The ramifications of uneven fee increases in Chapter 11 bankruptcies continue to ripple through federal courts.
As we discussed earlier, Congress enacted legislation in 2017 that temporarily increased U.S. trustee fees that Chapter 11 debtors had to pay in virtually every district in the United States. The increase was intended to offset the costs of the US trustee program, particularly in large bankruptcy cases. The maximum amount for large debtors has increased dramatically, from $30,000 to $250,000 per quarter.
Legal challenges to the raise have sprung up across the country, including in Circuit City’s massive bankruptcy case. The trustee disputed the fee hike because it did not apply to districts that employ bankruptcy administrators instead of US trustees, namely those in Alabama and North Carolina. Because the increase was not applied identically in every district, the Supreme Court ruled that it violated the uniformity requirement of the bankruptcy clause of the U.S. Constitution. Siegel versus Fitzgerald, 142 S.Ct. 1770 (2022). Under the bankruptcy clause, Congress can only establish that “uniform Bankruptcy laws across the United States. const. art. I, § 8, cl. 4 (emphasis added). Because the fee increase was not uniform, it was unconstitutional. The Supreme Court sent the case back to the Fourth Circuit to consider the appropriate remedy.
In a May 2021 opinion — before the Supreme Court intervened — the Second Circuit also ruled that the disparate increase in fees violated the uniformity requirement of the bankruptcy clause. The Court of Appeal sent the case back to the bankruptcy court to grant “reimbursement of the amount of quarterly royalties paid in excess of the amount [the petitioner] would have paid in a [Bankruptcy Administrator] District during the same period. In re Clinton Nurseries, Inc.998 F.3d 56, 70 (2nd Cir. 2021).
In February 2022, the United States requested certiorari after the Second Circuit’s decision in Clinton Nurseries. In June, the Supreme Court ruled Seige, addressing the same fundamental question. Then, on October 11, 2022, the Supreme Court granted the government’s motion to certiorari in Clinton Nurseries. The Court simultaneously quashed the judgment and remanded the case for reconsideration in light of Siegel versus Fitzgerald. See Harrington v. Clinton Nurseries, Inc.., no. 21-1123, 2022 WL 6571659, at *1 (United States, 11 October 2022).
In Siegel, the Supreme Court remanded to the Fourth Circuit (the circuit where North Carolina is located) to deal with the range of suggested remedies, ranging from a fee increase for those in the bankruptcy administrator’s districts (suggested by the government) to a full refund of the US trustee fees paid (suggested by the debtor’s trustee). In In re Clinton Nurseries, on the other hand, the Second Circuit simply ordered the bankruptcy court to refund the overpayment over what would have been paid in North Carolina or Alabama. We’ll see if the Second Circuit re-evaluates this approach to pretrial detention and how this issue continues to impact bankruptcies across the country.