In re Buffets: A Fees-t for the United States Trustee

The holidays came early for the United States Trustee (the “U.S. Trustee”) on November, 3, 2020, when a three-judge panel of the United States Circuit Court for the Fifth Circuit, on direct appeal, reversed the bankruptcy court and upheld the constitutionality of a 2017 increase to quarterly fees payable to the U.S. Trustee in Hobbs v. Buffets LLC (In re Buffets LLC), No. 19-50765, 2020 U.S. App. LEXIS 34866 (5th Cir. Nov. 3, 2020). Although the Fifth Circuit’s opinion addresses a variety of constitutional challenges to the recent increase to U.S. Trustee fees, the “the main event” was “whether [the] fee increase violates constitutional uniformity requirements.” Id. at *16. The court’s 2-1 decision, finding no constitutional infirmity with the fee increase, widens the split in authority on the issue. To that end, it likewise sows further uncertainty with respect to the ongoing viability of a decades-old “dual system:” with the majority of jurisdictions operating under the United States Trustee Program and a small minority using Bankruptcy Administrators.

As a consequence of operating in bankruptcy, even after a chapter 11 plan is confirmed, section 1930 of title 28 of the United States Code imposes a quarterly fee, which amount depends on the value of “disbursements” made by the debtor entity during the applicable quarter. See 28 U.S.C. § 1930(a)(6). Prior to 2017, $30,000 was the maximum quarterly fee for a chapter 11 debtor. See § 1930(a)(6)(A). But in 2017, Congress amended the statute to fund a budget shortfall—which provides that, during fiscal years 2018–2022, (i) “if the balance in the United States Trustee System Fund . . . is less than $200,000,000,” (ii) and a debtor has disbursements exceeding $1 million per quarter, then the debtor’s maximum quarterly U.S. Trustee fees are the lesser of $250,000 or 1% of total disbursements. § 1930(a)(6)(B). Because the U.S. Trustee System Fund was and continues to be under the statutory threshold, the amendment brought an 833% increase in maximum quarterly fees starting in 2018. This set off alarm bells for debtors that filed chapter 11 before the 2017 amendments but were stuck in chapter 11 after the increase. 28 U.S.C. § 1930(a)(6)(B).

Importantly, however, not all similarly situated chapter 11 debtors bore the same burden, specifically those chapter 11 debtors operating in six judicial districts in Alabama and North Carolina. Due to congressional politics (beyond the scope of the Weil Restructuring Blog), these six jurisdictions do not utilize the U.S. Trustee program as the bankruptcy “watchdog;” rather, they use the Bankruptcy Administrator (“BA”) program. For debtors in these BA districts, chapter 11 quarterly fees are determined by a different statute (§ 1930(a)(7)), which has two consequences with respect to the 2017 amendments: first, the quarterly fee increase was initially discretionary for BA districts, so the increase did not become effective in those districts until October 2018, nine months after it became effective in U.S. Trustee districts; second, the amended quarterly fee schedule only applied to those BA district debtors that filed for chapter 11 after October 2018.

Buffets, LLC (together with its debtor-affiliates, “Buffets”) filed chapter 11 petitions in the Bankruptcy Court for the Western District of Texas (San Antonio Division) on March 7, 2016, confirmed a chapter 11 plan on April 27, 2017, and, pursuant to that plan, was substantively consolidated with its debtor-affiliates thereafter. Following plan confirmation, Buffets (like many other post-confirmation chapter 11 debtors) continued to operate its business as a debtor-in-possession and make distributions to creditors under the confirmed plan. When Buffets commenced chapter 11 cases and confirmed a chapter 11 plan—both prior to the 2017 amendments to section 1930—Buffets anticipated that it would pay no more than $30,000 per quarter in U.S. Trustee fees. Imagine the heartburn caused by a mid-meal 833% increase in the bill.

Buffets thus challenged the 2017 increase to quarterly fees on statutory and constitutional grounds, primarily arguing that the differences in fees levied against debtors in U.S. Trustee districts (including Texas) as opposed to BA districts (just North Carolina and Alabama) violated constitutional requirements of uniformity. See U.S. const. art. I, § 8, cl. 1, 4. The bankruptcy court agreed with Buffets, in part, and held, among other things, that the increase violated: (i) constitutional requirement of uniformity because debtors in BA districts did not face the same increase as debtors in U.S. Trustee districts, like Buffets...