SCOTUS deals with the constitutionality of the 2018 trustee fee increase


Back in July, Craig Eller wrote of the ongoing confusion among courts and litigants regarding the applicability of a 2018 fee increase payable to the Office of the United States Trustee in Chapter 11 cases. You can find this discussion here. At the time of this post, Craig was speculating that the issue would likely need to be resolved by the US Supreme Court in the near future. Now, about three months later, that suggestion seems even more likely following a Tenth District Court ruling passed this week (October 5th).

With the Tenth Circuit’s recent ruling joining the Second Circuit to find bankruptcy violations as the increase didn’t apply immediately to Chapter 11 debtors in two states with trustees instead of U.S. trustees, there is now one 2/2 divided among the circles on this topic.

As discussed in July, the fee increase went into effect in January 2018 in 48 states with U.S. trustees. It applied to pending cases, even those with confirmed Chapter 11 plans. In the two states with bankruptcy administrators, the Justice Conference did not take the increase into effect until nine months later, and even then the increase did not apply to pending litigation in those two states.

The Second and Tenth Courts found violations of the unity aspect of the bankruptcy clause. See Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2nd Cir. May 24, 2021) and John Q. Hammons Case 2006 LLC v US Trustees (Relating to John Q. Hammons Case 2006 LLC), 20-3203 (10th cir. October 5th, 2021).

The fourth and fifth circles found no weaknesses in the constitution. See seal v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. April 29, 2021), and Hobbs v Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. 3rd Nov. 2020).

But the circuit division doesn’t end here. Two more cases are envisaged for those circles that raise the same question. The Federal Criminal Court took over the Fifth Circuit’s analysis and dismissed a class action lawsuit that could have resulted in national refunds for Chapter 11 debtors whose cases were pending prior to the trustee addition. See Acadiana Management Group LLC vs. USA, 19-496, 151 Fed. Class 121 (Kt. Class 30.11.2020). The case is on appeal with the Federal Circuit. And in July, an Ohio bankruptcy court upheld the increased fees. See Pidcock v US (Regarding ASPC Corp.), 19-2120, 2021 BL 262969, 2021 Bankr. Lexis 1857 (Bankr. SD Ohio July 13, 2021). An objection request for direct appeal to the Sixth Circuit is pending.

It is noteworthy that the issue is already before the Supreme Court. The fourth circle debtor filed an application for certiorari on September 20, 2021 to increase the division. See seal v. Fitzgerald, 21-441 (Sup. Ct.). It is likely that the judges will decide on the grant or denial of Certiorari in early 2022, allowing time for argument and a decision in 2022 before the end of the term that began in October 2021.

The outcome before the Supreme Court will at least affect Chapter 11 debtors across the country whose cases were pending between January 2018 and October 2018 when the quota was increased in the trustee districts.

Copyright © 2021 Nelson Mullins Riley & Scarborough LLPNational Law Review, Volume XI, Number 284

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