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SCOTUS to Rule on Chapter 11 Bankruptcy Fee Increases

January 10, 2022 | Posted in : Bankruptcy Fees / Expenses, Fee Issues on Appeal, Practice Area: Bankruptcy / Restructuring, SCOTUS, USTP

A recent Reuters story by Maria Chutchian, “Supreme Court to Determine Constitutionality of Bankruptcy Fee Increases,” reports that the U.S. Supreme Court said it will review a dispute over a recent increase in fees that Chapter 11 debtors are required to pay the federal government.  The issue, which stems from a 2017 law that hiked the government fees that most large companies in bankruptcy must pay, has divided top appellate courts across the country.

The law's imposition of higher fees in most, but not all, U.S. bankruptcy courts has caused uncertainty over the legal status of around $324 million in fees imposed under the law, according to the U.S. Trustee, which serves as the U.S. Department of Justice’s bankruptcy watchdog.

The underlying lawsuit was brought by Alfred Siegel, the trustee who oversaw Circuit City’s liquidation process.  He argued that the 2017 law violated the U.S. Constitution’s Bankruptcy Clause, which requires bankruptcy laws to be uniform, because it hiked fees for Chapter 11 debtors in most states but failed to do the same for Alabama and North Carolina.  Those two states use a different government entity, known as the Bankruptcy Administrator program, to perform similar duties as the U.S. Trustee in large corporate bankruptcies.

The law was eventually amended to include Alabama and North Carolina, but Siegel argued in his September petition to the Supreme Court that companies that filed for Chapter 11 in those two states were still permitted to go several months without being subject to the same fee increases that were imposed in the other states.  The government argued in its response that the constitution’s bankruptcy clause gives Congress flexibility in creating new statutes that govern bankruptcy court administration.

The law has been challenged in several districts with conflicting outcomes.  The 4th U.S. Circuit Court of Appeal, which ruled in Siegel's case, and the 5th Circuit have upheld the law while the 2nd and 10th Circuits have deemed it unconstitutional.  Though they oppose each other’s interpretation of the law, the U.S. Trustee and Siegel both asked the Supreme Court to weigh in on the case.