Fourth Circuit: Just Because Bankruptcy Laws Must Be Uniform Doesn’t Mean They Can’t Be Different

By a two to one vote, in an April 29 opinion, the United States Court of Appeals for the Fourth Circuit reversed a decision of the United States Bankruptcy Court for the Eastern District of Virginia that a 2017 increase in U.S. Trustee’s fees violated the Uniformity Clause and the Bankruptcy Clause of the U.S. Constitution.   In a dissenting opinion, Judge A. Marvin Quattlebaum, strongly stated his belief that the increase violated the Bankruptcy Clause, but agreed that the Uniformity Clause was not violated.  All three judges on the Fourth Circuit panel agreed with the Bankruptcy Court that the increase applied to Chapter 11 cases that were already pending when the increase took effect, not only to cases filed after the increase went into effect.

Eighty-Eight of the ninety-four United States Bankruptcy Court Districts participate in the U.S. Trustee program.  That program is funded by quarterly fees paid by debtors in Chapter 11 cases.  The fees are based on the disbursements made by the debtors.

In the remaining six United States Bankruptcy Court Districts, comprised of the Bankruptcy Courts in Alabama and North Carolina, bankruptcy cases are not overseen by U.S. Trustees, but by Bankruptcy Administrators.  Bankruptcy Administrators are funded by the general budget of the Judicial Conference of the United States.

In 1994, the United States Court of Appeals for the Ninth Circuit held that a system in which debtors in districts in the U.S. Trustee program were required to pay quarterly fees while debtors in districts in the Bankruptcy Administrator districts did not violated the Bankruptcy Clause of the U.S. Constitution.  That clause empowers Congress to enact “Uniform Laws of the subject of Bankruptcies throughout the United States.”  In response, Congress required that debtors in Bankruptcy Administrator districts pay quarterly fees consistent with the quarterly fees paid by debtors in U.S. Trustee Districts.

In 2017, because the U.S. Trustee program was not adequately funded, Congress increased the quarterly fees paid by debtors whose quarterly disbursements exceed $1 million.   There was no corresponding increase in the quarterly fees paid by debtors in Bankruptcy Administrator districts until nine months later and the increase applied only to Chapter 11 cases filed after the effective date of the increase.

Circuit City Stores and affiliates had filed Chapter 11 cases in the United States Bankruptcy Court for the Eastern District of Virginia in 2008.  Their Chapter 11 plan, confirmed in 2010, established a liquidating trust from which claims of unsecured creditors were to be paid.  During the seven years between confirmation of the plan and when the 2017 increase in quarterly fees took effect, the liquidating trustee had paid $833,000 in quarterly fees.  After the increase went into effect, the liquidating trustee paid $632,000 in U.S. Trustee’s fees in only three quarters, before he succeeded in convincing the Bankruptcy Court that the differential between treatment of Chapter 11 debtors in U.S. Trustee districts and Bankruptcy Administrator districts violated the Bankruptcy Clause and the Uniformity Clause of the Constitution.

The Uniformity Clause of the Constitution provides that “Duties, Imports, and Excises shall be uniform throughout the United States.”  The Fourth Circuit held that the Uniformity Clause is not implicated by U.S. Trustee’s fees because they are a “user fee” and the Uniformity Clause applies only to taxes.

The Bankruptcy Clause, the majority said, does not require that bankruptcy laws be identical in all states.  Differences are permissible to resolve “regionally isolated problems.”  When it increased U.S. Trustee’s fees, Congress had “solid fiscal justification for its challenged action: to ensure that the U.S. Trustee’s program is sufficiently funded by its debtors rather than by the taxpayers.”

Finally, the Court said that applying the fee increase to debtors whose cases had been filed before the increase took effect did not violate the Constitution.  Although “Applying a statute to events occurring before it was enacted gives rise to Fifth Amendment due process concerns,” the Court said that the fee increase did not apply to events that occurred before enactment, but only to quarterly disbursements made by debtors after enactment.

Judge Quattlebaum opened his dissenting opinion:

Make no mistake about it.  We have two types of bankruptcy courts in the United States.  Forty-eight states operate as part of the United States Trustee Program under which United States Trustees aid the courts in the administration and management of bankruptcy cases. But two states—Alabama and North Carolina—operate under a different system.  They use Bankruptcy Administrators rather than United States Trustees.

In Judge Quattlebaum’s view, “this difference in bankruptcy systems is arbitrary and financially damages unsecured creditors in every state other than Alabama and North Carolina.” because fees paid to the U.S. Trustee “trickle down and reduce the amounts unsecured creditors receive.”  This difference cannot be justified on the basis that a fee increase was needed to address the underfunding of the U.S. Trustee program because “the fact that the Trustee Program districts face the budgetary problems…ignores that fact that those districts face the budgetary problems because Congress treated them differently in the first place.”  In Judge Quattlebaum’s view “No matter how you slice it, uniform means not different.”  Judge Quattlebaum would hold that making Circuit City’s liquidating trustee pay substantially higher fees than are payable in Bankruptcy Administrator districts violated the Bankruptcy Clause.

Despite the large dollar amounts involved, the Supreme Court may never weigh in on whether the differences between fees paid in U.S. Trustee districts and fees paid in Bankruptcy Administrator districts violate the Constitution.  The Supreme Court does not often take on issues on which the lower courts are in agreement.  The Fourth Circuit and the Fifth Circuit are the only two Courts of Appeal to address the issue to date and they have come to the same conclusion.