Supreme Court faces trustee fees under Chapter 11 bankruptcy

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The United States Supreme Court granted certiorari on January 10, 2022 in a matter arising out of the Circuit City bankruptcy regarding certain additional fees imposed on large Chapter 11 debtors. Most Chapter 11 debtors pay a quarterly fee to the Office of the United States Trustee (“UST” ) in accordance with a schedule set forth in 28 USC § 1930(a)(6). The UST is the arm of the Department of Justice that oversees the administration of bankruptcy cases in most jurisdictions. However, in two states, Alabama and North Carolina, bankruptcy cases are not supervised by the UST. Rather, bankruptcy cases in these states are overseen by a bankruptcy administrator, who is part of the judiciary, not the executive branch.

In 2017, Congress increased the amount large Chapter 11 debtors had to pay UST, initially requiring them to pay the lesser of one percent (1%) or $250,000 per quarter on disbursements above $1,000,000.00. This increase came into effect in January 2018 and applied to cases filed before that date that were still pending and to all cases filed thereafter. Initially, Congress did not require bankruptcy courts in Alabama and North Carolina to impose additional fees, with the text of the law indicating that such fees “may” be required in those states. Later, this text was amended to replace “may” with “shall” in an attempt to remedy the problems at the origin of the present case before the Supreme Court.

The United States Constitution authorizes Congress to enact “uniform laws respecting the subject of bankruptcy throughout the United States.” The question before the Supreme Court is whether these bankruptcy costs are subject to and comply with this clause. Petitioner is the trustee appointed under the plan of liquidation affirmed in the Circuit City bankruptcy case that is responsible for, among other things, paying the costs of the UST at issue in this appeal. The Circuit City case was pending when the additional charges were imposed. He argues that the royalty system violates the Constitution for at least two reasons. First, because business in Alabama and North Carolina was initially exempt from the surcharge and second, when business in Alabama and North Carolina was eventually included in the fee regime, it only applied ‘to cases commenced after the effective date of imposition of these fees, thus creating an inconsistent system which has resulted in unequal treatment as cases commenced in Alabama and North Carolina before October 2018, as they would never be required to pay the additional costs.

The UST argues that the fee system is not subject to the bankruptcy clause of the Constitution because fees are not “subject to bankruptcy” in the sense that they do not regulate or alter the obligor relationship. -creditor. Further, the UST argues that the best interpretation of the law is that Congress intended to impose a uniform fee, as evidenced by legislative history and the subsequent Clarifying Amendment that replaced “may” by “shall”.

Various Circuit Courts of Appeal have come to different conclusions on this issue. The Fourth Circuit (where the Circuit City case arose) and the Fifth Circuit found the law to be constitutional, while the Second and Tenth Circuits found the system to be unconstitutional. Given the split in the circuit, the Supreme Court’s decision to take up this issue is not unusual. In fact, the government did not object to reviewing the Fourth Circuit’s ruling despite asserting that it was correct. Additionally, when the Supreme Court adjudicates bankruptcy matters, its decisions often have an impact outside of the specific issue being addressed. Some have even questioned whether the dual jurisdictional system of trustee and bankruptcy administrator is itself constitutional. A decision could be made by the end of June 2022.

Copyright ©2022 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XII, Number 18



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