Court rules disparate fees in corporate bankruptcy cases unconstitutional
By Ronald Mann
June 6, 2022
at 12:01 p.m.
The court ruled that Congress’ passage of a significant increase in bankruptcy fees that excluded two states violated the bankruptcy clause. (Elena Erskine)
The judges took the easy and simple route by Siegel versus Fitzgerald, agree unanimously Monday that a law that imposes higher fees on bankruptcy filers in 48 states than in the other two states is so far from “uniform” that it violates provisions of the Constitution requirement that Congress provide “uniform laws respecting the subject of bankruptcy throughout the United States”.
The dispute concerned the administrative costs of bankruptcy proceedings, which are quite significant in the case of large companies. Since 1986, in all states other than Alabama or North Carolina, these cases have been administered by the US Trustee Program of the Department of Justice. This office has always been required by law to charge bankrupt businesses a fee that covers the cost of administering their files. In Alabama and North Carolina, by contrast, cases were administered by administrators appointed by the judiciary. On several occasions, these administrators have charged fees far below those charged by the US administration program, with the shortfall coming from the general judicial budget. In this case, for example, Circuit City Stores, which filed for bankruptcy in Virginia, paid more than $500,000 more in fees than it would have paid had it filed a few hundred miles south of North Carolina.
Judge Sonia Sotomayor’s brief opinion for the court treated the case as straightforward. First, she addressed the government’s argument that the relevant law is an administrative law not subject to the bankruptcy clause of the Constitution. She dismissed this argument out of hand, explaining that “[n]nothing in the language of the bankruptcy clause … suggests a distinction between substantive laws and administrative laws”, and that the court emphasized that the clause has a “broad” scope. Above all, she pointed out that “[i]“The increase in mandatory fees paid out of the debtor’s estate decreases the funds available for payment to creditors”, which affects the central substance of bankruptcy proceedings – “the obligations between creditors and debtors are changed”.
She also rejected the idea that the need for local variation should allow for different fees in different parts of the country. On this point, she drew a distinction between “uniform laws allowing local determination of rules of governance,” which are quite common in the field of bankruptcy, and status here. Rather than “entrusting[ring] bankruptcy districts to set regional policies based on regional needs,” he “exempted debtors from only 2 states from a levy…which applied to debtors from 48 states.”
Sotomayor then turned to assessing whether the law authorizing the fee disparity “was a permissible exercise of that clause.” She briefly summarized the court’s three prior cases interpreting the clause, concluding that they “represent the proposition that the bankruptcy clause provides flexibility to Congress, but does not permit geographically disparate arbitrary treatment of debtors.” Applied to this case, the clause “does not give Congress the freedom to subject debtors in similar circumstances in different states to different costs because it chooses to pay the costs for some but not for others. “. Consequently, the opinion considers that the framework allowing the disparity is not admissible.
Sotomayor closed his opinion by refusing to define the appropriate remedy. The lower courts did not consider this issue, as they held that the distinction was admissible, and the judges declined to consider it at trial.
The unanimity and brevity of the opinion suggest the justices were directly swayed by the specter raised in the oral argument of influential congressional committee members getting favorable treatment for businesses in their districts, a plausible explanation for the dismissed disparity. in Siegel. That said, the likelihood of future disputes in the region seems relatively low, as Congress typically does not go out of its way to create disparities as stark as the one that led to this dispute.