By Ronald Mann
April 15, 2022
at 3:11 p.m.
Circuit City Stores paid more than half a million dollars more in bankruptcy costs than it would have if filing in another district. (Ed Yourdon via Wikimedia Commons)
Monday’s argument in Siegel versus Fitzgerald brings the judges a fun little argument: whether Congress violated the Constitution bankruptcy clause — which allows “uniform laws on the subject of bankruptcy across the United States — when he created two separate systems for administering corporate bankruptcy cases, with significantly lower fees in Alabama and North Carolina North than in the rest of the country.
The summary should make the average reader wonder how such a bizarre system could have come about, but it is only a typical account of the glaring dysfunction that plagues bankruptcy law. We can start with the passage of the Bankruptcy Code in 1978, which included a pilot program for trustees in the United States, who would perform administrative duties in bankruptcy cases previously performed by bankruptcy judges. These administrators would work in an Executive Office for United States Administrators, a component of the Department of Justice. When the program was successful, it was made permanent and extended nationwide. Well, not quite. A small group of bankruptcy judges in six of the country’s approximately 90 judicial districts, supported by their senators (in Alabama and North Carolina) succeeded in having their districts excluded from the US Trustee Program. Court-appointed bankruptcy administrators carry out the administrative work of trustees in these six districts.
Congress funded the US Trustee Program with user fees paid by companies that file for bankruptcy. As it usually does, Congress has mandated that the program be self-funding, so fees increase as program costs increase. The bankruptcy administrator program, on the other hand, is not funded separately, but charges a fee set by the Judicial Conference (the administrative component of the federal court system).
The case arises from a provision of the Bankruptcy Judge Act 2017, which responded to a funding shortfall for the US Trustee Program by demanding a five-year increase in fees paid by companies. The increase was strong for larger companies, as it raised the maximum fee from $30,000 to $250,000. Because the Judicial Conference did not quickly increase its fees to the same level, debtors in the U.S. Trustee Districts paid higher fees than debtors who filed in the Trustee Districts, a total of approximately $100 million. before the discrepancy is corrected. The case in court involves a large representative debtor – Circuit City Stores – which paid about $600,000 more in fees than it would have paid had it filed in an administrator district.
With little Supreme Court precedent — Congress hasn’t gotten into the habit of writing different bankruptcy laws for different parts of the country — it’s unclear what to expect on this one. The arguments, however, are easy to understand. Alfred Siegel (Administrator of Circuit City Estate) presents a simple textual argument. First, the law setting different fees for Trustee Districts and Trustee Districts is a “La[w] about bankruptcies”; it is the law that sets the fees that companies pay when they file a request for receivership. Second, it wasn’t “uniform…across the United States” because debtors who filed in 2018 paid millions more if they hadn’t filed in Alabama or North Carolina. North than they would have paid if they had filed in those states.
The government (defending the work of Congress) offers several justifications for the arrangement. First, it argues that “administrative matters” legislation is not the type of “law” that must be uniform because it is not a “subject matter of bankruptcy” law. The government points to early practice allowing bankruptcy judges to set fees on a district-by-district basis, which led to variations in fees in the early 19th century, and argues that a requirement for uniformity that goes as far as in terms of fees would be grossly impractical. . The government justifies the US Trustee Program under the power of Congress »[t]o constitute Courts inferior to the Supreme Courtsaying that legislation designed to improve the efficiency of bankruptcy courts falls squarely within that power.
The government also argues, oddly, that the program is constitutional because Congress failed to pass a law requiring anyone to charge a different fee. At any time, the Judicial Conference could have charged the same fees that Congress mandated for the U.S. Trustee Program, so Congress cannot be blamed for the lack of uniformity when it passed the challenged law. This argument, in my view, is a little difficult to follow, because the government cannot in fact deny that the rate schedule that Circuit City faced in 2018 was higher than the rate schedule in the administrative districts, which Circuit City would have actually paid less had it filed in one of those districts, and that the reason for the difference is that Congress drafted a mandatory high fee law for trustee districts and a discretionary fee law for administrative districts.
As I mentioned above, there aren’t many directly relevant precedents, so it’s a bit difficult to be sure of the judges’ reaction. In an earlier era, you would expect judges to bend over backwards to defer to Congress before striking down a federal law as unconstitutional, but I wouldn’t expect that to be a major reaction to Monday’s argument. The real question will be how many of them prefer to take the simple textual path proposed by Siegel. I should be able to write more about this in a few days.