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In Unanimous Opinion, Justice Sotomayor Upbraids Congress for Bankruptcy System that Left Debtors in 2 States Paying Much Lower Fees Than the Rest of the Country

Associate Justice Sonia Sotomayor sits during a group photo of the Justices at the Supreme Court in Washington, DC on April 23, 2021.

Associate Justice Sonia Sotomayor sits during a group photo of the Justices at the Supreme Court in Washington, DC on April 23, 2021.

The U.S. Supreme Court on Monday found unconstitutional a recent bankruptcy fee increase that only applied to debtors in 48 states.

The unanimous opinion authored by Justice Sonia Sotomayor was a solid but conditional win for Circuit City Stores, Inc., which paid over three-quarters-of-a-million dollars under the 2017 law at issue in the case stylized as Siegel v. Fitzgerald. Left undisturbed is the underlying system that allowed for Congress to institute the uneven fee increase. Additionally, the court did not decide whether Circuit City should actually get a refund. Those issues were left for lower courts to parse.

The heart of the matter is due to the nation’s two-tiered bankruptcy system. In 48 states, bankruptcy courts are funded by user fees. In Alabama and North Carolina, bankruptcy courts are funded as part of the judiciary’s general operating budget. The former system used by most states is called the Trustee Program. The two southern standalone states operate using the old Administrator Program.

As Law&Crime previously reported, and as the nine justices learned during oral arguments in April, the reason these two varying systems even exist in the first place is because of 1980s-era politics. The Trustee Program began a pilot run in 1978 and went national in 1986.

For awhile, this system chugged along. In 1994, the U.S. Court of Appeals for the Ninth Circuit found the fee disparity between the two kinds of districts unconstitutional as a violation of the Bankruptcy Clause. In response, Administrator districts eventually, though belatedly by a number of years, moved to charging user fees.

In 2017, Congress passed the Bankruptcy Judgeship Act of 2017. That law, premised on a budgetary shortfall in the Trustee fund, drastically increased the disparity between fees in these kinds of districts.

Bankruptcy Trustee district debtors were subject to a mandatory maximum fee that rose substantially from $30,000 to $250,000 per quarter. Debtors in Administrator districts were subject to increased fees, too, though those increases went into effect nine months later and only applied to newly filed cases. Debtors in Trustee districts had the massive increase applied to their already-in-progress cases.

“Across the first three quarters after the fee increase took effect, petitioner paid $632,542 in total fees,” the opinion notes. “Had Congress not increased fees, petitioner would have paid $56,400 over that same period.”

That’s quite a substantial difference in money paid to the government based on bygone politics from decades ago that produced a two-tiered system which discriminates solely on geography.

The justices found such an imposition unconstitutional.

“[T]he Bankruptcy Clause offers Congress flexibility, but does not permit arbitrary geographically disparate treatment of debtors,” the nation’s high court ruled in the 19-page opinion.

“Put simply, Congress may enact geographically limited bankruptcy laws consistent with the uniformity requirement if it is responding to a geographically limited problem,” Sotomayor continued later on. “While the uniformity requirement allows Congress to account for ‘differences that exist between different parts of the country,’ it does not give Congress free rein to subject similarly situated debtors in different States to different fees because it chooses to pay the costs for some, but not others.”

One argument advanced by the respondent was that the 2017 fee increase was more administrative than substantial–and therefore the Bankruptcy Clause doesn’t apply. While ultimately rejecting the basis of that argument, Sotomayor noted that administrative laws are also fair game for constitutional overview.

The opinion explains, at length:

Nothing in the language of the Bankruptcy Clause itself, however, suggests a distinction between substantive and administrative laws. This Court has repeatedly emphasized that the Bankruptcy Clause’s language, embracing “laws on the subject of Bankruptcies,” is broad. For example, the Court has recognized that the “subject of bankruptcies is incapable of final definition,” and includes “nothing less than ‘the subject of the relations between [a] debtor and his creditors.’” …

Nor has this Court ever distinguished between substantive and administrative bankruptcy laws or suggested that the uniformity requirement would not apply to both.

Another argument advanced by the respondent, who aimed to maintain the 2017 fee increase, was citing the existence of numerous laws allowing for local variation in determining bankruptcy procedures. The logic there, the respondent argued, was that the 2017 law could be viewed as a local prerogative.

Not so, the full court held. Those laws, Sotomayor explains, only allow variations based on “local needs and conditions.” The justices held those laws are not at all like the 2017 fee structure.

“The fee increase at issue here is materially different from these laws,” the opinion goes on to note. “It does not confer discretion on bankruptcy districts to set regional policies based on regional needs. Rather, Congress exempted debtors in only 2 States from a fee increase that applied to debtors in 48 States, without identifying any material difference between debtors across those States. The only difference between the States in which the fee increase applied and the States in which it was not required was the desire of those two States not to participate in the Trustee Program.”

The problem, Sotomayor pointed out, referring to the Trustee budget lapse, was one created by Congress when it instituted the user-fee based system all those years ago. The method Congress used to fix their own problem, Sotomayor explained, was clearly unconstitutional.

Sotomayor then skewers the congressional action at issue here:

It is true that Congress’ stated goal in raising fees in Trustee Program districts was to address this budgetary shortfall. That shortfall, however, existed only because Congress itself had arbitrarily separated the districts into two different systems with different cost funding mechanisms, requiring Trustee Program districts to fund the Program through user fees while enabling Administrator Program districts to draw on taxpayer funds by way of the Judiciary’s general budget…

The problems prompting Congress’ disparate treatment in this case, however, stem not from an external and geographically isolated need, but from Congress’ own decision to create a dual bankruptcy system funded through different mechanisms in which only districts in two States could opt into the more favorable fee system for debtors.

The Bankruptcy Clause affords Congress flexibility to “fashion legislation to resolve geographically isolated problems,” but as precedent instructs, the Clause does not permit Congress to treat identical debtors differently based on an artificial funding distinction that Congress itself created. The Clause, after all, would clearly prohibit Congress from arbitrarily dividing States into two categories and charging different fees to States in different categories unrelated to the needs of, or conditions in, those States. The Clause does not allow Congress to accomplish in two steps what it forbids in one.

“In sum, our precedent provides that the Bankruptcy Clause offers Congress flexibility, but does not permit the arbitrary, disparate treatment of similarly situated debtors based on geography,” the opinion reads.

[image via Erin Schaff-Pool/Getty Images]

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