Bankruptcy, Filing Fees, and the Constitution

The case of this week is In re Buffets LLC, No. 19-50765 (5th Cir. Nov. 3, 2020) (slip op.; Google Scholar).

When I was in college, doing moot court, I dreamed of one day doing “constitutional law.” In my head, constitutional law was this amazing and heady thing, dealing with rights to esoteric things like Life and Liberty and Property and Due Process. I imagined myself sitting in an appellate courtroom, with oak paneling , hardwood floors, and judges in wigs, waxing philosophical: “Mm, yes, your honor, but exactly how much ‘process’ is due?” When I got into the real world of practice, I learned that most of the practice of law is people on one side trying to find some excuse not to pay the people on the other side. Questions of how much process is due rarely come up. But they do, occasionally, and almost always because the side that doesn’t want to pay has a creative lawyer.

Buffets LLC operates a chain of buffet restaurants, including Ryan’s Family Steakhouse. It filed for bankruptcy under Chapter 11 in 2016, confirmed a plan in 2017, and was still making disbursements under that plan in 2018, when Congress amended 28 U.S.C. § 1930(a)(6).

Section 1930 governs the fees payable in bankruptcy cases, and paragraphs (a)(6) and (7) provide for quarterly fees payable in Chapter 11 cases. Subsection (a)(6) says that in most of the country (in “UST courts”) a “quarterly fee shall be paid to the United States trustee” based on the amount of disbursements by the debtor under the plan in that quarter. Subsection (a)(7) says that, in the rest of the country (in “BA courts”), the Judicial Conference “may require the debtor . . . to pay fees equal to those imposed by paragraph (6) of this subsection.” There  are two paragraphs because the country operates two systems for administering bankruptcy cases: the UST system and the BA system. U.S. trustees and bankruptcy administrators do essentially the same thing: they both monitor bankruptcy cases to make sure fees are paid, schedules and reports are filed, bank accounts are opened properly, etc. But U.S. trustees are funded by filing fees while bankruptcy administrators are funded out of the general budget of the judiciary. So: Congress controls quarterly fees in UST courts while the judiciary, through the Judicial Conference, controls quarterly fees in BA courts.

In 2018, to address budgetary problems in the UST system, Congress raised the cap on quarterly fees under section 1930(a)(6) from $30,000 to $250,000. The change was effective on a certain date and applied to all Chapter 11 cases pending on that date. In 2019, the Judicial Conference raised the quarterly fees under section 1930(a)(7) to match Congress’s raise, but limited the effect of the change to new cases filed on or after that date.

Now, like I said, Buffets LLC was still making disbursements under its Chapter 11 plan when the amendment came into effect in 2018. Because Buffets LLC had filed in the Western District of Texas (a UST court), its quarterly fee increased from $30,000 to $250,000. As you might expect, Buffets LLC resisted the fee hike. It raised number of factual and legal challenges—including that the fees were unconstitutional because they violate the Bankruptcy Clause of the Constitution.

Wait. What? Filing fees are unconstitutional? And there’s a bankruptcy clause in the Constitution? Yep:

The Congress shall have Power . . . To establish . . . uniform Laws on the subject of Bankruptcies throughout the United States[.]

U.S. Const. art. I, § 8, cl. 4. “The Bankruptcy Clause ‘might win’ a ‘contest for least-studied part’ of Article I’s congressional powers.” Slip Op. at 14. It “received ‘meager’ attention” at the Constitutional Convention after Charles Pinckney proposed it alongside the Full Faith and Credit Clause. “Roger Sherman raised the only doubt about the Bankruptcy Clause, expressing concern because ‘in England, some bankrupts were sentenced to death’.” Slip Op. at 14-15 n.8. The Bankruptcy Clause is mentioned only once in the Federalist Papers: “The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.” The Federalist No. 42. So if you’ve never heard of it before, you’re in good company.

The lawyers for Buffets LLC, though, had heard of it. They argued that a scheme under which one set of fees was payable in one part of the country and a different set of fees was payable in a different part is unconstitutional because it is not “uniform . . . throughout the United States.” [n.1]

The Fifth Circuit was not persuaded. The Bankruptcy Clause “forbids only two things . . . arbitrary regional differences in the provisions of the bankruptcy code [and] private bankruptcy bills.” In re Reese, 91 F.3d 37, 39 (7th Cir. 1996). [n.2] The fee statute is clearly not a private bankruptcy bill, but is it an arbitrary regional difference? Not according to the majority: regional difference yes, but it is justified by the different funding mechanisms for UST courts and BA courts and so is not “arbitrary.” After all, Congress made two systems for a reason, so Congress can fund the two systems however best it makes sense to fund them. If you’re scratching your head, again, you’re not alone. Doesn’t that answer just beg the question about the uniformity—and therefore constitutionality—of the dual UST-BA system? Maybe, but Buffets LLC “do not ask us to ‘hold that the permanent division of the country into UST districts and BA districts violates the Bankruptcy Clause.” Slip Op. at 19. Constitutional question averted.

But maybe not forever. The dissent relied heavily on St. Angelo v. Victoria Farms, Inc., in which the Ninth Circuit held that the dual UST-BA system is dis-uniform and therefore unconstitutional. 38 F.3d 1525 (9th Cir. 1994), amended by 46 F.3d 969 (9th Cir. 1995). Now that we have sophisticated lawyers fighting over hundreds of thousands of dollars, the issue may come to a head sooner rather than later.

Notes:

  1. In fact, because of the geography of UST courts and BA courts, Buffets LLC could have argued that there is one part of the United States where the fees are not uniform even within city limits. The federal courthouse in Texarkana sits on the state line. The bankruptcy courts on one side, in the Eastern District of Texas, are UST courts. The bankruptcy courts on the other side, in the Western District of Arkansas, are BA courts.
  2. The Fifth Circuit had to cite the Seventh Circuit because Supreme Court case law is not particularly helpful—it only provides that the Bankruptcy Clause is “not an Equal Protection Clause for bankrupts.” Railway Labor Executives Ass’n v. Gibbons, 455 U.S. 457, 470 n.11 (1982). Whatever that means.

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