying to strike that deal down!
A COSTLY REMEDY?
The costs of Alabama’s and North Carolina’s unconstitutionality also includes a potential refund of overpaid fees, in huge amounts, by the U.S. government.
Though the U.S. Supreme Court, in Siegel v. Fitzgerald, remands remedies issues, the parties are already on record. They’ve identified three possible remedies:
- collect underpaid fees from Alabama and North Carolina debtors;
- refund overpaid fee amounts to debtors in 48 states; and/or
- pretend unconstitutionality did not happen, and move on.
What follows are the Siegel v. Fitzgerald parties’ arguments on the three alternatives.
–Don’t Collect Underpaid Fees from Alabama and North Carolina Debtors
Brief of the Circuit City Trustee (Petitioner) doesn’t want underpaid fees collected from Alabama and North Carolina debtors. The obvious/selfish reason is this: Circuit City is in one of the 48 states and wants a fee refund for itself.
But the stated reasons in its brief are:
- “the government . . . has no realistic means of hunting down all BA debtors who escaped higher fees over a period of years—and somehow collecting those fees post-hoc” . . . it “has no clear legal or practical path to unscramble the egg” (at 17-18); and
- “Congress elected against . . . imposing fees retroactively on parties in BA districts” (id.).
The U.S. Trustee’s Brief does not dispute this argument.
–Refunding Fees in 48 States
The Circuit City Trustee (Petitioner) argues, instead, for the government to refund higher fees paid by the 48 states’ debtors:
- “a prospective fix is inadequate” because it “cannot restore uniformity (or equal treatment) for past periods where that treatment was not equal” (at 31); and
- while “Congress may prefer to avoid responsibility for past constitutional injuries” (at 32), it has only “one viable option: refund the fees it unlawfully extracted under a non-uniform bankruptcy law” (at 18).
–Pretend Unconstitutionality Did Not Happen
Brief of the U.S. Trustee (Respondent) argues against monetary relief. The obvious/selfish reasons are:
- recovering fees from Alabama and North Carolina debtors would be difficult; and
- the government does not want to reimburse large fee amounts to debtors in 48 states.
The U.S. Trustee says:
- “the appropriate remedy for any uniformity violation would be declaratory relief, not a refund of quarterly fees” (at 19); and
- “Congress would not have chosen to remedy any constitutional flaw . . . by granting massive refunds of fees previously paid by debtors in the 88 UST districts” (at 19-20).
Neither of the Siegel v. Fitzgerald parties is proposing any type of accountability for Alabama and North Carolina.
Those two states would continue on, as always, with their special deal—undeterred, unfazed, unchastised, and content in their specialness. Heck . . . if past behavior is any predictor of future action, Alabama and North Carolina are likely to try the same type of thing again—for a third time.
Alabama and North Carolina created unconstitutionality. They enjoyed the special benefits of unconstitutionality. Yet, they get off scot-free: they always have . . . and they always will—or, at least, that’s what they are obviously hoping.
So far, there is no accountability for the mess they have created and the huge amount of damage they have caused. None whatsoever!
–Remedies With Accountability
But there is are remedies the Fourth Circuit Court of Appeals could impose that would place accountability where it should lie.
Here’s one. Each of the six judicial districts in Alabama and North Carolina could choose to either:
- recover underpaid fees from the debtors in its district, because its operating budget is reduced by the amount of such underpaid fees; or
- voluntarily join the U.S. Trustee system, and have its constitutional sins purged thereby.
Here’s another. The Fourth Circuit could declare that Congress has a choice to either:
- fund a refund of all overpaid fees to debtors in the 48 states; or
- eliminate Alabama’s and North Carolina’s exemption from the U.S. Trustees system.
It’s time to make Alabama and North Carolina accountable for the unconstitutional mess and costs they have imposed upon the entire bankruptcy system.
Here’s hoping that the Fourth Circuit Court of Appeals, on remand, will do just that!
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