In addition to judicial oversight, bankruptcy cases are also supervised either through the office of the U.S. Trustee or a bankruptcy administrator. Funding for those programs is generated through quarterly fees taxed against a debtor. These fees have risen substantially over the last few years. Until recently, the amount of the quarterly fees assessed differed depending upon whether a U.S. trustee or bankruptcy administrator was employed in the district where the case was pending. This assessment disparity has generated consternation among debtors and has given rise to an interesting constitutional challenge.
On May 25, 2021 the U.S. Court of Appeals for the Second Circuit reaffirmed the U.S. Constitution’s requirement of uniformity in bankruptcy legislation and rulemaking. The dispute arose from the December 2017 bankruptcy of debtors-appellants Clinton Nurseries, Inc., Clinton Nurseries of Maryland, Inc., and Clinton Nurseries of Florida, Inc., (“Clinton entities”) in the District of Connecticut. The District of Connecticut is among those in which the U.S. Trustee (“UST”) program oversees bankruptcy administration (per the Second Circuit, rather than a judicially appointed bankruptcy administrator (“BA”).
Prior to The Clinton entities’ filing in 2017, Congress passed an amendment to the statute setting forth quarterly fees for administrators in bankruptcy cases, 28 U.S.C. Section 1930, which increased quarterly fees in UST districts without a corresponding fee increase in BA districts. This amended formulation of Section 1930 remained in effect until 2020, when Congress passed the Bankruptcy Administration Improvement Act of 2020, Pub. L. No. 116-325, requiring that UST districts and BA districts charge equal fees.
Prior to the implementation of the 2020 law, the Clinton entities incurred fees pursuant to the increase set forth in the 2017 amendment to Section 1930. Before the 2020 law was even in place, they had already challenged that the version of Section 1930 then in effect was in fact unconstitutional for imposing higher fees than BA districts over the same period. The Bankruptcy Court entered an order in August 2018 rejecting this challenge, and the debtors appealed.
The Clinton debtors’ argument centers on the “Bankruptcy Clause” of the Constitution, found in Article I, at Clause 4 of Section 8, which reads: “The Congress shall have power … to establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States …” According to the Second Circuit, the relevant Constitution inquiry is twofold: first, whether the 2017 amendment to Section 1930 is a “law on the subject of bankruptcies” implicating the uniformity requirement; and second, if it is, whether the law in question actually does violate that requirement.
Ultimately, according to the Second Circuit, the disparate fees imposed by the 2017 amendment created a “dual bankruptcy system” running afoul of the Constitution’s uniformity requirement. Reversing the Bankruptcy Court’s ruling, the Second Circuit held that the 2017 amendment was subject to the uniformity requirement of the Bankruptcy Clause, and that under the version of 28 U.S.C. Section 1930 in effect prior to the 2020 Act, the 2017 Amendment violated the uniformity requirement.
In this case, the dual tracks for quarterly fees demonstrated one of the bedrock principles of the Constitution’s Bankruptcy Clause: Absent an exception, uniformity of law must prevail.
Reprinted with permission from the June 23, 2021 issue of The Legal Intelligencer. © 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
The full article in its original form can be found here.
Francis J. Lawall (LAW ’85) is a partner at Troutman Pepper. His practice concentrates on national bankruptcy matters and workouts, including representation in commercial transactions, bankruptcy proceedings, and general litigation throughout the U.S.
Patrick M. Ryan is an associate at Troutman Pepper, where he advises financial institutions, asset management companies, and investment funds in a range of secured and unsecured financings, restructuring transactions, and bankruptcy matters.