By Erica L. Kravchenko –
UPDATED June 7, 2022
This term, the Supreme Court granted certiorari in Seigel v. Fitzgerald (In re Circuit City Stores, Inc.), 996 F.3d 156 (4th Cir. 2021), to resolve a growing split of authority arising across the country regarding whether the 2017 Amendment to 28 U.S.C. 1930(a)(6), the statute governing bankruptcy fees, violates the uniformity requirement of the Bankruptcy Clause by increasing quarterly fees solely in United States Trustee districts.
To fully understand the legal quagmire, historical context is required. In 1978, Congress implemented the United States Trustee (“UST”) pilot program in 19 districts, wherein USTs performed administrative duties that were once performed by bankruptcy judges. In 1986, after mostly favorably review, Congress made the program permanent and expanded it to all 50 states except for Alabama and North Carolina, where Bankruptcy Administrators were appointed to carry out administrative duties. UST districts were most self-funded by debtor fees, including chapter 11 quarterly fees, while Bankruptcy Administrator districts are overseen by the Judicial Conference and funded by the Judiciary. Although meant to be temporary, this dual program continues today.
This dual system first gave rise to a constitutional challenge in 1994, where the Ninth Circuit determined two things: (1) the dual structure was arbitrarily created without justification and thus, violated the uniformity requirement of the Bankruptcy Clause and (2) a reasonable remedy would be to abolish the dual program.
In response, Congress empowered the Judicial Conference to implement a procedure by which Bankruptcy Administrator districts would assess fees equal to those imposed in the UST districts. Though not perfect, it resolved the discrepancy as districts across the country uniformly calculated and distributed fees pursuant to the same fee structure under 28 U.S.C. § 1930(a)(6).
This uniformity persisted until the enactment of the 2017 Amendment, wherein Congress implemented a new fee structure in large chapter 11 cases to address a shortfall in the UST System fund. Under this new structure, the quarterly fees were assessed by calculating the lesser of 1% of disbursements or $250,000, a substantial increase from the prior maximum fee of $30,000. The 2017 Amendment was to be both temporal (sunsetting in 2022) and conditional (applying if the UST System Fund fell below $200 million at the end of the current fiscal year). Notably absent from the 2017 Amendment was language addressing whether the new fee structure would be uniformly applied to both types of districts and to both new and pending cases.
Shortly after its enactment, the conditional requirement was triggered. Both pending and new cases in UST districts were assessed the increased quarterly fees effective January 1, 2018, while only new cases in Bankruptcy Administrator districts filed on or after October 1, 2018 were assessed the increased fee. Across the country, opposition to these new fees arose.
In Siegel, the liquidating trustee for debtor Circuit City (“CC Trustee”), sought to limit its liability under the 2017 Amendment reasoning that it impermissibly created nonuniform laws and violated the Bankruptcy Clause. The Bankruptcy Clause requires all laws on the subject of bankruptcies to be constitutionally uniform, meaning they must (1) be applied uniformly to a defined class of debtors and (2) be geographically uniform.
The Bankruptcy Court ruled in favor of the CC Trustee on the constitutionality issue. But on direct appeal, the Fourth Circuit reversed, holding that the 2017 Amendment did not contravene the Bankruptcy Clause because the difference in quarterly fees assessed in UST districts and Bankruptcy Administrator districts was not arbitrary, that Congress provided solid justification for the amendment.
Currently, a Circuit split exists. Both the Fourth and Fifth Circuits have upheld the 2017 Amendment on the basis that unlike in St. Angelo, this time Congress provided a reasonable justification and therefore, the amendment passes constitutional muster. By contrast, the Second and Tenth Circuits held that the 2017 Amendment is “unconstitutionally nonuniform on its face” because it required an increase in fees in the UST districts but only permitted such change in Bankruptcy Administrator districts. In other words, it was unconstitutional because “[it] neither applie[d] uniformly to a class of debtors nor addresse[d] a geographically isolated problem.”  To remedy the discrepancy, these Courts ordered the refund of the excess fees paid pursuant to the 2017 Amendment.
Interestingly, the Eleventh Circuit also upheld the 2017 Amendment but on different grounds than the Second and Tenth Circuits, determining that the Judicial Conference’s decision to impose the fee increase ten (10) months later did not render the 2017 Amendment unconstitutional.
Currently, there are also pending appeals challenging the 2017 Amendment in the Federal, Sixth, and Ninth Circuits.
While this constitutional challenge is limited in scope, the outcome may have broader implications. First, if the Supreme Court determines that the 2017 Amendment is unconstitutional and adopts the recommendation of the Second and Tenth Circuits in requiring a refund of the excess fees, this could have a significant impact on larger chapter 11 cases pending during the first three (3) quarters of 2018. Second, the ruling may an additional impact on how the uniformity requirements in other statutes are interpreted. With the Court’s ruling scheduled to be issued in the next few weeks, we won’t have long to see how this plays out.
UPDATE June 8, 2022
The wait was not long indeed! Earlier this week, the Supreme Court in a unanimous decision in Siegel v. Fitzgerald, No. 21-441, struck down the 2017 Amendment to 28 U.S.C. 1930(a)(6), ruling that it violated the uniformity requirement of the Bankruptcy Clause. Specifically, the Court held that “the uniformity requirement of the Bankruptcy Clause prohibits Congress from arbitrarily burdening only one set of debtors with a more onerous funding mechanism than that which applies to debtors in other States.” Id.
In reaching its decision, the Court first determined that the 2017 Amendment was indeed subject to the uniformity requirement, noting that the Bankruptcy Clause applied to both legal and administrative laws, rejecting Respondent Fitzgerald’s contrary position. The Court approached the constitutional issue more narrowly, limiting its ruling to the specific circumstances presented in this specific nonuniform fee increase. The Court declined to address the constitutionality of the dual system, and even warned against applying the decision in a way that would limit Congress’s authority to structure relief to deal with geographically isolated issues.
But most notably, despite recognizing the potential pandora’s box of legal and administrative concerns such ruling would create, did not provide a potential remedy. Instead remanding it to the lower courts to address. With this ruling, debtors have been provided with an opportunity to creatively seek redress for the excessive fees. To learn more about how this ruling affects you and your right to a potential refund, please contact us.
 Seigel v. Fitzgerald (In re Circuit City Stores, Inc.), 996 F.3d 156 (4th Cir. 2021).
 Id. at 160.
 St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525 (9th Cir. 1994), amended by 46 F.3d 969 (9th Cir. 1995).
 28 U.S.C. § 1930(a)(7) (2002) (“In the districts that are not part of a United States Trustee region . . . the Judicial Conference may require the debtor in a case under chapter 11 of title 11 to pay fees equal to those imposed by paragraph (6) of this subsection.”) (emphasis added).
 See 28 U.S.C. 1930(a)(6) (2017). The increase only applies to quarterly fee disbursements that exceed $1 million.
 996 F.3d 156 (4th Cir. 2021). The CC Trustee also argued that the 2017 Amendment’s application to pending cases violated the Due Process Clause as it deprived debtors of fair notice and the uniformity requirement of the Taxing and Spending Clauses of the Constitution. The Bankruptcy Court rejected these two arguments, which was affirmed on appeal.
 U.S. Const. Art. I, Section 8, Cl. 4.
 See fn. 7 supra; Hobbs v. Buffets, L.L.C. (In re Buffets), 979 F.3d 366 (5th Cir. 2020).
 Clinton Nurseries of Md., Inc. v. Harrington (In re Clinton Nurseries, Inc.), 998 F.3d 56 (2d Cir. 2021); John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 15 4th 1011 (10th Cir. 2021)
 United States Tr. Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp.), 22 F.4th 1291 (U.S. 11th Cir. 2022).
 The 2021 Amendment essentially eliminated the constitutional issue by (1) replacing the fee schedule such that it no longer was tied to the level of surplus in the UST System Fund and (2) replacing the “may” language with “shall” language expressly requiring that all cases in both districts pay equal fees.