Issues
Does the Bankruptcy Judgeship Act of 2017, which increases filing fees for bankruptcy in all states except Alabama and North Carolina, violate the uniformity requirement of the Bankruptcy Clause?
This case asks the Supreme Court to determine whether Section 1930 of the Bankruptcy Judgeship Act of 2017, which increased filing fees in trustee districts but not in bankruptcy administrator districts, violates the uniformity requirement of the Bankruptcy Clause. Petitioner Alfred H. Siegel argues that the disparity in fees is non-uniform because it applies to different geographic locations in the United States differently. As a result Siegel, contends that that the fee system is unconstitutional, and asks the Court to grant a full refund of the difference in fees. Respondent John P. Fitzgerald, III, counters that the disparity does not violate the uniformity requirement of the Bankruptcy Clause, impacting trustee districts and administrator districts in a facially neutral way. The outcome of this case has heavy implications for the delegation of congressional power and the structure of bankruptcy courts.
Questions as Framed for the Court by the Parties
Whether the Bankruptcy Judgeship Act violates the uniformity requirement of the Constitution’s bankruptcy clause by increasing quarterly fees solely in districts under the U.S. Trustee program, not those under the Bankruptcy Administrator program.
Facts
In 1978, Congress established the Trustee program and Bankruptcy Administrator program. Siegel v Fitzgerald at 160. These programs were designed to handle United States bankruptcy proceedings. Id. In 1986, the Trustee program was made permanent in 1986 and U.S. Trustees are used in 88 of the 94 judicial districts in the United States. Id. The remaining six districts, all in Alabama and North Carolina, use the Bankruptcy Administrator program. Id. The two programs have different funding streams: the Bankruptcy Administrator program is funded by the general judiciary budget, while bankruptcy debtors in their respective districts fund the Trustee program. Id. at 162. Congress set up the Trustee program to receive its funding stream through quarterly collections of debtor fees. Id. By the mid 2010s, Bankruptcy Administrators were also receiving quarterly fees that had been imposed upon their districts. Id. This fee assessing system functioned for both programs until that time, when the Trustee program struggled to function. Id. In response, Congress passed the 2017 Amendment to the Bankruptcy Judgeship Act (“2017 Amendment”), which changed the quarterly fees formula and increased the fee requirements for debtors if they met certain balance amounts. Id. at 161.
Petitioner Alfred Siegel (“Siegel”) was the trustee for Circuit City Stores, a chain of consumer electronic retail stores that filed for Chapter 11 bankruptcy, or reorganization, protection in a trustee district in Virginia in 2008. Id. at 162. As part of the bankruptcy court’s approval of the chain’s liquidation plan, it was written that the Circuit City trustee (Siegel) would pay fees to the United States Trustee, Respondent John P. Fitzgerald, III, (“Fitzgerald”) until the Chapter 11 Bankruptcy cases were closed. Id. These bankruptcy proceedings were still pending in January 2018, after the 2017 Amendment had taken effect. Id.
At first, Siegel paid the 2017 Amendment mandated increase in quarterly fees on time. Id. However, in February 2019, the Western District of Texas ruled that the 2017 Amendment was unconstitutional because it created nonuniform bankruptcy laws that contravened the Bankruptcy Clause, and that the 2017 Amendment was unconstitutionally retroactive. Id. After this Texas ruling, Siegel wanted to limit his liability for paying the quarterly fees under the 2017 Amendment and filed for relief in the United States Bankruptcy Court for the Eastern District of Virginia. Id. at 165. While Fitzgerald disagreed with Siegel, arguing that the 2017 Amendment was not retroactive and does not implicate constitutional uniformity questions, the bankruptcy court granted Siegel’s request for relief. Id. The bankruptcy court determined that the quarterly fees could be classified as either a tax or a user fee and that, either way, the 2017 Amendment contravenes the Bankruptcy Clause and Uniformity Clause. Id. at 165. The bankruptcy court also concluded that Congress had not explicitly outlined the 2017 Amendment’s time frame, and so it was up to the courts to determine if it applied to bankruptcy cases that had been pending when it became effective. Id. at 166.
Fitzgerald, in his capacity as the acting U.S. Trustee for the relevant region appealed to the United States Court of Appeals for the Fourth Circuit, arguing that the bankruptcy court erred in its decision on uniformity. Id. Meanwhile, Siegel cross-appealed a different section of the bankruptcy court’s decision, claiming that he should be allowed to retroactively apply the 2017 Amendment to his situation. Id. at 162.
The Fourth Circuit consolidated the cases and ruled in favor of Fitzgerald, as the U.S. Trustee. Id. The Fourth Circuit reversed the bankruptcy court’s decision on uniformity but affirmed the bankruptcy court’s decision on the retroactivity of the 2017 Amendment. Id.
Siegel appealed. The United States Supreme Court granted certiorari on January 10, 2022.
Analysis
APPLICABILITY OF THE BANKRUPTCY CLAUSE
Petitioner Siegel argues that the 2017 Amendment directly contradicts the Bankruptcy Clause, which authorizes Congress to “establish uniform Laws on the subject of Bankruptcies throughout the United States,” which requires Congress to pass laws that operate with the same power and result throughout the United States. Brief for Petitioner, Alfred H. Siegel at 19–20. Siegel argues that the Bankruptcy Clause applies to all laws, whether procedural or substantive, that regulate the “subject of bankruptcies” and therefore it applies to the administrative fees in filing a bankruptcy case. Id. at 24. Siegel concludes that even if the administrative fees falls under the Necessary and Proper Clause, which permits Congress to act in accordance with its constitutional powers, it must still comply with the Bankruptcy Clause itself. Id. at 26. Moreover, Siegel contends that a law that would conflict with the Bankruptcy Clause cannot fall under the Necessary and Proper Clause because it is, inherently, not proper. Id.
Respondent Fitzgerald argues that the uniformity requirement of the Bankruptcy Clause only applies to substantive laws, but not procedural laws such as the fee provision for filing a bankruptcy application. Brief for Respondent, John P. Fitzgerald, III at 18. According to Fitzgerald, the Bankruptcy Clause is a grant of authority for Congress to enact substantive federal bankruptcy laws, and Congress is authorized to enact procedural laws under the Necessary and Proper Clause. Id. at 19–20. Fitzgerald therefore contends that the uniformity clause does not apply to such auxiliary laws, especially to bankruptcy fees. Id. at 20, 22. To illustrate this, Fitzgerald uses the first federal bankruptcy as an example: it also charges for a fee to reduce the estate available to creditors, and the amount of the fee can vary among districts. Id. at 21. Even in modern days, Fitzgerald contends that local rules often vary and therefore different outcomes are reached in different districts. Id. at 22–23.
UNIFORM TREATMENT UNDER SECTION 1930
Siegel argues that, by increasing fees for debtors in all places except Alabama and North Carolina, Section 1930 of the 2017 Amendment did not impose uniform fees throughout the United States. Brief for Petitioner at 20, 27. According to Siegel, Section 1930(a)(6) required increased fees in United States trustee districts, but Section 1930(a)(7) only permitted such increased fees in bankruptcy administrator districts. Id. at 27. This difference in terminology, Siegel argues, cannot be ignored. Id. As a result, although Section 1930(a)(7) gave the Judicial Conference discretion to impose the same fees, Siegel argues Congress did not compel it to do so. Id. Indeed, Siegel points out that the Judicial Conference has not imposed a fee increase in bankruptcy administrator districts. Id. at 28. Siegel further argues that the revised 2021 Act, which replaces the “may” in Section 1930(a)(7) with “shall,” does not prove that Section 1930(a)(7) was mandatory in the 2017 Act. Id. at 29. The change, according to Siegel, only proves that Congress was conscious of potential constitutional problems that might arise. Id.
Fitzgerald counters that the fees were facially uniform throughout the United States. Brief for Respondent at 31. According to Fitzgerald, when Congress drafted the statute, it expected that the fees in bankruptcy administrator districts would be equal to the fees in the trustee districts. Id. Although Section 1930(a)(7) used the word “may” when it was enacted in 2017, Fitzgerald argues that Congress only gave the Judicial Conference discretion to impose the fees or not, but not to impose unequal fees. Id. at 32. According to Fitzgerald, when enacting the statute, Congress knew that the Judicial Conference had imposed such fees in bankruptcy administrator districts in its 2001 standing order. Id. Fitzgerald further argues that the doctrine of constitutional avoidance, which means that the Court should avoid statutory construction that directly conflicts with the Constitution, also warrants this reading that Congress intended to impose equal fees. Id. at 33. According to Fitzgerald, Congress’s subsequent change of “may” to “shall” also confirms this reading. Id.
VIOLATION OF THE UNIFORMITY REQUIREMENT
Siegel argues that the disparity in fees cannot be constitutional even if having two parallel bankruptcy program, the United States Trustee Program and the Bankruptcy Administrator program (“the dual-system”), does not violate the uniformity requirement of the Bankruptcy Clause. Brief for Petitioner at 20. In fact, Siegel contends that the dual system cannot justify the non-uniform treatment. Id. at 30. According to Siegel, Congress may justify different treatments of the debtors based on natural distinctions, such as specific industries or specific regions, but not solely based on where they file for bankruptcy. Id. Siegel argues that the difference in treatment is not based on any material difference within the debtor class—in fact, similarly situated debtors are subject to different fees simply based on their location. Id. at 20. Siegel goes on to argue that the dual system is itself unconstitutional because Congress gives no meaningful distinction between the states except for politics. Id. at 33.
Fitzgerald argues that the disparity in fees does not violate the uniformity requirement even if the uniformity requirement does apply to the fee measure here. Brief for Respondent at 36. According to Fitzgerald, the Court has never invalidated a bankruptcy law because it does not apply uniformly in different geographical areas. Id. Fitzgerald also argues that the statute on its face does not refer to geography, but is merely program-specific, and the uniformity requirement is satisfied when Congress uses non-geographical terms. Id. at 37–38. Even if the fee increase were seen by the Court as defined in geographical terms, Fitzgerald contends that it would still not violate the uniformity requirement because Congress was addressing a problem that is unique to some geographical areas, namely, the funding shortfall in the United States Trustee Program. Id. at 39.
PROPER REMEDY FOR THE CONSTITUTIONAL VIOLATION
Siegel argues that the proper remedy for this constitutional violation must be a full refund or other retroactive adjustment of tax burden. Brief for Petitioner at 31–32. According to Siegel, the government must make amends to the constitutional violation “in the relevant time period.” Id. at 31. Siegel contends that the government errs in invoking declaratory or injunctive relief because case law suggests that future benefits are not adequate remedies for past unequal treatment. Id. Alternatively, Siegel proposes that the government should collect the difference in fees in the bankruptcy administrator districts, although Siegel admits that any such attempt would lead to serious judicial challenges of its validity. Id. at 32. As a practical matter, Siegel thus concludes that the government should provide a full refund for the fee difference in the United States Trustee Program and the Bankruptcy Administrator program. Id.
Fitzgerald counters that refunding the fee increase cannot be the appropriate remedy even if the Court found the 2017 Amendment unconstitutional. Brief for Respondent at 43. According to Fitzgerald, the Court can only adopt remedies that Congress would be likely to choose if it were aware of the constitutional infirmity when drafting the statute. Id. Fitzgerald argues that Congress would have chosen to impose the increased fees in the bankruptcy administrator districts had it been aware of the problem, for otherwise it would not be able to address the funding shortage in the United States Trustee Program. Id. at 44. Requiring the government to fully refund the difference in fees, which is approximately $324 million dollars, would contradict clear congressional intent, and Fitzgerald therefore argues that the proper remedy is to increase fees for bankruptcy administrator districts. Id. According to Fitzgerald, such a treatment would be sufficient here and Siegel misunderstands case law: a forward-looking remedy is only inadequate for past unequal treatment when no pre-enforcement challenge is possible. Id. at 47.
Discussion
DELEGATION OF CONGRESSIONAL POWER
Acadiania Management Group (“AMG”), in support of Siegel, argues that Congress acted unconstitutionally when it delegated some of its bankruptcy authority to bankruptcy judges in Alabama and North Carolina. Brief of Amici Curiae Acadiana Management Group, LLC et al., in support of Petitioner, at 24. AMG argues that Congress does not have the power to delegate to the judiciary branch the power to determine whether or not to take part in the Trustee system. Id. at 27. AMG argues that Congress decidedly does not have the authority to contravene Article III Judicial power to Article I bankruptcy judges by delegating authority to specific bankruptcy judges in Alabama and North Carolina. Id. AMG draws upon the words of Alexander Hamilton to argue that the federal government alone has exclusive jurisdiction to make uniform laws, and this bedrock principle cannot be contravened by bankruptcy judges in states making their own distinct rules. Id. at 28.
Fitzgerald argues that the Bankruptcy Uniformity Requirement did not, and does not, impinge upon Congressional authority to set user fees for the U.S. Trustee Program. Brief of Respondents at 18. From the very beginning, Fitzgerald contends, the uniformity section of the Bankruptcy Clause included some intended limits and restrictions on Congress’s power. Id. at 19. These were minimal and offset by Congress’s inherent power under the Necessary and Proper clause, which allowed it to pass substantive bankruptcy laws, should it want to. Id. It is clear, says Fitzgerald, that both historical and modern interpretations of laws such as the Bankruptcy Clause and its auxiliaries, are in line with variations between judicial districts. Id. at 20.
THE FUTURE STRUCTURE OF BANKRUPTCY ADMINISTRATION
John Q. Hammons Hotels & Resorts (“Hammons”) argues that the dual system of bankruptcy administration—trustees versus administrators—is unconstitutional. Brief of Amici Curiae John Q. Hammons Hotel, et. al., in support of Siegel, at 13. Hammonds notes, in particular, that the Department of Justice’s involvement in trustee bankruptcy cases has serious impact on the disposition of a debtor’s estate, particularly in contrast with bankruptcy administrators. Id. at 13–14. While neither Hammons—nor other amicus briefs—propose alternate structures of bankruptcy administration, they claim that the “constitutional infirmity” of the dual system at the heart of the Bankruptcy Code has long plagued the entire system, despite Congress’s failed attempts at salvaging it. Id. at 13, 19. Thus, Hammons contends that the amendment in whole should be declared unconstitutional, resulting in the effective dismantling of the trustee and administrator programs. See id. at 26.
Fitzgerald, on the other hand, contends strenuously that the current system is constitutional and responsive to geographical differences in bankruptcy cases. Brief of Respondents at 15. Fitzgerald holds that the strength of the current system is that it allows Congress to respond to budget shortfalls in, for instance, the Trustee program, and thus allow the whole system to move smoothly. Id. In effect, Fitzgerald argues that the current dual structure of the bankruptcy administrators is, in fact, a constitutionally valid strength, and should remain the same. Id.
Conclusion
Acknowledgments
Additional Resources
- Daniel Gill, Supreme Court to Decide if Bankruptcy Fee Hike Constitutional, Bloomberg Law, (January 10, 2022).