Bankruptcy Court Rules U.S. Trustee Amended Fee Schedule Unconstitutional

In Circuit City, the debtors' liquidating plan was confirmed on Sept. 14, 2010. The plan formed a liquidating trust to administer and distribute assets and provided that the liquidating trustee would pay U.S. Trustee quarterly fees until the bankruptcy cases were closed or converted. After the amendment was enacted, the liquidating trustee paid the increased quarterly fees to the U.S. Trustee for all of 2018. In March 2019, the liquidating trustee requested the Bankruptcy Court to determine the amount of post-confirmation quarterly fees owed to the U.S. Trustee — specifically, the liquidating trustee argued that the amount of quarterly fees owed should have been calculated based on the statutory fee schedule in effect on the debtor's petition date, not based on the increased fee schedule.

The liquidating trustee challenged the amendment's constitutionality on two grounds: 1) that the amendment could not be retroactively applied to the liquidating trust because the underlying bankruptcy case was pending before the amendment's enactment; and 2) that the amendment's increased fee schedule was not applied uniformly throughout the country (i.e., Chapter 11 debtors in districts subject to the BA program were not subject to the increased fees for the first three quarters of 2018 and the BA program's increased fees were not applied retroactively).

With respect to its argument that the amendment was unconstitutional because it applied retroactively to cases filed prior to the amendment's enactment, the liquidating trustee argued that the "exponential statutory increase" in U.S. Trustee fees could not have been anticipated when the plan was confirmed eight years earlier and that if the liquidating trustee could have anticipated such an increase of fees, he may have made different decisions in the confirmation process. As it stood now, the plan and all parties' rights were fixed, and the increased fees would harm allowed claimholders as a result of fewer assets being available for distribution.

The Bankruptcy Court determined that Congress did not expressly define the amendment's temporal reach; therefore, it was left to the Bankruptcy Court to decide whether the amendment was impermissibly applied to cases pending on the amendment's effective date. The Bankruptcy Court found its prior decision in In re AH Robins, 219 B.R. 145 (Bankr. E.D. VA. 1998) to be controlling, such that the increased U.S. Trustee fees were similar to taxes or expenses that arose post-confirmation and differed in amount from what was initially anticipated. The Bankruptcy Court held that the increased U.S. Trustee fees did not violate the anti-retroactivity principle because the amendment was substantively prospective.

The liquidating trustee's second argument was that the Amendment was unconstitutional because of its non-uniform application between judicial districts participating in the U.S. Trustee program and those participating in the BA program. This argument stemmed from the fact that for the first three quarters of 2018, debtors in judicial districts in the BA program were not subject to the increased fee schedule; and that debtors whose Chapter 11 cases were filed before Oct. 1, 2018, in judicial districts in the BA program are not subject to the increased fee schedule but similarly situated debtors in all other judicial districts are subject to the increased quarterly fees.

Classifying the quarterly fees as a tax, the Bankruptcy Court determined that the Constitution's Uniformity Clause would be violated because the quarterly fees were not applied in a geographically uniform manner given the differences in how the quarterly fees were assessed for debtors in districts participating in the U.S. Trustee program and those in the BA program. Alternatively, classifying the quarterly fees as a Chapter 11 user fee, the Bankruptcy Court found that the amendment violated the Constitution's bankruptcy clause, which requires that Congress establish uniform bankruptcy laws throughout the country.

Now that the increased U.S. Trustee's fees are being applied consistently in all districts throughout the United States, the direct application of the Circuit City decision may be of limited impact. However, what it highlights is just how dramatic the increase in U.S. Trustee fees has been and the potential impact on reorganizations throughout the country. Effectively, in many large cases this arguably amounts to 1% of all disbursements, which could translate in some circumstances to 1% or more of gross revenues.

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Francis J. Lawall, a partner in the Philadelphia office of Pepper Hamilton, concentrates his practice on national bankruptcy matters and workouts. Marcy J. McLaughlin is an associate in the corporate restructuring and bankruptcy practice group of the firm, resident in the Wilmington, DE, office.