Supreme Court Finds 2017 Bankruptcy Fee Increases Unconstitutional But Leaves Remedy Unclear

In June, the U.S. Supreme Court, by unanimous decision, resolved a split amongst five circuits and determined that a 2017 Congressional amendment to the bankruptcy fee provisions was unconstitutional as violating the Bankruptcy Clause of the US. Constitution. See, Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022). The Bankruptcy Clause of the U.S. Constitution empowers Congress to establish "uniform laws on the subject of Bankruptcies throughout the United States." U.S. Const. art. I, §8, cl. 4. The meaning of "uniform" became the subject of debate in the Siegel case. The Supreme Court concluded that because the 2017 amendments exempted debtors located in two States, it was not "uniform" as it did not apply equally to all debtors regardless of where they were situated and, therefore, the statute was unconstitutional. Siegel, 142 S. Ct. 1770 (2022). A discussion of the Supreme Court's decision in Siegel, and relevant factual backdrop precipitating such decision, appears below.

The United States Trustee Program and Administrator Program

In 1986, Congress created the United States Trustee Program (UST Program) to ease what was previously an administrative burden on bankruptcy judges and assigned responsibility to U.S. Trustees, a component of the Department of Justice. At this time, six judicial districts in North Carolina and Alabama were given permission by Congress to opt out of the UST Program. In these six districts, the bankruptcy courts appoint bankruptcy administrators to perform the administrative functions that would otherwise have been performed by the UST Program but for the election to opt-out. For these six districts, the administrative system is referred to as the Administrator Program. The Administrator Program was scheduled to phase out, but in 2000, Congress permanently exempted the six districts from the requirement to transition to the UST Program. While the functions of the UST Program and the Administrator Program are largely identical, their funding sources are not. The UST Program is funded by user fees paid to the United States Trustee System Fund. These user fees are primarily comprised of fees paid by debtors who file cases under Chapter 11 of the Bankruptcy Code. By contrast, the Administrator Program is funded by the Judiciary's general budget. Funding source differences aside, from 2001 to 2017, all districts within the UST Program and Administrator Program paid identical user fees.

The 2017 Amendments to Bankruptcy Fees Provisions

In 2017, to address a funding shortfall in the UST Program, Congress increased the fees applicable to debtors. See, 28 U.S.C. §1930 (2017) (the 2017 Amendments). The 2017 Amendments significantly increased the quarterly fees paid and impacted both small and large debtors. Specifically, Congress added the following provision: "During each of fiscal years 2018 through 2022, if the balance in the United States Trustee System Fund as of September 30 of the most recent full fiscal year is less than $200,000,000, the quarterly fee payable for a quarter in which disbursements equal or exceed $1,000,000 shall be the lesser of 1 percent of such disbursements or $250,000." 28 U.S.C. §1930(B) (2017) (emphasis added). For larger debtors, this change resulted in an 833% as prior to 2017, that same debtor would only be required to pay a maximum of $30,000. For small debtors, the impact of the 2017 Amendments was even worse. For example, a small debtor with assets totaling $2 million and secured liens of $1.1 million who sells substantially all of its assets and pays its lien creditors at closing, would expect for $900,000 less $30,000 in UST fees to be the net return to the estate. However, the 2017 Amendments would require this debtor to pay the UST Program $250,000, thereby reducing the return to the estate by 27%. Prior to the 2017 Amendments, the effect on this small debtor's estate would have only reduced the return to the estate by 3%.