The Fourth, Fifth, and Eleventh Circuits Decided That the Fee Disparity Was Constitutional
On one side, the Fifth, Fourth, and Eleventh Circuits agreed that the UST’s temporary hike in quarterly fees was constitutional. The Fifth Circuit in Matter of Buffets, L.L.C reasoned that there was no uniformity problem because the distinction between the UST program and the BA program was not “arbitrary.” It is not always unconstitutional for bankruptcy laws to lack uniformity; it is only unconstitutional if the lack of uniformity is a product of arbitrariness. The difference in quarterly fees was not arbitrary, held the Fifth Circuit, but was rather a solution to a problem: the UST program had a shortfall in funding, whereas the BA program did not. The Fourth Circuit followed suit in Siegel v. Fitzgerald and adopted the Fifth Circuit’s reasoning.
The Eleventh Circuit agreed that the Amendment was constitutional, albeit while employing a different analysis than its sister circuits. The Eleventh Circuit emphasized the “inherent flexibility” of the Bankruptcy Clause. The court acknowledged that the Amendment mandated UST districts to impose the fee increase while merely permitting BA districts to do the same. The Eleventh Circuit, however, determined that Congress expected the Amendment to nonetheless be applied uniformly. The court, leaning on the flexibility of the Bankruptcy Clause, held that because Congress reasonably expected the BA districts to implement the quarterly fee raise, and because Congress quickly acted to solve the disparity when BA districts did not implement the fee hike, the Amendment was constitutionally uniform.
The Second and Tenth Circuits Held that the 2017 Amendment Was Unconstitutional
Conversely, the Second Circuit resisted the statutory-interpretation path of the Eleventh Circuit and instead held that the Amendment’s mandatory language for the UST districts—as opposed to its permissive language for the BA districts—plainly violated the Constitution’s uniformity requirement. The Second Circuit also disagreed with the Fourth and Fifth Circuits’ conclusion that the lack of uniformity was acceptable because of a “geographically isolated problem” (i.e., the court dispelled the argument that the distinction was not arbitrary because of the UST funding shortfalls). The court instead highlighted a crucial dilemma: “[t]wo debtors, identical in all respects save the geographic locations in which they filed for bankruptcy, are charged dramatically different fees.” This dilemma, regardless of the UST program’s funding shortfall, was determinative for the Second Circuit: the Amendment was not uniform, and thus unconstitutional, because it treated identical debtors differently. The Tenth Circuit followed in the Second Circuit’s footsteps and adopting its holding and nearly all of its analysis.
The Supreme Court Unanimously Held that the Fee Disparity Was Unconstitutional— But What Happens to the Debtors Who Paid Unconstitutionally High Fees?
In an opinion written by Justice Sotomayor, the Supreme Court unanimously held that the fee disparity was unconstitutional. First, the Court held that because of how broad the Bankruptcy Clause is written, the Act was a law “on the subject of Bankruptcies” and therefore within the purview of the Constitution. The fact that the law is administrative is no matter—the Court has never “distinguished between substantive and administrative bankruptcy laws.”
Next, the Court centered its analysis on whether the fee disparity was arbitrary, i.e., whether the disparity was truly in place to remedy geographical differences. In answering this question, the Court emphasized that the fee disparity was a product not of geographical difference, but of Congress’ arbitrary decision to create a dual bankruptcy system. Therefore, because the disparity was arbitrary, the Court held that it was unconstitutional.
Now that the fee disparity is officially unconstitutional, what happens to the UST debtors in 2018 who paid unconstitutionally high fees? Does the UST system have a large enough pot to reimburse those debtors? Will the UST system even offer reimbursement? Unfortunately, the Court opted not to answer this question and instead left the question of remedy to the Fourth Circuit on remand. In the coming months, all eyes will be on the Fourth Circuit as it determines the remedy, if any, for the overpaying debtors. Or perhaps another Circuit will have occasion to decide the appropriate remedy before the Fourth Circuit does. [Editor’s Note: after this article was submitted for publication, the Tenth Circuit issued its decision in In re John Q. Hammons Fall 2006, LLC, No. 20-3203, 2022 WL 3354682 (10th Cir. Aug. 15, 2022), remanding for determination of the appellant-debtors’ quarterly Chapter 11 fees and a refund of overpayment.] Additionally, the Court’s ruling expressly left open the question of whether either the BA program or the UST program will have to be abolished in favor of one uniform, nationwide system. Much remains unsettled, and bankruptcy practitioners would be well-advised to stay abreast of Siegel-related developments.