June 06, 2022

Supreme Court Decides Siegel v. Fitzgerald

On June 6, 2022, the U.S. Supreme Court decided Siegel v. Fitzgerald, No. 21-441, holding that Congress’s enactment of a significant fee increase that exempted bankruptcy debtors in two states violated the uniformity requirement of the Constitution’s Bankruptcy Clause.

Concerned by the high workload of bankruptcy judges, Congress created the United States Trustee Program to transfer administrative functions previously handled by those judges to a stakeholder — the U.S. Trustee. When it converted the initiative from a limited pilot program to a nationwide one, Congress allowed the judicial districts in North Carolina and Alabama to opt out of the program. In these districts, courts continue to appoint bankruptcy administrators under a system called the Administrator Program, which operates under a separate funding source than the Trustee Program. While the Trustee Program is funded by quarterly fees paid by debtors who file cases under Chapter 11 of the Bankruptcy Code, the Administrator Program is funded by the federal judiciary’s general budget. From 2001 to 2017, the Judicial Conference of the United States required Chapter 11 debtors in Administrator Program districts to pay fees equal to those imposed in Trustee Program districts. In 2017, Congress, to address budget shortfalls, enacted a temporary increase in the fee rates applicable to large Chapter 11 cases, applicable to both currently pending and newly filed cases. In turn, the Judicial Conference adopted an analogous 2017 fee increase for the six Administrator Program districts — but those fees were applicable only to newly filed cases and took effect several months after the fees for Trustee Program cases took effect.

In 2008, Circuit City Stores, Inc., filed for Chapter 11 bankruptcy in a Trustee Program district. The bankruptcy was still pending when fees increased through the 2017 Act. As a result, petitioner paid significantly more in fees than it had previously. Circuit City challenged those fees, contending that the fee increase was non-uniform across Trustee Program districts and Administrator Program districts, in violation of the Bankruptcy Clause, which empowers Congress to establish “uniform Laws on the subject of Bankruptcies throughout the United States,” U.S. Const., Art. I, § 8, cl. 4. The Bankruptcy Court agreed, but the Fourth Circuit reversed.

In reversing and remanding, the Supreme Court first explained that the 2017 Act was subject to the Bankruptcy Clause’s uniformity requirement because nothing in that provision suggested a distinction between substantive and administrative laws, and the Necessary and Proper Clause does not permit Congress to circumvent the limitations set by the Bankruptcy Clause. Moreover, the 2017 Act does not confer discretion on bankruptcy districts to set regional policies based on regional needs.

The Court then held that the statute violated the uniformity requirement because the 2017 Act’s fee increase was not geographically uniform, in that it applied differently to Chapter 11 debtors based on whether they had filed in a Trustee Program district or an Administrator Program district — i.e., whether the case had been filed in North Carolina or Alabama, or in any other state. And though this disparity may have resulted from an effort to solve a budgetary shortfall, that gap stemmed not from an external and geographically isolated need, but from Congress’s creation of a two-track bankruptcy-administration system; and Congress cannot treat identical debtors differently based on artificial distinctions Congress itself created.

Justice Sotomayor authored the opinion for a unanimous Court.

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