SCI Direct LLC v. McDermott, United States Trustee for Region 9

The court incorporates by reference in this paragraph and adopts as the findings and orders

of this court the document set forth below. This document was signed electronically at the

time and date indicated, which may be materially different from its entry on the record.

if i 7 AT □□

ay ‘5 Russ Kendig

□□ a United States Bankruptcy Judge

Dated: 01:03 PM September 22, 2020

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF OHIO

EASTERN DIVISION

IN RE: ) CHAPTER 11

)

SCI DIRECT, LLC, et al., ) CASE NO. 17-61735

)

Reorganized Debtors. ) ADV. NO. 19-06056

_ )

SCI DIRECT, LLC and SUAREZ ) JUDGE RUSS KENDIG

CORPORATION INDUSTRIES, )

)

Plaintiffs, )

Vv. ) MEMORANDUM OF OPINION

)

ANDREW R. VARA, United States )

Trustee for Region 9, )

Defendant.

I. INTRODUCTION

SCI Direct, LLC (‘SCI Direct”) and Suarez Corporation Industries (“Suarez Corp.”)

(collectively, “Plaintiffs”) and their affiliates are the reorganized debtors in the underlying

chapter 11 case, In re SCI Direct, LLC, No. 17-61735 (Bankr. N.D. Ohio). Plaintiffs filed this

adversary proceeding against the United States Trustee (“UST”) for Region 9 (“Defendant”)1 on

November 6, 2019, seeking a determination that amended 28 U.S.C. § 1930(a)(6)(B) is

unconstitutional as applied to them in their jointly administered chapter 11 case. Plaintiffs and

Defendant have filed cross-motions for summary judgment.

II. JURISDICTION

The court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334 and the general

order of reference entered in this district. This dispute is a core proceeding. 28 U.S.C.

§ 157(b)(2)(A) and (O). And because the dispute “stems from the bankruptcy itself,” the court

has constitutional authority to enter final orders and judgments. Stern v. Marshall, 564 U.S. 462,

499 (2011).2 The court also has authority to issue a declaratory judgment in this matter under 28

U.S.C. § 2201(a). See, e.g., City of Cent. Falls v. Cent. Falls Teachers’ Union, R.I. Council 94,

Local 1627 (In re City of Cent. Falls), 468 B.R. 36, 44 (Bankr. D.R.I. 2012) (explaining that

bankruptcy courts are permitted to issue declaratory judgments pursuant to 28 U.S.C. § 2201(a)).

Venue is appropriate in this court pursuant to 28 U.S.C. §§ 1408 and 1409.

III. FACTS

A. Historical Background

The UST Program, a division of the Department of Justice, was established by Congress

in 1978.3 USTs are tasked with numerous administrative functions in bankruptcy cases,

including appointing private trustees and monitoring cases for abuse and fraud. See 28 U.S.C.

§ 586(a), (b); see also In re Revco D.S., Inc., 898 F.2d 498, 500 (6th Cir. 1990). USTs are

involved in chapter 11 cases, as they conduct initial debtor interviews, 11 U.S.C. § 341, appoint

committees, 11 U.S.C. § 1102, and litigate various other matters. USTs also collect graduated,

quarterly fees from chapter 11 debtors, which are based on the size of the disbursements4 made

in the case. 28 U.S.C. § 1930(a)(6). These quarterly fees, and a portion of all bankruptcy

petition filing fees, are deposited into the UST System Fund established in the United States

Treasury and are used to fund the UST Program. 28 U.S.C. § 589a(a), (b).

But not every federal judicial district is part of the UST Program. The UST Program was

initially created as a pilot program in certain districts. Cranberry Growers Coop. v. Layng (In re

Cranberry Growers Coop.), 930 F.3d 844, 854-55 (7th Cir. 2019) (citations omitted). In 1986,

1 Andrew R. Vara has replaced Daniel M. McDermott as UST for Region 9. Therefore, he is automatically

substituted as the defendant. See FED. R. CIV. P. 25(d), applicable in adversary proceedings pursuant to FED. R.

BANKR. P. 7025.

2 To the extent necessary, the parties have consented to this court’s authority to enter final orders and judgments.

See Wellness Int’l Network v. Sharif, 575 U.S. 665 (2015).

3 Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549 (1977).

4 “Disbursements” include “all payments to third parties directly attributable to the existence of the bankruptcy

proceeding, and that, throughout the proceeding, these payments’ essential character will not change.” Robiner v.

Danny’s Mkts., Inc. (In re Danny’s Mkts., Inc.), 266 F.3d 523, 526 (6th Cir. 2001).

the program was instituted across the country, with the exception of the districts in North

Carolina and Alabama. Id. “Those districts initially were required to opt in by 1992.

Eventually, however, this opt-in requirement was removed altogether. In those districts, the

functions of the Trustee are performed by Bankruptcy Administrators, who are employees of the

Judicial Branch.” Id. Unlike UST Program Districts, quarterly fees were originally not imposed

in the Bankruptcy Administrator Districts (the “BA Districts”). Id. However, in 2000 Congress

enacted 28 U.S.C. § 1930(a)(7), which provides that in BA Districts “the Judicial Conference of

the United States may require the debtor in a case under chapter 11 of title 11 to pay fees equal

to those imposed by paragraph (6) of this subsection.” 28 U.S.C. § 1930(a)(7). Soon after 28

U.S.C. § 1930(a)(7)’s enactment, the Judicial Conference mandated the imposition of quarterly

fees in BA Districts “in the amounts specified in 28 U.S.C. § 1930, as those amounts may be

amended from time to time.”5

B. Factual and Procedural Background

Plaintiffs and their affiliates filed voluntary petitions for relief under chapter 11 of the

Bankruptcy Code on August 7, 2017 (the “Petition Date”). Their cases were procedurally

consolidated and jointly administered in Case No. 17-61735. Plaintiffs’ joint plan of

reorganization (the “Plan”) was confirmed on February 25, 2019 (the “Confirmation Date”) and

became effective on April 18, 2019. The Plan provided that Plaintiffs would pay all quarterly

fees until their chapter 11 case was closed, converted, or dismissed. (Case No. 17-61735 at ECF

No. 395.)

On the Petition Date, the maximum quarterly fee that could be charged under 28 U.S.C.

§ 1930(a)(6) was $30,000, or $120,000 annually. However, due to a decline in bankruptcy

filings and a projected budget shortfall for the UST Program, Congress enacted the Bankruptcy

Judgeship Act of 2017 (the “Bankruptcy Judgeship Act”) on October 26, 2017.6 Among other

things, the Bankruptcy Judgeship Act amended 28 U.S.C. § 1930(a)(6) by adding subparagraph

(B) (the “2017 amendment”). The 2017 amendment significantly increased quarterly fees for

chapter 11 debtors in UST Program Districts by providing:

During each of fiscal years 2018 through 2022, if the balance in the

United States Trustee System Fund as of September 30 of the most

recent full fiscal year is less than $200,000,000, 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.

5 Report of the Proceedings of the Judicial Conference of the United States, at 45-46 (Sept./Oct. 2001),

http://www.uscourts.gov/sites/default/files/2001-09_0.pdf.

6 Pub. L. No. 115-72, div. B, § 1004, 131 Stat. 1224. See H.R. Rep. No. 115-130, at 7-9 (2017).

28 U.S.C. § 1930(a)(6)(B).7 The 2017 amendment applies to disbursements made on or after

January 1, 2018.8 The fee increase was made mandatory for chapter 11 debtors in UST Program

Districts. However, the Judicial Conference did not implement the 2017 amendment to BA

Districts until October 1, 2018, and the fee increase only applied to disbursements made in

chapter 11 cases filed on or after this date.9

During the first three quarters of 2019, Plaintiffs made payments and cash disbursements

in the approximate amount of $6,500,000 each quarter. (Ex. 1 to Pls.’ Mot. at ¶ 12, ECF No. 22-

1.) If the prior version of 28 U.S.C. § 1930(a)(6) had applied, Plaintiffs would have only paid

$13,000 per quarter, or $39,000 total in UST fees for the first three quarters of 2019. But

Defendant, applying the 2017 amendment, submitted invoices to Plaintiffs in the amount of

$64,919 per quarter, or $194,757 total for the first three quarters of 2019. (Id. at ¶ 13.) When

this adversary proceeding was filed, Plaintiffs had an estimated outstanding balance of $183,242

in quarterly fees. (Ex. 1 to Pls.’ Am. Compl., ECF No. 8-1.)

IV. STANDARD OF REVIEW

Rule 56 of the Federal Rules of Civil Procedure, made applicable to adversary

proceedings by Rule 7056 of the Federal Rules of Bankruptcy Procedure, provides that the court

“shall grant summary judgment if the movant shows that there is no genuine dispute as to any

material fact and the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). If

the moving party meets its initial burden, the burden shifts to the non-moving party to establish

the existence of a fact requiring trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,

475 U.S. 574, 586-87 (1986). When deciding a motion for summary judgment, the court must

view the evidence and draw all reasonable inferences in favor of the non-moving party. Id. at

587. But where, as here, the parties have filed cross-motions for summary judgment, “the court

must evaluate each party’s motion on its own merits, taking care in each instance to draw all

reasonable inferences against the party whose motion is under consideration.” EMW Women’s

Surgical Ctr., P.S.C. v. Beshear, 920 F.3d 421, 425 (6th Cir. 2019) (quotation marks and citation

omitted).

7 A recent appropriations statute raised the applicable reserve threshold to $300 million for fiscal years 2020 and

2021. Department of Justice Appropriations Act, 2020, Pub. L. No. 116-93, div. B, tit. II, § 219, 133 Stat. 2317,

2415 (2019).

8 See Pub. L. No. 115-72. § 1004(c) (uncodified) (“The amendments made by this section shall apply to quarterly

fees payable under section 1930(a)(6) of title 28, United States Code, as amended by this section, for disbursements

made in any calendar quarter that begins on or after the date of enactment of this Act.”); see also Clinton Nurseries,

Inc. v. Harrington (In re Clinton Nurseries, Inc.), 608 B.R. 96, 109 (Bankr. D. Conn. 2019) (“Beginning January 1,

2018, quarterly fees increased in all Chapter 11 cases in all UST districts, whether new or pending”), appeal

pending, Nos. 19-1428 & 19-1433 (D. Conn.).

9 Report of the Proceedings of the Judicial Conference of the United States, at 11 (Sept. 13, 2018),

https://www.uscourts.gov/sites/default/files/2018-09_proceedings.pdf.

V. LAW & ANALYSIS

Plaintiffs claim that the 2017 amendment: (1) is impermissibly retroactive pursuant to the

Supreme Court’s decision in Landgraf v. USI Film Products, 511 U.S. 244 (1994); (2) violates

the Due Process Clause of the Fifth Amendment of the U.S. Constitution; (3) violates the

Uniformity and Bankruptcy Clauses of the U.S. Constitution; and (4) violates the Takings Clause

of the Fifth Amendment of the U.S. Constitution. Plaintiffs seek a declaratory judgment stating

that the 2017 amendment does not apply to them. Defendant maintains that the 2017 amendment

is constitutional and applicable to Plaintiffs’ case.

A. Retroactivity

Because the 2017 amendment became effective after the Petition Date, Plaintiffs claim

that the 2017 amendment is impermissibly retroactive pursuant to the Supreme Court’s decision

in Landgraf v. USI Film Products, 511 U.S. 244 (1994). Plaintiffs argue that Congress did not

clearly express an intent to apply the 2017 amendment to pending cases. Plaintiffs argue further

that Defendant’s application of the 2017 amendment caused them to pay far greater in quarterly

fees than what they had anticipated prior to seeking bankruptcy relief, effectively attaching new

legal consequences to their decision to file for bankruptcy.

When an objection is made to a statute based on retroactivity, the court must first

determine whether Congress expressly prescribed the statute’s temporal reach. Landgraf, 511

U.S. at 280. In the absence of express language, the court must try to discern Congress’ intent

using “‘normal rules of construction.’” Fernandez-Vargas v. Gonzales, 548 U.S. 30, 37 (2006)

(quoting Lindh v. Murphy, 521 U.S. 320, 326, (1997)). But if the court cannot determine

Congress’ intent, then the court must ask whether applying the statute would have an

impermissible retroactive effect, i.e. “whether it would impair rights a party possessed when he

acted, increase a party's liability for past conduct, or impose new duties with respect to

transactions already completed.” Landgraf, 511 U.S. at 280. If so, then the court must apply the

presumption against retroactivity by construing the statute as inapplicable to the complaining

party. See id.

For the reasons set forth below, the court finds that Congress intended the 2017

amendment to apply to new and pending chapter 11 cases where qualifying disbursements were

made on or after January 1, 2018, including Plaintiffs’ case. But even if Congress’ intent was

ambiguous, Defendant’s application of the 2017 amendment to this case is not an impermissible

retroactive application. Thus, the presumption against retroactivity does not apply.

1. Congress Intended the 2017 Amendment to Apply to New or Pending Chapter 11

Cases Where Qualifying Disbursements Were Made on or After January 1, 2018

Plaintiffs first argue that Congress did not clearly express an intent to apply the 2017

amendment to pending cases. Plaintiffs primarily rely on the decisions in Buffets and Life

Partners. In those cases, the courts held that there is no indication from the plain text of the 2017

amendment or its legislative history that Congress intended the fee increase to apply to pending

cases. In re Buffets, LLC, 597 B.R. 588, 596 (Bankr. W.D. Tex. 2019) (“Nothing in the statute

or legislative history indicates that Congress intended the amendment to apply retroactively.”),

appeal pending sub nom. Hobbs v. Buffets, LLC, No. 19-50765 (5th Cir.); In re Life Partners

Holdings Inc., 606 B.R. 277, 285 (Bankr. N.D. Tex. 2019) (“The Court is not willing to fill in

the gaps in the statute and legislative history by applying the amendment to cases that were

pending as of the 2017 Amendment date, especially given the astronomical increase in fees.”),

appeal pending sub nom. Neary v. Quilling (In re Life Partners Holdings, Inc.), No. 19-90041

(5th Cir.).

However, it appears that a majority of courts have held otherwise. In re Exide Techs.,

611 B.R. 21, 26-27 (Bankr. D. Del. 2020), appeal pending, No. 20-76 (D. Del.); MF Glob.

Holdings LTD. v. Harrington (In re MF Glob. Holdings LTD), 615 B.R. 415, 432 (Bankr.

S.D.N.Y. 2020); In re Mosaic Mgt. Grp., Inc., 614 B.R. 615, 622 (Bankr. S.D. Fla. 2020), appeal

pending sub nom. Gargula v. Smith, Nos. 20-12547, 20-12548, (11th Cir.); In re Clayton Gen.,

Inc., No. 15-64266, 2020 Bankr. LEXIS 842, at *13-14 (Bankr. N.D. Ga. March 30, 2020); In re

John Q. Hammons Fall 2006, LLC, No. 16-21142, 2020 Bankr. LEXIS 2116, at *22-23 (Bankr.

D. Kan. July 27, 2020).

The majority view was articulated in Exide. There, the Bankruptcy Court for the District

of Delaware explained:

The language of [28 U.S.C. § 1930(a)(6)(B)] indicates that the

object of the amendment is not cases, but disbursements. As the

UST correctly notes, the conduct that triggers liability under that

section is the making of a disbursement of $1 million or more.

Similarly, the temporal reach of the amendment is also expressly

defined, not through case dates, but through fiscal years: 2018

through 2022. The application of the increased fees is not a

function of when a case was filed or a plan confirmed; rather, the

application of the increased fees is a function of the amount and

timing of a disbursement and the health of the UST fund.

Id. at 26. The court also cited paragraph (c) of Section 1004 of the Bankruptcy Judgeship Act,

which provides: “‘The amendments made by this section shall apply to quarterly fees payable

under section 1930(a)(6) of title 28, United States Code, as amended by this section, for

disbursements made in any calendar quarter that begins on or after the date of enactment of this

Act.’” Id. at 26-27 (quoting Pub. L. No. 115-72. § 1004(c) (uncodified)).10 In addition, the

court cited Section 1005 of the Bankruptcy Judgeship Act and explained that if Congress did not

intend for the 2017 amendment to apply generally to pending chapter 11 cases, including post-

confirmation cases, then Congress would have had no reason to state that the amendment did not

apply to pending, post-confirmation chapter 12 cases. Id. at 27. The court concluded that the

10 Statutes at large have “the force of law” even if omitted from the United States Code. Glenn v. Holder, 690 F.3d

417, 419, n. 2 (6th Cir. 2012) (citing Schmitt v. City of Detroit, 395 F.3d 327, 330 (6th Cir. 2005)); U.S. Nat’l Bank

v. Independent Ins. Agents of Am., 508 U.S. 439, 448 (1993) (“Though the appearance of a provision in the current

edition of the United States Code is ‘prima facie’ evidence that the provision has the force of law, 1 U.S.C. § 204(a),

it is the Statutes at Large that provides the ‘legal evidence of laws,’ [1 U.S.C.] § 112 . . .”).

2017 amendment was intended to apply to all chapter 11 cases pending at the time of its

enactment, as well as cases filed thereafter through 2022. Id.

This court agrees with the court’s thorough analysis in Exide. It is clear from the

language of the 2017 amendment, the specific context in which it is used, and the broader

context of the statute as a whole, that Congress intended the 2017 amendment to apply to new

and pending cases where qualifying disbursements were made on or after January 1, 2018,

including Plaintiffs’ case.11

2. The 2017 Amendment is Not Retroactive Under Landgraf

Even if Congress’ intent regarding the applicability of the 2017 amendment to pending

cases was ambiguous, Defendant’s application of the 2017 amendment is not an impermissible

retroactive application. Thus, the court need not apply the presumption against retroactivity by

construing the 2017 amendment as inapplicable to Plaintiffs’ case.

Plaintiffs argue that the 2017 amendment is impermissibly retroactive because their case

was filed prior to the 2017 amendment’s enactment and the amendment significantly increased

the amount of their obligations to the UST. Plaintiffs also argue that the 2017 amendment

“attach[ed] a new legal significance to [their] decision to file a Chapter 11 petition in

contravention of the parties’ expectations.” (Pls.’ Mot., ECF No. 22, at 19.)

In Landgraf, the Supreme Court explained that a statute creates an impermissible

retroactive effect when it “impair[s] rights a party possessed when he acted, increase[s] a party’s

liability for past conduct, or impose[s] new duties with respect to transactions already

completed.” 511 U.S. at 280. But the Court also stated that a statute does not operate

retroactively “merely because it is applied in a case arising from conduct antedating the statute's

enactment or upsets expectations based in prior law.” Id. at 269 (citation omitted).

Plaintiffs correctly point out that their case was pending prior to the 2017 amendment’s

enactment on October 26, 2017. But the 2017 amendment only applied to qualified

disbursements made on or after January 1, 2018. And Plaintiffs were not even assessed higher

fees under the 2017 amendment until qualified disbursements were made in 2019. Therefore, it

cannot be said that the 2017 amendment impaired Plaintiffs’ rights, increased Plaintiffs’ liability

for past conduct or imposed new duties with respect to any of Plaintiffs’ completed transactions.

Most courts that have addressed this issue have reached the same conclusion. See, e.g., MF

Glob., 615 B.R. at 432 (rejecting retroactivity argument and explaining that “[w]hile the

Plaintiffs and their creditors may have harbored different expectations about what the future

held, UST fees included, the increase did not affect any rights under their plans.”); Exide, 611

11 This interpretation is also consistent with the Congressional Budget Office’s cost estimate, which assumed that

the 2017 amendment would apply to pending chapter 11 cases. Cong. Budget Office Cost Estimate, H.R. 2266,

Bankruptcy Judgeship Act of 2017, at 1 (May 18, 2017), https://www.cbo.gov/system/files/2018-07/52739-

hr2266.pdf. See, e.g., MF Glob., 615 B.R. at 430 (“If the 2017 Amendment did not apply to pending cases, it would

not have generated the funds the CBO estimated had to be generated to meet the funding requirements of the 2017

Act. Thus, the only permissible inference is that Congress adopted the CBO’s funding assumption without which

the 2017 Amendment would not have worked.”).

B.R. at 29 (“imposing increased quarterly fees does not attach new legal consequences to

completed transactions.”); In re Cir. City Stores, Inc., 606 B.R. 260, 268-69 (Bankr. E.D. Va.

2019) (“A mere increase in the quarterly U.S. Trustee fee is not substantively retroactive.”),

appeal pending sub nom. Fitzgerald v. Siegel, No. 19-2240 (4th Cir.)

Plaintiffs rely heavily on Alfred Bone Shirt v. Hazeltine, No. 01-3032, 2007 WL

9735805 (D.S.D. April 5, 2007), aff’d, 524 F.3d 863 (8th Cir. 2008) in support of their argument.

But Alfred Bone Shirt is distinguishable. In that case, the plaintiffs were the prevailing party in

an action challenging a statewide legislative redistricting plan under the Voting Rights Act.

During the appeal, Congress enacted an amendment that would permit the plaintiffs to recover

expert witness fees. But when the plaintiffs sought to recover fees under the amendment, the

court denied their request. The court held that the amendment was impermissibly retroactive

because it would permit the plaintiffs to recover expert witness fees from the defendants, a

previously non-existent liability, after the fees were already incurred. Id. at *3. Here, in

contrast, the 2017 amendment modified Plaintiffs’ existing duty to pay quarterly fees. And it

only applied to qualified disbursements made in quarters subsequent to its enactment. Thus,

unlike the amendment in Alfred Bone Shirt, the 2017 amendment did not attach new legal

consequences to events completed prior to its enactment.

Plaintiffs cite numerous other cases where courts have declined to apply statutes

retroactively because either the express language of the statute indicated it was to be applied

prospectively or the statute was silent or ambiguous regarding its temporal scope.12 However,

because this court finds that: (1) Congress intended the 2017 amendment to apply to pending

chapter 11 cases; and (2) the 2017 amendment is not impermissibly retroactive, these cases are

distinguishable. Therefore, Plaintiffs’ retroactivity claim fails.

12 See Turkhan v. Perryman, 188 F.3d 814, 825-27 (7th Cir. 1999) (reiterating previous holding that Congress was

silent with respect to whether it intended section 440(d) of the AEDPA to apply retroactively); Craig v. Eberly, 164

F.3d 490, 494 (10th Cir. 1998) (holding that Congress did not intend section 1997e(e) of the PLRA to apply

retroactively); Sarmiento Cisneros v. U.S. Atty. Gen., 381 F.3d 1277, 1281 (11th Cir. 2004) (holding that Congress

did not intend 8 U.S.C. § 1231(a)(5) to apply retroactively); United States v. Miller, 911 F.3d 638, 645-46 (1st Cir.

2018) (holding that the temporal reach of a 2003 amendment to the Mann Act was uncertain); Jaghoori v. Holder,

772 F.3d 764 (4th Cir. 2014) (holding that Congress did not expressly intend to apply 8 U.S.C. § 1229b(d)(1)(B)

retroactively); Siding & Insulation Co. v. Alco Vending Inc., 822 F.3d 886, 892 (6th Cir. 2016) (declining to apply

47 C.F.R. § 64.1200(f)(1) retroactively as this would increase liability for past conduct and run against

considerations of fair notice, reasonable reliance, and settled expectations); Monoson v. United States, 516 F.3d 163,

167-69 (3d Cir. 2008) (declining to apply section 555 of the STRE Act retroactively since Congress did not clearly

indicate whether it intended the statute to apply retroactively or prospectively); Yue v. Brown, 92 F. Supp. 2d 1236,

1242-45 (D.N.M. 2000) (declining to defer to agency interpretation of section 101(a)(27)(J) of the Immigration and

Nationality Act and holding that the statute was intended to apply prospectively, not retroactively); Alicea v.

Citizens Bank of PA., No. 12-1750, 2013 WL 1891348, at *3 (W.D. Pa. May 6, 2013) (failing to engage in any

analysis regarding retroactivity but holding that the plaintiff alleged sufficient facts to support a claim under the

EFTA as it stood when plaintiff filed his complaint).

B. Due Process13

Next, Plaintiffs claim that Defendant’s application of the 2017 amendment violates their

rights under the Due Process Clause. Plaintiffs’ due process claim is largely based on their

argument that the 2017 amendment is retroactive under Landgraf. (Pls.’ Mot., ECF No. 22, at

20.) Plaintiffs also argue that their due process rights were violated because they lacked

adequate notice of the 2017 amendment when they decided to file for bankruptcy.

Plaintiffs’ due process claim fails for several reasons. First, for the reasons already

stated, the 2017 amendment is not retroactive under Landgraf. Second, Plaintiffs had adequate

notice of the 2017 amendment, given that it went into effect more than a year before the

Confirmation Date and before any qualifying disbursements were made. Third, even if the 2017

amendment was retroactive, the 2017 amendment is supported by a legitimate legislative

purpose furthered by rational means.

1. Plaintiffs had Adequate Notice of the Fee Increase

Plaintiffs claim that they did not have sufficient notice of the “exponential fee increase

when they decided to pursue Chapter 11 bankruptcy, invested time and effort in preparing the

petition, and began working with the court and creditors to develop a plan of reorganization.”

(Pls.’ Mot., ECF No. 22, at 22.) Plaintiffs argue that had they known about the size of fee

increase, they “could have attempted to restructure debts outside of bankruptcy before they

considered filing for bankruptcy.” (Id. at 23, citing Ex. 1 to Pls.’ Mot. at ¶ 11, ECF No. 22-1.)

Plaintiffs once again rely on the decisions in Buffets and Life Partners for support, but

those cases involved debtors with plans that were already confirmed prior to January 1, 2018.

Buffets, 597 B.R. at 591, 596; Life Partners, 606 B.R. at 280-81. Here, the 2017 amendment

went into effect more than a year before Plaintiffs’ Plan was confirmed and any qualifying

disbursements were made. Thus, Plaintiffs had ample notice of the fee increase and time to

explore alternatives with creditors. See, e.g., Clayton, 2020 Bankr. LEXIS 842, at *16 (rejecting

due process challenge to the 2017 amendment and explaining that the parties “had the option to

make other decisions” since the 2017 amendment took effect before the plan was confirmed);

MF Glob., 615 B.R. at 436 (“The Due Process Clause does not require Congress to give personal

notice to affected parties before enacting a change in fees or taxes, even when (unlike here) those

changes are tied to past conduct.” (citation omitted)).

Furthermore, chapter 11 debtors have long been required to pay quarterly UST fees, and

the fee amounts have periodically changed over the years. Therefore, any expectation by

Plaintiffs that the old fee schedule would continue to govern disbursements indefinitely was

unreasonable. See, e.g., MF Glob., 615 B.R. at 436 (rejecting due process challenge to the 2017

amendment and explaining that “[n]either Plaintiff nor any of its stakeholders could reasonably

expect that the quarterly fees would not increase. Increased fees are like increased taxes. The

taxpayer hopes they do not go up but, notwithstanding that hope, they sometimes do.”);

13 Some of the facts and discussion hereinafter may be relevant to the points raised above and vice versa.

Landgraf, 511 U.S. at 269 (noting that a statute does not operate retroactively “merely because it

. . . upsets expectations based in prior law.” (citation omitted)).

2. The 2017 Amendment Does Not Violate the Due Process Clause

When retroactive economic legislation is challenged on due process grounds, a

deferential standard of review applies:

Provided that the retroactive application of a statute is supported

by a legitimate legislative purpose furthered by rational means,

judgments about the wisdom of such legislation remain within the

exclusive province of the legislative and executive branches . . .

To be sure, . . . retroactive legislation does have to meet a burden

not faced by legislation that has only future effects . . . The

retroactive aspects of legislation, as well as the prospective

aspects, must meet the test of due process, and the justifications for

the latter may not suffice for the former . . . But that burden is met

simply by showing that the retroactive application of the

legislation is itself justified by a rational legislative purpose.

U.S. v. Carlton, 512 U.S. 26, 30, 31 (1994) (quotation marks and citations omitted). The party

challenging legislation under the Due Process Clause has the burden of proving that Congress

acted in an irrational and arbitrary way. E. Enters. v. Apfel, 524 U.S. 498, 537 (1998) (citing

Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15 (1978)).

The majority of courts have held that the 2017 amendment does not violate the Due

Process Clause. See Exide, 611 B.R. at 31; MF Glob., 615 B.R. at 436; Mosaic, 614 B.R. at 622;

Clayton, 2020 Bankr. LEXIS 842, at *16. Once again, this court again adopts the reasoning of

the court in Exide. In Exide, the court explained:

in enacting the 2017 Amendment Congress had a legitimate

legislative purpose: to prevent revenue loss and preserve the UST

Program’s self-funded character . . . Congress’s decision to

impose higher fees on larger pending chapter 11 cases is rationally

related to that goal. It is logical for Congress to assume that larger

cases tax the UST system more than smaller cases and that the size

of the case can be determined by the amount of disbursements

made by the particular debtor. In addition, applying the increased

fees to pending cases, including confirmed cases, is rational as it

spreads the costs among more chapter 11 debtors and allows

Congress’s funding goal to be met more quickly . . . Lastly, the

Court concludes that the deposit of 2% of fees collected into the

general fund of the U.S. Treasury is rational. The increased fees

are meant to offset not only the UST appropriations but also the

costs of the 18 new bankruptcy judgeships created by the 2017

Amendment.

Exide, 611 B.R. at 31 (citations and quotation marks omitted). Accordingly, Plaintiffs’ due

process claim fails.

C. Uniformity

Next, Plaintiffs claim that the 2017 amendment, as applied to them, is unconstitutional

under the Uniformity and Bankruptcy Clauses. Plaintiffs argue that even though UST Program

Districts were required to adopt the increased fee schedule, the Judicial Conference did not

implement the 2017 amendment to BA Districts until October 1, 2018, and the 2017 amendment

was explicitly made applicable only to chapter 11 cases filed on or after this date. Thus, debtors

with pending cases in BA Districts at the time the 2017 amendment was enacted were not liable

for the increased fees, whereas debtors with pending cases in UST Program Districts were liable.

Consequently, Plaintiffs argue that Defendant’s application of the 2017 amendment to their case

violates the Uniformity and Bankruptcy Clauses. This is not the law.

1. The Uniformity Clause Does Not Apply

As a preliminary matter, the Uniformity Clause does not apply to this dispute. The

Uniformity Clause states that Congress shall have the power to “lay and collect Taxes, Duties,

Imposts and Excises . . . but all Duties, Imposts and Excises shall be uniform throughout the

United States.” U.S. CONST. art. I, § 8, cl. 1. But the quarterly fees imposed under 28 U.S.C.

§§ 1930(a)(6), and (7) are plainly not “Duties,” “Imposts,” or “Excises” subject to the conditions

of the Uniformity Clause, and at no point in their briefs did Plaintiffs even appear to argue

otherwise. Instead, as Defendant correctly points out, the quarterly fees “are user fees, payable

only by debtors or others in ongoing chapter 11 cases, for the purpose of funding the bankruptcy

system they are using.” (Def.’s Mot., ECF No. 23, at 22.) (citations omitted).14 User fees,

unlike certain taxes, are not subject to the constitutional restrictions imposed by the Uniformity

Clause. See, e.g., Thomson Multimedia, Inc. v. U.S., 340 F.3d 1355, 1363-64 (Fed. Cir. 2003)

(holding that the Harbor Maintenance Tax under 26 U.S.C. §§ 4461-4462 as applied in that case

was “outside the scope of the Uniformity Clause’s prohibitions” because it was a user fee, not a

tax). Therefore, the Uniformity Clause does not apply.

2. The 2017 Amendment Does Not Violate the Bankruptcy Clause

The Bankruptcy Clause provides that Congress shall have the power “[t]o establish . . .

uniform Laws on the subject of Bankruptcies throughout the United States[.]” U.S. CONST. art.

I, § 8, cl. 4. The Supreme Court recently explained the impetus of the Bankruptcy Clause:

The Bankruptcy Clause emerged from a felt need to curb the

States’ authority. The States had wildly divergent schemes for

discharging debt, and often refused to respect one another’s

14 Plaintiffs do not dispute this characterization. In fact, they characterize the quarterly fees as “unreasonable user

fees” later in their brief. (Pls.’ Mot., ECF No. 22, at 34.)

discharge orders. The Framers’ primary goal in adopting the

Clause was to address that problem—to stop competing sovereigns

from interfering with a debtor’s discharge. And in that project, the

Framers intended federal courts to play a leading role. The

nation’s first Bankruptcy Act, for example, empowered those

courts to order that States release people they were holding in

debtors’ prisons. So through and through, the Bankruptcy Clause

embraced the idea that federal courts could impose on state

sovereignty. In that, it was sui generis—again, unique—among

Article I’s grants of authority.

Allen v. Cooper, -- U.S --, 140 S. Ct. 994, 1002 (2020) (citations, quotation marks, and

alterations omitted). “To properly enact a law under the Bankruptcy Clause, legislation must

meet two criteria: [1] the law must be on the subject of bankruptcies, and [2] the law must be

uniform throughout the United States.” Exide, 611 B.R. at 34. Both criteria are satisfied in this

case.

a. The 2017 Amendment is a Law on the Subject of Bankruptcies

The Supreme Court has defined bankruptcy as “the subject of the relations between an

insolvent or nonpaying or fraudulent debtor and his creditors, extending to his and their relief.”

Ry. Labor Executives’ Ass’n v. Gibbons, 455 U.S. 457, 466, 470-71 (1982) (quotation marks

and citations omitted) (holding that the Rock Island Railroad Transition and Employee

Assistance Act,which ordered a debtor railroad company’s bankruptcy estate to pay benefits to

former employees of the debtor, was a law on the subject of bankruptcies and violated the

Bankruptcy Clause). The Court has also stated that “[t]he Framers would have understood the

Bankruptcy Clause’s grant of power to enact laws on the entire ‘subject of Bankruptcies’ to

include laws providing, in certain limited respects, for more than simple adjudications of rights

in the res.” Cent. Va. Cmty. College v. Katz, 546 U.S. 356, 370 (2006) (holding that sovereign

immunity did not block preferential transfer actions because they were authorized by Bankruptcy

Clause’s grant of in rem jurisdiction).

Here, the 2017 amendment is part of 28 U.S.C. § 1930, which is literally titled

“[b]ankruptcy fees.” Section 1930 only imposes fees in bankruptcy cases, and the fees are used

to fund the UST Program which is part of the bankruptcy system. See 28 U.S.C. § 589a(a), (b).

In addition, the fees imposed under § 1930 receive administrative claim treatment in bankruptcy

cases, which means that “any increase or decrease in fees payable to the U.S. Trustee affects the

amount of funds available for distribution to lower-priority creditors and the debtor.” Life

Partners, 606 B.R. at 287-88 (citing 11 U.S.C. § 507(a)(2)). Thus, the 2017 amendment is

clearly a law on the subject of bankruptcies. It appears that every court to address the

constitutionality of the 2017 amendment under the Bankruptcy Clause has reached the same

conclusion. Life Partners, 606 B.R. at 287-88; Exide, 611 B.R. at 35-36; MF Glob., 615 B.R. at

445-46; Mosaic, 614 B.R. at 623; Clayton, 2020 Bankr. LEXIS 842, at *20-21; Buffets, 597 B.R.

at 594-95; John Q. Hammons Fall 2006, 2020 Bankr. LEXIS 2116, at *22-23; Cir. City Stores,

606 B.R. at 269-70.

Nevertheless, Defendant contends that the 2017 amendment was enacted under the

Necessary and Proper Clause, not the Bankruptcy Clause. But the Necessary and Proper Clause,

standing alone, is not a source of congressional power. Kinsella v. U.S. ex rel. Singleton, 361

U.S. 234, 247 (1960). Rather, Congress’ exercise of authority pursuant to that clause must be:

(1) tethered to one of Congress’ existing enumerated powers; and (2) within the scope of what is

permitted under that power. See, e.g., Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 559,

560 (2012) (finding that the individual mandate of the Patient Protection and Affordable Care

Act of 2010 could not be upheld under the Necessary and Proper Clause because the mandate

was neither narrow in scope nor incidental to Congress’ exercise of power under the Commerce

Clause).15 Thus, Defendant’s argument fails.

b. The 2017 Amendment is Uniform Under the Bankruptcy Clause

Having determined that the 2017 amendment is a law on the subject of bankruptcies, the

court must now determine whether the law is constitutionally uniform. A law enacted pursuant

to the Bankruptcy Clause must: (1) apply uniformly to a defined class of debtors; and (2) be

geographically uniform. Gibbons, 455 U.S. at 473; Schultz v. U.S., 529 F.3d 343, 351 (6th Cir.

2008). However:

The uniformity provision does not deny Congress power to take

into account differences that exist between different parts of the

country, and to fashion legislation to resolve geographically

isolated problems. The problem dealt with under the Bankruptcy

Clause may present significant variations in different parts of the

country . . . the uniformity clause was not intended to hobble

Congress by forcing it into nationwide enactments to deal with

conditions calling for remedy only in certain regions.

Reg’l Rail Reorg. Act Cases, 419 U.S. 102, 159 (1974) (citations, alterations, and quotation

marks omitted) (holding that the Regional Railroad Reorganization Act, which only applied to

rail carriers in certain regions and to railroads that were reorganizing within a certain time

period, was uniform under the Bankruptcy Clause because it was designed to solve a national rail

transportation crisis that began when eight major railroads initiated reorganization

proceedings).16

This court agrees with the majority of courts that have upheld the constitutionality of the

2017 amendment under the Bankruptcy Clause. Exide, 611 B.R. at 36-38; MF Glob., 615 B.R.

at 446-48; Clayton, 2020 Bankr. LEXIS 842, at *21-27; John Q. Hammons Fall 2006, 2020

15 In its response, Defendant argues for the first time that the quarterly fees are necessary and proper to execute

Congress’ power to establish courts pursuant to Article 1, Section 8, Clause 9 of the U.S. Constitution. Defendant’s

argument is a stretch, given that 28 U.S.C. § 1930’s primary purpose is not to regulate the conduct of bankruptcy

courts or the means by which their judgments are enforced, cf. Willy v. Coastal Corp., 503 U.S. 131, 136 (1992), but

rather to fund the UST Program, 28 U.S.C. § 589a(a), (b).

16 “Over two centuries after its adoption, it is quite clear the Bankruptcy Clause is a source of congressional power

far more often than it is a serious limitation.” Stephen J. Lubben, A New Understanding of the Bankruptcy Clause,

64 CASE W. RES. L. REV. 319, 411 (2013).

Bankr. LEXIS 2116, at *21-23. First, the 2017 amendment applies to a specific class of debtors:

chapter 11 debtors in UST Program Districts who make qualified disbursements during the years

2018-2022. Indeed, the 2017 amendment is not a “private bankruptcy bill” applicable to a single

debtor. Cf. Gibbons, 455 U.S. at 470-71. Second, the law remedies a geographically isolated

problem that is unique to UST Program Districts, i.e. the depletion of the UST System Fund.

Exide, 611 B.R. at 37. As the court stated in MF Global: “The BA Districts do not support the

UST Fund and the UST Fund does not support the BA Program. The Plaintiffs do not challenge

the dual UST/BA system as unconstitutional, and as long as the two regimes co-exist, they will

face funding problems that may be unique to only one of them.” 615 B.R. at 447-48.17 Thus,

the 2017 amendment is uniform under the Bankruptcy Clause.

D. The Takings Clause

Finally, Plaintiffs claim that Defendant’s application of the 2017 amendment to their case

violates the Takings Clause of the Fifth Amendment and constitutes an unreasonable user fee.

The court disagrees.

The Fifth Amendment provides in relevant part that private property shall not “be taken

for public use, without just compensation.” U.S. CONST. amend. V. “The Fifth Amendment’s

guarantee that private property shall not be taken for a public use without just compensation was

designed to bar Government from forcing some people alone to bear public burdens which, in all

fairness and justice, should be borne by the public as a whole.” Armstrong v. U.S., 364 U.S. 40,

49 (1960).

The standard for assessing the constitutionality of user fees under the Takings Clause was

illustrated in United States v. Sperry Corp., 493 U.S. 52 (1989). Sperry involved section 502 of

the Foreign Relations Authorization Act, Fiscal Years 1986 and 1987, which required the

deduction of a user fee of up to 1.5% of the first $5 million and 1% of any amount over $5

million from awards obtained by American claimants before the Iran-U.S. Claims Tribunal. An

American company challenged the constitutionality of the statute, arguing that it violated the

Takings Clause because the deduction did not approximate the cost of the Iran-U.S. Claims

Tribunal to the United States and did not bear any relationship to the company’s use of the

Tribunal or the value of the Tribunal’s services to the company. The Supreme Court rejected the

company’s argument.

17 Plaintiffs rely on St. Angelo v. Victoria Farms, Inc., 38 F.3d 1525 (9th Cir. 1994), modified, 46 F.3d 969 (9th Cir.

1995), where the Ninth Circuit held that the absence of quarterly fees in BA Districts rendered 28 U.S.C. § 1930

non-uniform under the Bankruptcy Clause. But the “proper focus” in this case is whether the 2017 amendment, not

the dual UST/BA system, is constitutionally uniform. Exide, 611 B.R. at 33-34. And even if it was proper to

consider the fees charged in BA Districts, 28 U.S.C. §§ 1930(a)(6) and (7) are uniform. Section 1930(a)(7)

authorized the Judicial Conference to impose quarterly fees equal to those imposed in UST Program Districts, and

the Judicial Conference mandated the imposition of quarterly fees in BA Districts in an amount equal to what is

charged in UST Program Districts. Report of the Proceedings of the Judicial Conference of the United States, at 45-

46 (Sept./Oct. 2001), http://www.uscourts.gov/sites/default/files/2001-09_0.pdf. Thus, “the Judicial Conference

exercised its discretion under section 1930(a)(7) long before enactment of the 2017 Amendments and rendered

subsections 1930(a)(6) and (a)(7) uniform in their effect. While the Judicial Conference separately resolved to delay

the imposition of the increased fees and limited the increase to new cases, non-uniform implementation of a uniform

law does not render the law non-uniform.” MF Glob., 615 B.R. at 448, n. 20 (citation omitted).

The Court explained: “This Court has never held that the amount of a user fee must be

precisely calibrated to the use that a party makes of Government services. Nor does the

Government need to record invoices and billable hours to justify the cost of its services. All that

we have required is that the user fee be a ‘fair approximation of the cost of benefits supplied.’”

Sperry, 493 U.S. at 60 (quoting Mass. v. U.S., 435 U.S. 444, 463, n. 19 (1978)). Because the

1.5% deduction was designed for the reimbursement of government services, and because the

American company clearly benefited from its use of the Tribunal, the Court held that the

deduction did not constitute a “taking” under “any standard of excessiveness.” Sperry, 493 U.S.

at 62-64. The Court also appeared to reject the proposition that any user fee could constitute a

“physical occupation requiring just compensation.” Id. at 62, n. 9.

As noted earlier, the UST quarterly fees are user fees. However, Plaintiffs contend that

the fees are unreasonable and excessive. Specifically, Plaintiffs argue:

The increased UST fee of up to $250,000 is charged whenever the

debtor’s quarterly disbursement equals or exceeds $1,000,000. But

if the disbursement is less than $1,000,000, the prior fee schedule

applies, resulting in a maximum fee of $30,000. Nevertheless, in

either instance, the Trustee necessarily renders the same services,

as the number of creditors remains the same and those creditors are

still entitled to receive their percentage of the disbursement,

regardless of the amount of the disbursement. It appears that the

only justification for charging a UST fee up to 833% higher than

previously imposed for the same services is the fact that the debtor

happens to be able to make a larger disbursement . . . The

Reorganized Debtors maintain that the UST fees imposed by the

Amendment cannot qualify as a reasonable user fee because they

are clearly not designed to reimburse the government for the cost

of the Trustee’s services.

(Pls’. Mot., ECF No. 22, at 34-35.) (citation omitted).

Plaintiffs’ argument misses the mark. The UST fees are “user fees associated with the

debtors’ use of the bankruptcy system.” Exide, 611 B.R. at 20 (citation omitted). They are

imposed on disbursements made in chapter 11 cases in order to fund the UST Program. 28

U.S.C. § 589a(a), (b). And they were increased by the 2017 amendment in order to fund a

projected shortfall for the UST Program.18 Plaintiffs are reorganized chapter 11 debtors who

have clearly benefited from their use of the bankruptcy system and the UST Program. It is true

that chapter 11 debtors, like Plaintiffs, who make larger disbursements are charged a higher

amount in UST fees. But user fees need not be “precisely calibrated” to a party’s use of

government services. Sperry, 493 U.S. at 60. And “[i]t is permissible for Congress to impose

higher user fees on large chapter 11 debtors to reflect both a fair approximation of the benefits

18 See H.R. Rep. No. 115-130, at 7-9 (2017).

conferred and Congress’ assumption that larger, more complex cases tax the system more than

smaller ones.” Exide, 611 B.R. at 33.

In addition, the UST fees are not unconstitutionally excessive. The 2017 amendment

limits UST fees in cases where disbursements exceed $1 million to the lesser of 1% of the

disbursements or $250,000. In Sperry, the Supreme Court upheld a 1.5% user fee. Plaintiffs are

correct that the Court in Sperry limited its decision to the facts of that case and did not specify

what percentage would constitute a taking. However, in Sperry there was no dollar cap or sunset

provision on the user fee, the company’s use of the Tribunal was involuntary, and the user fee

was expressly retroactive. Here, the UST fees are capped at $250,000, there is a sunset

provision, Plaintiffs’ use of the bankruptcy system was voluntary, and the fee schedule only

applies to qualified disbursements made in quarters subsequent to its enactment. Thus, the UST

fees are, in many aspects, less burdensome than the fee upheld in Sperry.

Finally, Plaintiffs rely on the Supreme Court’s decisions in United States v. U.S. Shoe

Corp., 523 U.S. 360 (1998) and Massachusetts v. United States, 435 U.S. 444 (1978). But

neither of those cases involved a challenge to a user fee under the Takings Clause. This court

agrees with the courts that have upheld the constitutionality of the 2017 amendment under the

Takings Clause. See Exide, 611 B.R. at 33; MF Glob., 615 B.R. at 443.

VI. CONCLUSION

The court is sympathetic to the fact that Plaintiffs are ultimately required to pay a much

larger amount in UST fees than what they expected prior to seeking bankruptcy relief. The court

also recognizes that dramatically increasing quarterly fees for chapter 11 debtors in pending

cases may ultimately hinder one of the chief purposes of chapter 11, which is to preserve going

concerns. See Bank of Am. Nat. Tr. & Sav. Ass’n v. 203 N. LaSalle St. P’ship, 526 U.S. 434,

453 (1999). But whatever the wisdom of Congress’ decision, the 2017 amendment is

constitutional and applicable to Plaintiffs’ case. Therefore, the court will grant Defendant’s

motion for summary judgment.

Service List:

Anthony J. DeGirolamo

3930 Fulton Drive NW, Suite 100B

Canton, OH 44718

James M. McHugh

Lauren A. Gribble

Tzangas Plakas Mannos Ltd

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Canton, OH 44702

Suzana Krstevski Koch

United States Attorney's Office, NDOH

801 W. Superior Avenue

Suite 400

Cleveland, OH 44113

Maria D. Giannirakis

Scott R. Belhorn

Office of the U.S. Trustee

H.M. Metzenbaum U.S. Courthouse

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Cleveland, OH 44114-1240