U.S. Supreme Court finds 2017 bankruptcy fee increase was unconstitutional

(Reuters) - The U.S. Supreme Court ruled on Monday that a 2017 law that increased government fees for many Chapter 11 debtors is unconstitutional because it failed to uniformly apply the fees in all U.S. states.

The Supreme Court unanimously ruled in favor of a liquidating trust for Circuit City Stores Inc, which filed for bankruptcy in 2008 in Richmond, Virginia and was still in Chapter 11 when the 2017 law took effect. The fee increase meant that the Circuit City trust paid $500,000 more in bankruptcy fees than it would have if it had filed in North Carolina or Alabama, according to an opinion written by Justice Sonia Sotomayor.

The fee disparity resulted from a system in which most, but not all, U.S. bankruptcy courts receive administrative support from the U.S. Department of Justice rather than court employees.

“The Court does not today address the constitutionality of the dual scheme of the bankruptcy system itself, only Congress’ decision to impose different fee arrangements in those two systems,” Sotomayor wrote.

The DOJ and an attorney for the Circuit City trust did not immediately respond to a request for comment.

Appeals courts had been evenly split on the constitutionality of the 2017 fee increase. The 4th and 5th Circuits had issued rulings upholding the law, while the 2nd and 10th Circuits determined it was unconstitutional.

The fee increase was meant to address a budget shortfall in the DOJ's office of the U.S. Trustee, which serves as the government's bankruptcy watchdog. The U.S. Trustee program is funded solely by fees collected from bankrupt companies and said in December that about $324 million in fees had been imposed under the 2017 law.

North Carolina and Alabama had opted out of the U.S. Trustee program when it was rolled out in 1986, choosing to provide similar services through state-specific bankruptcy administrators. Those states did not subject bankrupt companies to the same fee increase as debtors in other states’ bankruptcy courts. Bankruptcy administrators in North Carolina and Alabama are funded from the courts’ general budgets, rather than bankruptcy fees.

The 2017 fee increase was meant to be a temporary measure, applying from 2018 to 2022 in large bankruptcy cases.

The disparity in fees violated the U.S. Constitution's bankruptcy clause, which allows Congress to pass “uniform” bankruptcy laws, according to Monday's opinion. The 2017 law that increased bankruptcy fees was not “uniform” because it did not bind courts in North Carolina and Alabama.

The Circuit City trustee had asked for a refund of all bankruptcy fees stemming from the 2017 increase. The Supreme Court remanded the case to the 4th U.S. Circuit Court of Appeals to determine the appropriate remedy.

The case is Alfred H. Siegel, Trustee of the Circuit City Stores Inc. Liquidating Trust v. John P. Fitzgerald III, Acting United States Trustee for Region 4, U.S. Supreme Court, No. 21-441.

For Siegel: Daniel Geyser of Haynes and Boone

For the U.S. Trustee: Elizabeth Prelogar of the U.S. Department of Justice

Read more:

Circuit City trustee seeks Supreme Court review of bankruptcy fee hikes

Government asks Supreme Court to review $324 mln bankruptcy fee fight

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