Inappropriate DOJ Bankruptcy Watch Fee Rise, Supreme Court Rules (2)

Congress’ 2017 increase in Justice Department fees paid by bankrupt businesses violated a uniformity requirement in the Constitution’s Bankruptcy Clause because it did not apply in two states, said the Supreme Court of the United States.

The hike in quarterly debtors’ fees payable to the Office of the US Trustee, the Justice Department’s bankruptcy watchdog, was unconscionable and must be rectified, the High Court ruled in a unanimous decision on Monday. The case stems from a Chapter 11 case appeal for electronics retailer Circuit City.

Congress increased the fee beginning in 2018 from a maximum of $30,000 to a maximum of $250,000 — depending on how much the debtors’ estate paid in disbursements to creditors that quarter — to address a budget shortfall in the American trustee.

The hike did not take effect in Alabama or North Carolina because bankruptcy cases there are not monitored by the US trustee. A bankruptcy administrator, overseen by the United States Judicial Conference, oversees cases in both states.

The ruling helps resolve the legal status of approximately $324 million in quarterly fees charged to debtors under the 2017 Amendment, according to a U.S. trustee filing in the Circuit City case.

Disputes over the fee disparity have arisen in several other Chapter 11 cases, creating split decisions among federal circuit courts. The Tenth and Second Circuits found that the lack of uniformity violates the Constitution, while the Fourth and Fifth Circuits said the fee hike could stand.

Alfred Siegel, the Circuit City estate administrator, took the fight to the Supreme Court after the United States Court of Appeals for the Fourth Circuit upheld the raise. The Circuit City Estate has been paying distributions to creditors for more than a decade after its 2008 bankruptcy.

Siegel argued in his motion that the U.S. trustee’s office would have to reimburse debtors more than $100 million if Supreme Court justices invalidate the charges. The Circuit City estate alone paid about $575,000 more in fees in the first three quarters of 2018 than it would have had it not been for the raise or if its case was in Alabama or North Carolina. , said Siegel.

“The clause does not allow Congress to treat identical debtors differently based on artificial distinctions that Congress itself has created,” the court said in an opinion written by Judge Sonia Sotomayor.

During oral arguments in April, the nine justices questioned why the distinction even existed. The justices clarified on Monday that the decision “does not address the constitutionality of the dual regime of the bankruptcy system itself, only Congress’s decision to impose different pricing arrangements in these two systems.”

The judges remanded the proceeding to the United States Court of Appeals for the Fourth Circuit to determine the appropriate remedy and to decide whether the debtor should be reimbursed for fees it paid during the “non-uniform period.”

The case is Siegel v. Fitzgerald, USA, No. 21-441, 6/6/22.

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