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Circuit City trustee seeks Supreme Court review of bankruptcy fee hikes

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A Circuit City retail store in San Diego, California is shown here March 6, 2009 with three days left before the electronics retailer closes its doors for good. REUTERS/Mike Blake

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(Reuters) - The trustee who oversaw the Circuit City liquidation process has asked the U.S. Supreme Court to weigh in on a dispute over fee hikes imposed by the U.S. Department of Justice’s bankruptcy watchdog, the U.S. Trustee.

In a petition made public on the high court’s docket on Wednesday, Circuit City liquidating trustee Alfred Siegel said a 2017 law that increased the U.S. Trustee fees for Chapter 11 debtors in most states failed to do the same for two states that use a different governmental entity, known as the Bankruptcy Administrator program, to perform similar duties in overseeing large corporate bankruptcies.

Siegel, represented by Pachulski Stang Ziehl & Jones and Haynes and Boone, says the alleged disparity forced the Circuit City liquidating trust to pay substantially higher U.S. Trustee fees than it had in prior years, while Chapter 11 debtors in North Carolina and Alabama, the two states with the alternative program, went several months without being subject to the same fee increases. The inconsistency across the government bankruptcy overseer programs violates the U.S. Constitution’s requirement that bankruptcy laws be uniform, Siegel alleged.

North Carolina and Alabama opted in 1986 for the Administrator, rather than the U.S. Trustee, program.

Though Circuit City filed for bankruptcy in Virginia in 2008 and closed its stores in 2009, the trust set up under its liquidation plan spent more than a decade to administer the defunct electronic retailer’s remaining assets to creditors. During that time, the trust continued paying quarterly fees to the U.S. Trustee.

The 2017 law imposed a five-year increase on quarterly fees for Chapter 11 debtors in U.S. Trustee districts for any year in which the program’s fund fell below $200 million. Debtors would have to pay the lesser of 1% of quarterly “disbursements” over $1 million or $250,000. The term “disbursements” was not defined but has been interpreted by courts to mean any spending by the debtor, including ordinary business expenses, according to the petition.

Siegel says that initially, the Administrator program was not subject to those requirements and any fee increase was left up to the discretion of the U.S. Judicial Conference. The Judicial Conference eventually imposed the same fee hike but only applied it to bankruptcies filed on or after Oct. 1, 2018, whereas the U.S. Trustee fee increases were implemented nine months earlier, according to the petition. The disparity led to non-uniform treatment between the two programs, Siegel says.

The 2017 law has been challenged in several districts. The 4th U.S. Circuit Court of Appeals upheld the law in response to Siegel's challenge and the 5th Circuit also signed off on it in a separate case, while it was struck down as unconstitutional by the 2nd Circuit.

Siegel called the circuit split an invitation for “confusion and uncertainty as identically situated debtors face different fees in different parts of the country.”

The U.S. Trustee’s office declined to comment. The department argued before the 4th Circuit that the statute does not violate the uniformity requirement in part because it is an administrative measure, not a new bankruptcy law.

The U.S. Trustee also said that the Circuit City trustee misunderstood the statute, saying it does require the Administrator district fees be equal to U.S. Trustee fees, and the failure of the Judicial Conference to implement the fee hikes in the Administrator districts for nine months was a violation of the statute itself.

The U.S. Trustee has until Oct. 22 to file a reply to Siegel’s petition.

The case is Alfred Siegel v. John Fitzgerald III, U.S. Supreme Court, No. 21-441.

For the Circuit City liquidating trustee: Jeffrey Pomerantz, Andrew Caine and Robert Feinstein of Pachulski Stang Ziehl & Jones and Daniel Geyser and Ben Mesches of Haynes and Boone

For the U.S. Trustee: General Counsel Ramona Elliott, Associate General Counsel Matt Sutko, Assistant Attorney General Joseph "Jody" Hunt, Trial Attorney Beth Levene and Appellate Staff Attorneys Mark Stern and Jeffrey Sandberg

Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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