New Bankruptcy Question Captures Attention of Supreme Court Justices
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Justices Ponder How to Respond to Congress’s Two-Tiered System of Bankruptcy Courts, Which Leaves Debtors in Two States Paying Much Lower Fees Than the Rest of the Country

 

U.S. Supreme Court Building

The Supreme Court of the United States heard oral arguments late Monday morning in a relatively novel case about the two separate bankruptcy systems that exist within the country and whether or not the markedly lower fees paid in one system are a violation of the U.S. Constitution.

Stylized as Siegel v. Fitzgerald, the nine justices have been asked to consider whether Congress ran afoul of the founding charter’s Bankruptcy Clause–which authorizes the creation of “uniform Laws on the subject of Bankruptcies throughout the United States.”

At issue is the creation of the bankruptcy trustee pilot program–part of the 1978 Bankruptcy Code–which took away authority for some administrative functions of bankruptcy courts and put them under the purview of federal trustees. Self-funded through the fees extracted from debtors, the program proved a success and was extended to all but six judicial districts thanks to the opposition of bankruptcy judges and elected officials in Alabama and North Carolina.

In 48 states users fund their own bankruptcy proceedings while the two lone holdout states retain the Bankruptcy Administrator program–which is funded as part of the federal judiciary budget. Up until 1994, Bankruptcy Administrator districts were required to pay quarterly fees, while Bankruptcy Trustee districts were not.

One of the scant few instances of courts dealing with this odd division among the states was a ruling by the U.S. Court of Appeals for the Ninth Circuit which found the fee disparity between the two kinds of districts was unconstitutional as a violation of the Bankruptcy Clause.

In 2017,  facing an alleged shortfall, Congress passed the Bankruptcy Judgeship Act of 2017. Largely a funding mechanism, the recent change drastically exacerbated the incongruity between the two kinds of districts. Bankruptcy Trustee district debtors were now subject to a mandatory maximum fee that rose substantially from $30,000 to $250,000. Debtors in Administrator districts were subject to increased fees, too, though that increase went into effect nine months later and was permissive instead of mandatory.

Several bankruptcy trustees sued the federal government in consolidated cases; they argued that the disparate treatment of representatives in the two kinds of bankruptcy programs constitutes a violation of the Bankruptcy clause. The lead plaintiff here, Circuit City, recently paid some $600,000 more in fees to the Trustee system than if they had filed in an Administrator state.

Procedurally, a bankruptcy court in Virginia found the 2017 fee structure unconstitutional. On appeal, the U.S. Court of Appeals for the Fourth Circuit ruled two to one in favor of the federal government. The lone dissenter from that opinion, Judge A. Marvin Quattlebaum, would have sided with the debtors.

“Words have meaning, and the words of the Bankruptcy Clause are clear,” Quattlebaum, a Donald Trump appointee, wrote in his brief dissent. “[N]o matter how you slice it, uniform means not different. That was true when the Constitution was drafted, and it is still true today.”

According to the debtors’ petition for certiorari, “This disparity has left identically situated debtors paying drastically different fees based solely on the happenstance of where their bankruptcy was filed.”

“The constitution requires uniform bankruptcy laws,” Daniel L. Geyser, arguing for Circuit City, said during opening arguments.

Despite the disparity and the language of the Constitution, however, the nation’s high court seemed at times perplexed about what to do about the varying systems.

Justice Clarence Thomas began questioning by asking if the problem is the “original division of the county” or the difference in fees.

“I think it’s both,” Geyser replied. “Congress has artificially bifurcated the country into two different systems and now it’s charging debtors different fees based on that original bifurcation. Either way, though, Congress is treating an identically situated debtor class–debtors that look alike in every material respect. There’s nothing about them that justifies different treatment. And, yet, they’re paying more for their bankruptcies based on where they happen to file.”

Thomas, however, suggested there was a “problem” with Circuit City’s case if the original division itself is legitimate because then the differential fees might just be “based on geography.”

Chief Justice John Roberts picked up on that line of questioning–suggesting some confusion about, and opposition to, the debtors.

“Why are there two different systems?” the chief justice asked.

Geyser replied to say that the two systems are arbitrary. Roberts, unsatisfied, pressed the trustees’ attorney to admit there must be some reason. To which Geyser blamed “politics and local preferences.” Roberts, still not convinced, asked what that means. Geyser said the bankruptcy judges in the two states “liked it the way it was and didn’t want to be part of the U.S. Trustee system.”

Justice Stephen Breyer argued that this wasn’t an issue about “substantive law” and likened the different systems to some judges saying their courts open at 11:00 a.m. instead of 9:00 a.m.

“Why can’t they try out different things?” Breyer asked. “They like it the way they’re doing it. It works.”

Geyser dismissed the premises of the hypothetical by arguing this case would be more like if two states are allowed to start when they wanted but the other 48 were forced to start at 9:00 a.m.

Breyer later followed up by asking whether there was any evidence that the other 48 states had protested the adoption of the trustee system. He then answered his own question, saying there probably wasn’t, and suggested the division was acceptable because Alabama and North Carolina “were the only ones who asked for it.”

Justice Elena Kagan returned to Thomas’s presumption that the separation of the two states at a basic level is constitutional.

“At that point, doesn’t this have to be constitutional as well?” she asked. “Because isn’t this second differentiation, if you will, just really responding in a sensible way to the effects of the first differentiation? In other words, at that point, it’s not arbitrary and it’s not solely geographic.”

Kagan went on to suggest that the two states were in a different financial situation than the other 48 because they are not self-financing and therefore don’t need to assess higher fees.

“There’s still no reason that Congress has to impose fees to make the U.S. Trustee program self-funding,” Geyser noted. “There’s nothing inherent about the trustee program that requires self-funding. That’s a separate and subsequent policy choice.”

Kagan, however, was unconvinced–saying the self-funding mechanism was part of the original separation of the 48 and the two.

Justice Sonia Sotomayor was also skeptical of Circuit City’s arguments.

“I’m having a difficulty,” she said–noting that Geyser had conceded the existence and constitutionally acceptable nature of regional differences. “Because you’re trying to establish a broad rule in a situation that I don’t think lends itself to it given our case law.”

Justices Brett Kavanaugh and Amy Coney Barrett seemed somewhat open to the merits of Circuit City’s argument but still had trouble seeing how to resolve the issue at this stage. Kavanaugh, for his part, was concerned about how many millions of dollars it would take to grant the debtors retroactive relief. Barrett asked whether “the lower courts [or] the Judicial Conference” would sort out a potential victory for the debtors.

Perhaps underlying the dearth of precedent on tap for the justices to consider when deciding the case, questioning was also occasionally skeptical of the government’s position as well.

Deputy Solicitor General Curtis E. Gannon began by arguing that “quarterly fees by Chapter 11 debtors have sometimes differed across districts” but did not rise to a violation of the uniformity requirement of the Bankruptcy Clause.

The crux of the government’s argument is that the difference between the two systems is not really substantive, but rather a question about “administrative aspects.”

In response to a question from Thomas about whether the two systems were uniform at a basic level. Gannon, sidestepping, effectively said that’s not really a question that matters in this case.

“They are different programs,” he said. “But we don’t think that that difference in administrative assistance to the way the bankruptcy system operates is covered by the uniformity requirements because it is essentially procedural.”

Justice Kagan also aggressively questioned Gannon on Monday.

“This is a top-down imposition of a fee structure that predictably can’t help but disadvantage debtors and creditors in 48 states as compared to two states,” she noted. “Bankruptcies are going to be different in those 48 states and they’re going to be different by virtue of a congressional decision related to bankruptcy.”

Gannon, in response, attempted to argue such variation was also the case during two 19th century pieces of bankruptcy legislation. Kagan cut him off to say she wasn’t persuaded by his history.

“I don’t think so, Mr. Gannon,” she said. “At first, I read your brief and I thought, ‘Oh, that’s pretty convincing.’ And then it turns out it’s not so convincing because everybody had that choice and they made a choice. So, this is Congress making a choice for 48 states and only giving the choice to two states.”

Justice Barrett took direct aim at the government’s arguments about what, exactly, constitutes facial uniformity under the Bankruptcy Clause.

“The facial uniformity requirement applies, in your view, only to what you’re describing as ‘substantive bankruptcy regulations’ like priority for creditors?” the nation’s newest seated justice clarified.

Gannon answered in the affirmative, saying no one would really dispute a pilot program trying out something new. Barrett agreed but then suggested he was trying to have it both ways.

She noted that the government attorney had previously ridiculed a national choice regime where states can choose to opt in or out of the trustee program as “a funny view of uniformity” that “undermines the point of bankruptcy” and would “allow for a lot of disuniformity.”

“But that functional view really doesn’t matter if the uniformity requirement doesn’t apply to so-called bankruptcy administration,” Barrett added.

Breyer, when questioning Gannon, also suggested an openness to a standard that allows states to leave the trustee program, likening the situation to “National Pork Week” where everyone must participate but anyone can opt out. Echoing Barrett’s previous questions for the debtors’ attorney, however, Breyer said he was concerned about whether the Judicial Conference’s involvement here “makes it different.”

Elura Nanos contributed to this report.

[image via Chip Somodevilla/Getty Images]

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