Some bankrupt debtors are fighting for repayments at Bankruptcy HQ because of a simmering dispute over an increase in government fees.
Debtors’ fees fund the U.S. Department of Justice. Trustee Program, which oversees bankruptcy proceedings within 48 U.S. state and territory. Alabama and North Carolina have an exception and operate a separate bankruptcy system.
Starting in 2018, Congress increased the quarterly fee to the US Trustee program for those debtors who have filed bankruptcy in areas that participate in it. The first nine months of 2018 saw a discrepancy, with North Carolina and Alabama not increasing their fees. Before districts in both states matched the fees, there was no difference in the fee. The debtors claim that this disparity in fees is unconstitutional.
The issue is divided between federal appeals courts. A case is awaiting the decision of the United States Supreme Court. Critician of the fee disparity are hopeful that the judges will settle the case.
The petition for consideration by Supreme Court filed by mass of Circuit City bankruptcy (now defunct) states that if the judges reverse the fee hike, the USTP might have to reimburse as much as $ 100,000,000.
Robyn SOkol, partner at Leech Tishman Fuscaldo & Lampl LLC stated, “It seems unfair to pay a much higher fee if you’re a larger operating creditor in 48 state,” “This seems to be contrary to the uniformity between states regarding the application of bankruptcy laws.”
In the nine-month span of 2018, debtors who had quarterly operating expenses and received distributions of at minimum $ 1,000,000 in USTP system jurisdictions were able to pay more than eight times what they would have paid in Alabama and North Carolina. The USTP states saw their quarterly maximum increase from $30,000 to $ 250,000.
A High Court order requiring USTP reimbursement of costs could trigger a frenzy of litigation.
Sokol stated that the U.S. trustee is unlikely to examine its records and decide who is entitled to a refund in the event of an overturning of the law. According to Sokol, debtors who believe that they are entitled to a reimbursement will need to go to court in order to recover any higher fees paid.
Further disputes could arise about whether debtors and creditors are allowed to reopen long-closed bankruptcy proceedings in order get their money back.
Robert Fishman is a shareholder lawyer at Cozen-O’Connor PC. He said that “it could be very difficult” to benefit from a ruling that the fees had been wrongly collected. “But, you will see a lot more creativity in lawyers if these costs can be recovered.”
Nicholas Koffroth (at Fox Rothschild LLP) stated that if Congress decides to repeal the fee hike, it would also create an emergency funding requirement for the program.
The US trustee program is funded primarily by bankrupt debtors, which would make it a risky move.
If the USTP is required to return the money, and ask Congress to make up any difference, it will shift taxpayers’ costs.
Koffroth stated that he believes the Supreme Court will be lenient because of the financial and potential consequences of a full return.
The USTP manages bankruptcy cases within 88 of the federal judicial regions. US Attorney General appoints US Trustees “To promote The Integrity and Efficiency of The Bankruptcy Scheme,” USTP Says website.
Trustees oversee most aspects of bankruptcy cases. They review the work of debtors and approve creditors committees creations. They can also appoint independent professionals for Chapter 7, 11, 12 or 13 bankruptcies.
However, in North Carolina and Alabama, bankruptcy matters are handled by administrators appointed by American Judicial Conference.
Congress passed legislation in 2017 to address USTP’s shortfall. It was created as a result of declining cases and shrinking coffers.
The fee increase was not adopted in North Carolina and Alabama by the districts until October 2018.
The different tariff structure led to lawsuits, which resulted in a split in circuit. The Second Circuit claims that the first three quarters of 2018 fees were unconstitutional.
The Fifth and Fourth Circuits came up with different results. The Supreme Court currently has the Fourth Circuit case, a Circuit City bankruptcy appeal.
Fishman said, “I don’t see how you could get around this constitutional question.” “It’s wrong to think that you can get a financial gain by filing in different district,” Fishman stated.
Koffroth indicated that there are many ways to fix the situation even if the judges decide the fee hike is unconstitutional.
Koffroth referred back to the April 2020 U.S. South Florida District Bankruptcy Court Decision, in which only a small portion of the costs was found unconstitutional, and so is subject to reimbursement.
Nearly 98% of USTP fees are directly used to fund this program. However, the US Treasury gets 2%. This is to “offset the cost of expanding certain permanent bankruptcy judge posts (including one in North Carolina),”, the Florida bankruptcy court determined.
Accordingly, the court ruled the increase in fees of 2% was unconstitutional and must therefore be refunded.
The Eleventh Circuit is currently examining the case. Although it has heard the pleadings and has not yet made its decision, the Eleventh Circuit continues to hear the case.
You can also ask the Supreme Court to dismiss the case.
This will end the status quo – that is, debtors in certain parts of the country will receive money through the USTP, while others won’t.
As this disparity continues, it could only be a matter time before judges are called upon once more to address the matter.