Bankruptcy

• Publication year: 2023

Bankruptcy

John T. Laney III

Thomas Alec Chappell

Siena Berrios Gaddy

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Bankruptcy Law The Honorable John T. Laney III^* Thomas Alec Chappell^** Siena Berrios Gaddy^***

I. Introduction

This Article focuses on bankruptcy opinions issued by the Supreme Court of the United States and the United States Court of Appeals for the Eleventh Circuit.¹ Topics addressed include constitutionality of the 2017 U.S. Trustee quarterly fee increase; statutory mootness under 11 U.S.C. § 363(m);² retroactive application of § 505(a)(2)(C);³ exemption of traditional and Roth IRAs from a debtor's bankruptcy estate; scope of "claim" under § 101(5);⁴ effect of post-petition transfers on the new value preference defense; scope of the fiduciary capacity exception from discharge of § 523(a)(4);⁵ and errors in debtor's name in a financing statement.

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II. In re Mosaic Management Group, Inc. and Siegel v. Fitzgerald: Constitutionality of 2017 U.S. Trustee Quarterly Fee Increase

The U.S. Constitution's Bankruptcy Clause authorizes Congress to establish "uniform Laws on the subject of Bankruptcies throughout the United States."⁶ In 2022, both the United States Court of Appeals for the Eleventh Circuit and the Supreme Court of the United States addressed the constitutionality of the Bankruptcy Judgeship Act of 2017 (the 2017 Act),⁷ which increased quarterly fees owed by Chapter 11 debtors in judicial districts under the U.S. Trustee Program but not in districts under the Bankruptcy Administrator Program.⁸ While the Eleventh Circuit held in U.S. Trustee Region 21 v. Bast Amron LLP (In re Mosaic Management Group, Inc.)⁹ that the 2017 Act did not violate the Bankruptcy Clause, that decision was abrogated four months later by the Supreme Court's decision in Siegel v. Fitzgerald.¹⁰

By way of background, the Bankruptcy Reform Act of 1978¹¹ established on a trial basis the United States Trustee Program as a division of the Department of Justice, with U.S. Trustees carrying out administrative functions previously handled by bankruptcy judges.¹² When Congress sought to make the Trustee Program permanent and nationwide in 1986, local interests in North Carolina and Alabama resisted.¹³ Therefore, in the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986,¹⁴ Congress expanded the program to all federal judicial districts except for the six in those two states, where bankruptcy judges continued to appoint bankruptcy administrators in what became known as the Bankruptcy Administrator Program.¹⁵ Rather than phasing out the Bankruptcy Administrator Program, Congress passed the Federal Courts Improvement Act of 2000 (the 2000 Act),¹⁶ permanently exempting those six districts from the Trustee Program while also permitting them to opt into the program on

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an individual basis.¹⁷ To date, all six districts remain under the Bankruptcy Administrator Program.¹⁸

While the Bankruptcy Administrator Program is funded by the Judiciary's general budget, the Trustee Program is funded by quarterly fees paid by Chapter 11 debtors pursuant to 28 U.S.C. § 1930(a)(6).¹⁹ Congress initially imposed no such fees in Bankruptcy Administrator Program districts, but the United States Court of Appeals for the Ninth Circuit struck down that system as unconstitutional under the Bankruptcy Clause.²⁰ In response, Congress included a provision in the 2000 Act enacting 28 U.S.C. § 1930(a)(7),²¹ which then stated that the Judicial Conference "may" require a Chapter 11 debtor in a Bankruptcy Administrator Program district to pay fees equal to those charged in Trustee Program districts under § 1930(a)(6).²² Exercising its authority under this provision, the Judicial Conference adopted a standing order in 2001 imposing such fees "in bankruptcy administrator districts in the amounts specified in 28 U.S.C. § 1930, as those amounts may be amended from time to time."²³

To address a shortfall in the U.S. Trustee System Fund (the Fund), Congress passed the 2017 Act, which temporarily increased the quarterly fees due in large Chapter 11 cases. Specifically, the 2017 Act amended § 1930(a)(6) to provide that if the Fund had a balance of less than $200 million in the prior fiscal year, "the quarterly fee payable for a quarter in which disbursements equal or exceed $1,000,000 shall be the lesser of 1 percent of such disbursements or $250,000."²⁴ While this fee increase in the Trustee Program districts took effect in the first quarter of 2018 and applied to all pending cases,²⁵ the six Bankruptcy Administrator Program districts did not implement the new fees until October 1, 2018, and then only as to cases filed after that date.²⁶ This state of affairs persisted until Congress passed the Bankruptcy Administration

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Improvement Act of 2020,²⁷ amending § 1930(a)(7) to require the Judicial Conference to impose fees in Bankruptcy Administrator Program districts equal to those in Trustee Program districts.²⁸

The Eleventh Circuit case of Mosaic Management Group began in the Southern District of Florida, a Trustee Program district.²⁹ The debtors, businesses that purchased life insurance policies and sold interests in those policies to investors, filed Chapter 11 petitions in 2008. Under the terms of the plan confirmed on June 6, 2017, the debtors' assets were transferred to an investment trust, which was required to make quarterly U.S. Trustee payments until the case was closed, dismissed, or converted. When the 2017 Act took effect, the investment trust paid $125,816.69 more in fees than previously would have been required. The investment trustee filed a motion to determine the investment trust's liability for quarterly fees, arguing, among other things, that the fee increase was non-uniform and thus violated the Bankruptcy Clause. The bankruptcy court held that the fee increase violated the uniformity requirement only with respect to a 2% allocation to the U.S. Treasury to offset the cost of a temporary bankruptcy judgeship in a Bankruptcy Administrator Program district. The parties jointly certified the case for direct appeal to the Eleventh Circuit, and, while the appeal was pending, the investment trust's rights and interests in the appeal were assigned to Bast Amron, LLP (Bast Amron).³⁰

In January of 2022, the Eleventh Circuit affirmed in part and reversed in part.³¹ At the outset, the court determined that the 2017 Act was subject to the Bankruptcy Clause's uniformity requirement because the amount of quarterly fees due by a debtor affects the availability of funds to satisfy debts, thereby affecting debtor-creditor relations.³² But, in the Eleventh Circuit's view, the fee increase did not violate the uniformity requirement; the court reasoned from the statutory history of 28 U.S.C. §§ 1930(a)(6) and (a)(7) that Congress intended these provisions to operate in tandem to keep fees parallel in all judicial districts nationwide.³³ Congress, the court stated, had an "understanding" with the Judicial Conference that any amendments to § 1930(a)(6) would also be imposed in Bankruptcy Administrator Program districts.³⁴ Thus,

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while the 2017 Act on its face applied only to Trustee Program districts, Congress "reasonably expected" that fees would increase in all districts.³⁵

The Eleventh Circuit rejected Bast Amron's argument that Congress violated the uniformity requirement by stating in § 1930(a)(6) that debtors in Trustee Program districts "shall" pay quarterly fees while stating in § 1930(a)(7) that debtors in Bankruptcy Administrator Program districts "may" be required to pay such fees.³⁶ Citing Supreme Court precedent³⁷ for the flexibility inherent in the Bankruptcy Clause, the Eleventh Circuit observed that no uniformity violation would have occurred had the Judicial Conference immediately adopted the 2017 fee increase, and therefore any constitutional infirmity must be attributed to the Judicial Conference rather than to Congress.³⁸ Explaining that the Bankruptcy Clause constrains the power of Congress, not of other actors, the court analogized the disparate fees to bankruptcy exemptions, which differ from state to state as permitted by the Bankruptcy Code.³⁹ And, the court pointed out, the disparity in exemptions does not violate the Bankruptcy Clause despite being ongoing and permanent, whereas the fee disparity was remedied by Congress in 2020.⁴⁰ The Eleventh Circuit therefore held that the 2017 Act's fee increase did not violate the Bankruptcy Clause in any respect.⁴¹ Judge Jordan wrote a separate concurrence, and Judge Brasher concurred in the result, asserting that the fee increase violated the Bankruptcy Clause but that refunding debtors in Trustee Program districts was an improper remedy that failed to reflect Congress's intent to raise the fees in all districts.⁴²

In June of 2022, just over four months after Mosaic Management Group was decided, the Eleventh Circuit's decision was abrogated by the Supreme Court in Siegel v. Fitzgerald.⁴³ That case arose from the 2008 Chapter 11 filing by Circuit City Stores, Inc., in the Eastern District of Virginia, a Trustee Program district. Under the liquidating plan confirmed in 2010, the debtor was required to pay quarterly fees until the case was closed or converted. During the three quarters after the 2017 Act took effect, the debtor paid $632,542 in fees, whereas under the

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previous version of § 1930(a)(6), it would have been required to pay only $56,400. The debtor objected, arguing that the increased fees violated the Bankruptcy Clause's uniformity requirement. The bankruptcy court agreed, but the United States Court of Appeals for the Fourth Circuit reversed.⁴⁴ The Supreme Court granted certiorari to resolve a circuit split as to the constitutionality of the 2017 Act.⁴⁵

Like the Eleventh Circuit, the Supreme Court held that the 2017 Act affected the substance of debtor-creditor relations because the debtor's increased fees reduced the funds available to pay...