When Congress boosted bankruptcy fees but exempted filers in Alabama and North Carolina from the higher fees, it violated a uniformity requirement in the U.S. Constitution, the Supreme Court ruled unanimously on June 6.
The 19-page court opinion (pdf) in Siegel v. Fitzgerald, court file 21-441, was written by Justice Sonia Sotomayor. Oral arguments in the case were heard on April 18.
The petitioner is Alfred H. Siegel, trustee of the Circuit City Stores Inc. Liquidating Trust. The respondent is John P. Fitzgerald III, the acting United States trustee for Region 4.
Circuit City, a now-defunct technology retail chain, filed in 2008 for Chapter 11 bankruptcy in the Eastern District of Virginia, and its trustee argued the company wasn’t treated fairly in the process, as compared with bankruptcy filers in Alabama and North Carolina.
The U.S. Trustee Program is a component of the U.S. Department of Justice (DOJ) that oversees the administration of bankruptcy cases, according to the department. Region 4 includes the federal judicial districts established for Maryland, South Carolina, Virginia, West Virginia, and the District of Columbia.
Alabama and North Carolina aren’t part of the DOJ’s watchdog program. Bankruptcies in those states are handled by a bankruptcy administrator, overseen by the Judicial Conference of the United States, who monitors cases there.
The bankruptcy clause in Article I, section 8 of the U.S. Constitution empowers Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States.”
This difference in approach to two sets of bankruptcy leads to unfair outcomes, Siegel stated in the petition (pdf) filed with the high court in September 2021.
In the Bankruptcy Judgeship Act of 2017, “Congress adopted a five-year increase in quarterly fees paid only in U.S. Trustee districts, which boosted the maximum fee from $30,000 to $250,000 for all pending cases.”
But the increase was not imposed in the U.S. Trustee districts “until nine months later, and it applied only to cases filed after that date,” Siegel wrote.
“The result is a wide disparity in fees paid by identically situated debtors based solely on the geographic location of their bankruptcy. The total difference exceeds $100 million in aggregate fees in Chapter 11 cases nationwide.”
Sotomayor wrote for the Supreme Court that the difference in quarterly fees between states overseen by the DOJ trustee and the two other states must be corrected.
The Constitution’s “requirement that bankruptcy laws be ‘uniform’ is not a straitjacket: Congress retains flexibility to craft legislation that responds to different regional circumstances that arise in the bankruptcy system,” Sotomayor wrote.
“Nor, however, is this uniformity requirement toothless. The question in this case is whether Congress’ enactment of a significant fee increase that exempted debtors in two States violated the uniformity requirement. Here, it did.”
There is no dispute that when Congress raised fees in 2017 the increase “was not geographically uniform.”
“The only remaining question is whether Congress permissibly imposed nonuniform fees because it was responding to a funding deficit limited to the Trustee Program districts. Under the specific circumstances present here, the nonuniform fee increase violated the uniformity requirement,” the justice wrote.
“Debtors in Alabama and North Carolina, unlike debtors in the remainder of the country, paid no fee increases for the first three quarters of 2018. Moreover, the fee increase only applied to newly filed cases, and not pending cases, in those two States. That geographical disparity meant that petitioner paid over $500,000 more in fees compared to an identical debtor in North Carolina or Alabama.”
The Constitution “does not permit Congress to treat identical debtors differently based on artificial distinctions Congress itself created,” Sotomayor wrote, as the court remanded the case to the U.S. Court of Appeals for the 4th Circuit “to consider in the first instance the proper remedy.”