SCOTUS considers the Bankruptcy Judge Act 2017 unconstitutional

On June 6, 2022, the United States Supreme Court released its opinion in Siegel v. Fitzgerald, in which the Court held that the Bankruptcy Judges Act of 2017, Pub. L. 115-72, Div. B, 131 Stat. 1229 (the “2017 Act”) was unconstitutional. The 2017 law required a significant and temporary increase in the rates of fees paid to the United States Trustee System Fund (the “UST Fund”) by debtors in large Chapter 11 cases.[1] At the basis of the Court’s decision is the Constitution’s Bankruptcy Clause (Article I) which gives Congress the power to “establish…uniform laws respecting the subject of bankruptcy throughout the United States.” The Court ruled that the 2017 law was unconstitutional because the fees were not applied uniformly. Perhaps most interestingly, the Court did not decide on an appeal. Instead, he sent the case back to the Fourth Circuit Court of Appeals with a sum of $325 million.[2] question: “Now what? »[3]

Background

Originally, bankruptcy judges handled the administrative duties of bankruptcy cases.[4] This tangle of administrative and judicial tasks resulted in a heavy workload as well as the appearance of partiality of the bankruptcy judges supervising the trustees they had appointed.[5] To address these concerns, Congress created the United States Trustee Program (the “Trustee Program”) in 18 of the 94 federal judicial districts.[6] After eight years, Congress expanded the trustee program to nearly every district except just six districts in North Carolina and Alabama.[7] For both of these states, Congress has temporarily authorized the judiciary to pursue judicial review of administrative duties under the bankruptcy administrator program (the “Administrator Program”).[8] Eventually, Congress made the administrator program permanent.[9]

The administrator program is funded by fees paid by debtors to the UST fund, and the administrator program is funded from the general budget of the judiciary.[10] The resulting payment gap, with the trustee program being more costly for debtors, led the Ninth Circuit Court of Appeals to declare the 2017 law unconstitutional.[11] In response, Congress gave the United States Judicial Conference (the “Judicial Conference”) the discretion to impose the same fees on a Chapter 11 debtor under the administrator program as on a debtor under the fiduciary program.[12] The Judicial Conference has used its discretion to do so.[13] This arrangement equalized fees paid in the two systems until Congress enacted the 2017 Act to Address Funding Shortages in the Administrators Program, which increased fees in the first quarter of 2018 for all cases. in progress of chapter 11.[14] The six districts applying the administration program did not enact this fee until October 1, 2018 and then only applied this fee to newly filed cases.[15] Thus, debtors governed by the administrator program paid less than debtors governed by the fiduciary program. This discrepancy led the Siegel Supreme Court to declare the 2017 law unconstitutional.[16] However, he also left open the question of how to fix the discrepancy in payments made under the 2017 law.[17]

Possible solutions to the “what now” question

There appear to be three possible actions as a result of the Court’s decision: (1) refund the money, (2) retroactively increase the fees of debtors who have filed Chapter 11 cases in the states using the Administrator program ; or (3) do nothing. Each of these potential remedies has certain advantages, but also carries a disease that the courts will have to deal with.

Reimbursing the money may be the most sensible solution. The two circuit courts that previously ruled the 2017 law unconstitutional ordered the bankruptcy court to provide plaintiff debtors with reimbursement of the amount of quarterly fees paid beyond the amount they would have paid in a district using the administrator program. during the same period. period.[18] However, implementing nationwide reimbursement raises issues of equity and practicality.[19] First, it could lead to the disinvestment of extremely large portions of the reserves that the trust program maintains in its UST fund. Congress initially raised the fee in response to concerns about a shortfall in the UST fund. Running out of funds to repay overpayments could lead to yet another, even larger increase in Congressional fees (this time applied evenly) and would be a pyrrhic victory for current debtors and a decisive loss for future ones. debtors. Also, the courts would have to reopen many old cases and then answer the question of what to do with the money after it is refunded (for example, how would a refund be paid to a liquidator trustee for a long-dissolved trust? ).

Retroactively increasing fees on debtors who filed in exempt states would theoretically be simpler to implement due to fewer parties involved: only 6 of the 94 judicial districts are currently exempt. However, this would raise significant due process concerns. For example, in the context of a tax increase, the Supreme Court said that a retroactive tax assessment could be “so severe and oppressive as to transgress constitutional limits[s].”[20] While it cannot be said that retroactively increasing fees would definitely create a violation of due process, it can definitely be said that harsh retroactive enforcement would result in a great deal of litigation.

Even doing nothing carries with it the specter of injustice. Failing to correct the imbalance created by the unconstitutional law of 2017 offers no relief to those who paid the highest fees and allows the administrator program created by the government to reap the rewards of an unconstitutional law. In Montana National Bank of Billings v. Yellowstone County Supreme Court considered what to do with the money collected under a discriminatory tax law after the state court ruled the tax unconstitutional but declined to order a refund.[21] The Supreme Court said that fixing the law but not ordering a remedy “does not remedy the wrongdoing”.[22] Here, too, granting only a prospective remedy would not cure the wrongdoing.

A possible landmark in this thicket is the Supreme Court’s decision in McKesson Corp. v. Div. alcoholic bevs. & The tobacco.[23] In McKesson, the state of Florida enacted a tax that violated the Commerce Clause by imposing a higher tax burden on liquor sales that did not use Florida products than those that did.[24] The taxpayer requested reimbursement of the “amount of excess taxes he had paid because of his disadvantaged treatment”.[25] The Supreme Court had to determine which remedy to apply. In analyzing the situation, the Court concluded that there were three possible remedies: (1) reimbursement of the difference between the tax paid by the applicant taxpayer and the tax of the privileged class; (2) assess and collect the tax arrears of this privileged class to “retrospectively create a non-discriminatory system”; and (3) “a combination of a partial refund[etunecotisationrétroactivepartielle»tantquelataxeimposéependantlapériodediscriminatoire«reflèteunrégime»quineviolepaslaConstitution[26] The Court ultimately returned the case to Florida courts, reinforcing that “[t]The state is free to choose the form of relief it will provide, as long as it meets the minimum federal requirements.[27]

The Fourth Circuit will now find itself playing the same role as the Florida courts in McKesson — it will have to fashion a form of relief that satisfies the Constitution without violating due process. The simplest solution, if all potential claimants are considered, may be the third McKesson option, implementing both a partial refund and a partial retroactive assessment. While this solution may not please anyone and entails its own administrative burden, it is probably the only solution that remedies the constitutional violation without creating a catastrophic situation for the trustee program and without infringing on the due process rights of debtors who Filed Chapter 11 cases in the states using the Administrator program. Regardless of the Fourth Circuit’s response, litigation will likely continue for many years as the court system struggles to right this constitutional error. The question of “what now?” isn’t going away anytime soon.



NOTES

[1] See pub. L. 115-72, Div. B, 131 Stat. 1229.

[2] See Vince Sullivan, Justices’ US Trustee Fee Ruling Could Wreak Ch. 11 Havoc, Law 360 Bankruptcy, https://www.law360.com/bankruptcy/articles/1500307/justices-us-trustee-f…(last updated June 7, 2022) (“[E]Experts say managing the $500,000 in excess fees paid by the trust — which equates to nearly $325 million for all debtors in the same situation — presents several options that have serious pitfalls. “).

[3] Siegel, 596 US___, at 15 (2022).

[4] See HR Rep. no. 99-764, p. 17 (1986).

[5] Identifier. at 17-18.

[6] See Bankruptcy Reform Act of 1978, Pub L. No. 95-598, 92 Stat. 2549, 2662-65 (1978).

[7] See Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088, 3090-95 (1986); Siegel, 596 United States at 2.

[8] §§ 11-115, 302(d)(3), 100 Stat. 3090-3095, 3121-3123.

[9] § 501, 114 Stat. 2421-2422 (Law of 2000); §302(d)(3), 100 Stat. 3121-3123.

[10] See Siegel, 596 US at 3; see also 28 USC § 589a(b)(5);

[11] St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525, 1532-1533 (1994), as amended, 46 F.3d 969 (1995).

[12] Act of 2000 § 105, 114 Stat. 2412 (enacting 28 USC § 1930(a)(7)).

[13] See Report of the Proceedings of the Judicial Conference of the United States 45-46 (Sept./Oct. 2001) https://tinyurl.com/2001-jud-conf-report.

[14] See pub. L. 115-72, Div. B, 131 Stat. 1229.

[15] See Siegel, 596 US at 4-5.

[16] Identifier. at 13-15.

[17] In 2021, Congress removed the discretion of the Judicial Conference whether or not to impose fees in the Trustee program that are equal to those in the Trustee program by making the imposition mandatory. See pub. L. 116-325, 134 Stat. 5088.

[18] See Clinton Nurseries of Md., Inc. v. Harrington (In re Clinton Nurseries, Inc.), 998 F.3d 56, 64-70 (2d Cir. 2021); John Q. Hammons Fall 2006, LLC v. Office of the US Tr. (In re John Q. Hammons Fall 2006, LLC), 15 F.4th 1011, 1021-1026 (10th Cir. 2021).

[19] If the Fourth Circuit does not consider the potential remedy from a national perspective, a court will likely eventually have to.

[20] McKesson Corp. vs. Div. alcoholic bevs. & Tobacco, 496 US 18, 40 n. 23 (1990).

[21] National Bank of Montana of Billings v. Yellowstone County, 276 US 499 (1928).

[22] Identifier. at 34 years old.

[23] 496 US 18 (1990).

[24] Identifier. at 23 years old.

[25] Identifier. at 24-25.

[26] Identifier. at 40-41.

[27] Identifier. at 51 years old.

© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 166

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