Recent Developments in Bankruptcy Litigation 2023

Editors

§ 1.1. Supreme Court

Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022).  The Supreme Court was called on to address the Bankruptcy Clause found in Article I, Section 8, Clause 4 of the Constitution, which authorizes Congress to establish “uniform laws on the subject of Bankruptcies” throughout the United States.  The issue in question was the nonuniform nature of Congress’ enactment of a significant fee increase that exempted debtors in two states and whether that variation violated the uniformity requirement of the Constitution.

The Court began by noting that “[b]ankruptcy cases involve both traditional judicial responsibilities and extensive administrative rules.”  While prior law vested bankruptcy judges with the responsibility to handle both the judicial and administrative responsibilities, Congress created the United States Trustee Program (the “Trustee Program”) to separate these judicial and administrative functions.  Ultimately, Congress made the Trustee Program permanent and expanded it nationwide.  However, stakeholders in North Carolina and Alabama resisted. Thus, Congress expanded the U.S. Trustee Program to all federal judicial districts except for those in North Carolina and Alabama.  In those districts, the prior system (the “Administrator Program”) continued.  The Trustee Program, which covers 48 states, is funded by user fees paid to the United States Trustee System Fund, with the bulk of those funds being paid by chapter 11 debtors who pay a fee in each quarter of the year that their case remains pending.  The Bankruptcy Administrator Program that exists in North Carolina and Alabama is not funded by user fees but instead is funded by the Judiciary’s annual budget.  In 1994, the Ninth Circuit held it unconstitutional that the Administrator Program states did not have to pay user fees.  Accordingly, Congress enacted a law authorizing the Judicial Conference to require Administrator Program districts to pay fees equal to those imposed in Trustee Program districts.  Thereafter, the Judicial Conference adopted a standing order for such fees to be paid.

Eventually, Congress faced a shortfall in the United States Trustee System Fund and enacted a temporary, but significant, increase in the fees paid in large chapter 11 cases (the “2017 Act”).  When that additional fee was triggered, the fee increased from $30,000 to $250,000 per quarter.  The North Carolina and Alabama districts did not immediately adopt this increase.  A year later, the Judicial Conference ordered those districts to implement the amended fee schedule.  Even then, substantial differences remained between the fees faced by debtors in the Trustee Program and those in the Administrator Program.  First, the date on which the new fees took affect differed by approximately six months and, in the Administrator Program districts, the fee increase only applied to newly filed cases, while in Trustee Program districts the increased fee applied to pending cases.

In 2008, Circuit City Stores, Inc. sought chapter 11 protection in the Eastern District of Virginia and was subjected to the Trustee Program.  When its plan was confirmed, the maximum quarterly fee was $30,000.  However, the bankruptcy case was still pending when Congress raised the …