Bankruptcy – Bankruptcy fees amendment is constitutional

Although a 2017 amendment to the bankruptcy fees provisions may render it more expensive for some debtors in Virginia—as opposed to North Carolina or Alabama—to go through Chapter 11 proceedings, because the difference is a byproduct of Virginia’s use of the trustee program, it is not unconstitutional.

Background

These consolidated appeals present two constitutional issues concerning changes made to the bankruptcy laws nearly four years ago. Alfred H. Siegel, the Circuit City trustee, sought a ruling in 2019 on his liability for quarterly fees assessed under a 2017 amendment to the bankruptcy fees provisions of the United States Code. In response, the bankruptcy court ruled that the fees aspect of the 2017 amendment is unconstitutional.

The U.S. trustee maintains that the bankruptcy opinion erred in its uniformity ruling and has appealed. The Circuit City trustee, on the other hand, has cross-appealed a separate aspect of the opinion that rejected his claim concerning retroactive application of the 2017 amendment.

2017 amendment

Several bankruptcy courts have recently addressed similar constitutional challenges to the 2017 amendment, and most of those courts have ruled that the amendment does not present a constitutional uniformity problem. As emphasized by the Fifth Circuit, the bankruptcy clause forbids only “arbitrary” geographic differences. And the Supreme Court has never held that a statute contravened the bankruptcy clause because of arbitrary geographic distinctions.

Although the amendment may render it more expensive for some debtors in Virginia—as opposed to North Carolina or Alabama—to go through Chapter 11 proceedings, the 2017 amendment does not draw an arbitrary distinction based on the residence of the debtors or creditors. Instead, the distinction is simply a byproduct of Virginia’s use of the trustee program. The 2017 amendment does not contravene the uniformity mandate of either the uniformity clause or the bankruptcy clause.

Retroactivity

The bankruptcy court characterized the 2017 amendment as substantively prospective, and thus not in violation of any anti-retroactivity constitutional principles. On appeal, the Circuit City trustee contends that, regardless of the statutory language, applying the new quarterly fees to pending bankruptcy cases is unconstitutionally retroactive.

As the text of the 2017 amendment indicates, Congress intended for the increase to apply to all Chapter 11 quarterly fees due in January 2018 or thereafter, without regard to the case’s filing date. Notwithstanding the statutory provision, the Circuit City trustee contends that Congress never intended for the 2017 amendment to apply to bankruptcy cases that were pending before Jan. 1, 2018.

The Circuit City trustee relies on a 1996 amendment of the same statute and argues that Congress was “crystal clear” in 1996 that the amendment was intended to apply to current cases. That contention reflects a critical misunderstanding of the 1996 amendment. It was only after several courts reached divergent conclusions about whether Congress intended for the 1996 amendment to apply to ongoing bankruptcy cases that Congress enacted “clarifying legislation,” making it explicit that pending cases were covered. Unlike the 1996 amendment, the 2017 amendment plainly applies to all disbursements made after its effective date.

Even if its terms were somehow ambiguous, however, the 2017 amendment would have no “retroactive effect” because—consistent with Supreme Court precedent—it does not “impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed.” Of importance here, the Fifth Circuit’s decision correctly resolved the retroactivity challenge to the 2017 amendment. The court of appeals applied the amendment only to disbursements made after its effective date.

Affirmed in part, reversed in part and remanded.

Concurrence/dissent

(Quattlebaum, J.): Some Chapter 11 debtors in districts that employ the United States trustees pay materially more in quarterly fees than similarly situated debtors in districts that employ bankruptcy administrators. Therefore, many unsecured creditors in the 48 states operating under the United States trustee program are receiving less of the amounts owed to them than similarly situated unsecured creditors in Alabama and North Carolina.

Because I believe a faithful application of the Constitution’s bankruptcy clause renders the statutory scheme permitting these different quarterly fees unconstitutional, I respectfully dissent from the portion of the majority’s opinion that finds to the contrary. I concur as to the remainder of the majority’s well-reasoned opinion.

In re Circuit City Stores Inc. (Lawyers Weekly No. 001-089-21, 37 pp.) (Robert Bruce King, J.) (A. Marvin Quattlebaum Jr., J., concurring in part and dissenting in part) Case Nos. 19-2240 and 19-2255. April 29, 2021. From E.D. Va. (Kevin R. Huennekens, B.J.) Jeffrey E. Sandberg for Appellant/Cross-Appellee. Andrew William Caine for Appellee/Cross-Appellant.