U.S. Sales, Inc. v. Office of the U.S. Tr.

CourtUnited States District Courts. 9th Circuit. United States District Courts. 9th Circuit. Central District of California
Citation532 F.Supp.3d 921
Docket NumberCase No. 5:19-cv-02133-JWH-KKx
Parties USA SALES, INC., Plaintiff, v. OFFICE OF the UNITED STATES TRUSTEE, Defendant.
Decision Date01 April 2021

A. Lavar Taylor, Lisa Otilia Nelson, A. Lavar Taylor Law Offices LLP, Santa Ana, CA, Daren M. Schlecter, Law Office of Daren Schlecter PC, Los Angeles, CA, for Plaintiff.

Jasmin Yang, AUSA - US Attorneys Office, Los Angeles, CA, for Defendant.

MEMORANDUM OPINION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT [ECF Nos. 25 & 26]

John W. Holcomb, UNITED STATES DISTRICT JUDGE

I. INTRODUCTION

The filing of a bankruptcy petition is a significant legal event, with dramatic and far-reaching consequences. A debtor's voluntary and affirmative act of filing that petition commences its bankruptcy case and constitutes the entry of an order for relief under the Bankruptcy Code.1

The debtor's bankruptcy rights, duties, and obligations commence the instant it files that petition. For example, a bankruptcy estate is established at that moment, the res of which consists of all of the debtor's real and personal property—tangible and intangible—and the debtor's equitable interests in property. The bankruptcy automatic stay also springs into existence, preventing creditors from taking any action to enforce a pre-petition debt against the debtor or the bankruptcy estate. Actions taken in violation of the automatic stay are not merely voidable; they are void. If the debtor files its petition under Chapter 11 of the Bankruptcy Code, the debtor transforms into a new legal entity—a debtor in possession—with all of the rights and duties of a bankruptcy trustee.

In sum, a debtor's entry into bankruptcy transports it into another legal realm; the debtor is like Lewis Carroll's Alice, stepping through the looking-glass.2 The debtor, and other parties in interest, find that many new rules apply, and the old rules apply in different ways, or sometimes not at all. The instant case, which concerns the obligation of a Chapter 11 debtor to pay quarterly fees to the Office of the United States Trustee (the "UST"), turns upon the fundamental bankruptcy concept that the act of commencing a bankruptcy case carries important consequences, which inform the Court regarding how it should interpret the Chapter 11 quarterly fee statute.

In May of 2016, Plaintiff USA Sales, Inc. commenced a case under Chapter 11 of the Bankruptcy Code, and, thus, became a Chapter 11 debtor and debtor in possession. When USA Sales filed its bankruptcy petition, the relevant statute28 U.S.C. § 1930(a)(6) —capped the fees payable by a Chapter 11 debtor at $30,000 per quarter. In late 2017, Congress amended that statute to provide an additional schedule for calculating quarterly fees during fiscal years 2018 through 2022 (the "2017 Amendment").3 Under the amended statute, Chapter 11 debtors whose disbursements exceeded $1 million in any quarter were required to pay the lesser of $250,000 or 1% of the debtor's total quarterly disbursements. Beginning on January 1, 2018, the UST calculated quarterly fees according to the amended statute in new and pending cases . The application of the new quarterly fee schedule to cases that were commenced before the amendment's enactment resulted in a significant increase in the quarterly fees owed by the debtors in those cases. In USA Sales' case, for example, its fees increased from $13,000 per quarter before the 2017 Amendment to an average of about $87,493 per quarter for the years 2018 through 2019 under the amended schedule.4 USA Sales was in bankruptcy from May 20, 2016, until November 7, 2019, when the bankruptcy court dismissed the case pursuant to the terms of a structured dismissal negotiated by USA Sales and its creditors.5

USA Sales commenced this district court case on November 6, 2019.6 In its operative Complaint, USA Sales asserts two claims for relief against the UST, through which it seeks a refund of the excess amount of quarterly fees that it believes the UST assessed against it under the 2017 Amendment. In its first claim for relief, USA Sales challenges the constitutionality of the 2017 Amendment, as applied to pending Chapter 11 cases.7 In its second claim for relief, USA Sales alleges that, as a matter of statutory interpretation, the 2017 Amendment should not have been applied to USA Sales' Chapter 11 case.8

Before the Court are cross-motions for summary judgment filed by Defendant UST,9 on the one hand, and Plaintiff USA Sales,10 on the other (jointly, the "Motions").11 The material facts are undisputed. The Motions present two primary questions:

1. As a matter of statutory interpretation, does 28 U.S.C. § 1930(a)(6)(B) apply to debtors in Chapter 11 cases that were commenced before the date of enactment of the 2017 Amendment?

2. If 28 U.S.C. § 1930(a)(6)(B) properly applies to pending cases, then is the 2017 Amendment unconstitutional, as applied to USA Sales?12

Having considered these questions, the Court concludes that the plain text of 28 U.S.C. § 1930(a)(6), subparagraph (B), as amended in 2017, does not apply to Chapter 11 cases that were commenced prior to the effective date of the 2017 Amendment. Therefore, the UST wrongly applied the 2017 Amendment to USA Sales' distributions in fiscal years 2018 and 2019. As an alternative ground for decision, the Court further concludes that the 2017 Amendment is a non-uniform law on the subject of bankruptcies, and, therefore, it is unconstitutional. Accordingly, the Court will GRANT in part , and DENY in part ,13 the Motion of USA Sales, and will DENY the Motion of the UST.14

II. BACKGROUND
A. The United States Trustee Program and 28 U.S.C. § 1930

In 1978, Congress launched the UST pilot program to assist bankruptcy judges with the administrative functions of bankruptcy. See Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549, 2662–65 (1978). Under that program, Congress transferred bankruptcy administrative duties to USTs in the Department of Justice. The USTs "were given responsibility for many administrative functions, such as appointing private trustees and monitoring their performance, and monitoring cases for signs of fraud or abuse." In re Prines , 867 F.2d 478, 480 (8th Cir. 1989). The pilot program was largely successful, and, in 1986, Congress made the UST program permanent. See Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088, 3090–95 (1986).

Not every judicial district, however, participates in the UST program; out of the 94 judicial districts nationwide, only 88 participate in the program ("UST Districts"). See 28 U.S.C. § 581(a). Six districts in Alabama and North Carolina instead participate in the Bankruptcy Administrator program ("BA Districts"), which the Judicial Conference oversees. See Federal Courts Improvements Act of 2000, Pub. L. No. 106-518 § 501, 114 Stat. 2410, 2421 (2000); see also Matter of Buffets, L.L.C. , 979 F.3d 366, 370 (5th Cir. 2020).

One of the primary differences between the two programs involves funding; each is funded through a different source. The administrator program in BA Districts is funded through the judiciary's general budget. Buffets , 979 F.3d at 371. The UST program, although technically funded by annual appropriations, is designed so that its cost is offset by fees paid by debtors. See Consolidated Appropriations Act of 2019, Pub. L. No. 116-6, div. C., tit. II, 133 Stat. 13, 103-04 (2019). Those fees include Chapter 11 quarterly fees. 28 U.S.C. § 1930(a)(6) ; see also id. § 589a.

When the quarterly fee program was first implemented, debtors in BA Districts were not required to pay quarterly fees, whereas debtors in UST Districts were. This disparity resulted in a challenge to the constitutionality of the quarterly fee statute. In St. Angelo v. Victoria Farms, Inc. , 38 F.3d 1525 (9th Cir. 1994), amended by 46 F.3d 969 (9th Cir. 1995), the Ninth Circuit held that Congress' decision to impose quarterly fees in UST Districts, but not in BA Districts, violated the Bankruptcy Clause of the Constitution. See id. at 1529, 1531–32. In response to that decision, Congress amended 28 U.S.C. § 1930(a) to authorize the Judicial Conference to charge quarterly fees "equal to those imposed" in UST Districts. 28 U.S.C. § 1930(a)(7). Shortly thereafter, the Judicial Conference accepted this authorization and adopted the schedule of quarterly fees that were assessed in UST Districts (i.e. , the fees prescribed by 28 U.S.C. § 1930(a)(6) ). See Buffets , 979 F.3d at 371 (citation omitted) (the Judicial Conference adopted fees "in the amounts specified in 28 U.S.C. § 1930, as those amounts may be amended from time to time").

Before October 2017, 28 U.S.C. § 1930(a) provided, in pertinent part:

(a) The parties commencing a case under title 11 shall pay to the clerk of the district court or the clerk of the bankruptcy court ... the following filing fees:
* * *
(6) In addition to the filing fee paid to the clerk, a quarterly fee shall be paid to the United States trustee, for deposit in the Treasury, in each case under chapter 11 of title 11, other than under subchapter V, for each quarter (including any fraction thereof) until the case is converted or dismissed, whichever occurs first. The fee shall be $325 for each quarter in which disbursements total less than $15,000; ... $13,000 for each quarter in which disbursements total $5,000,000 or more but less than $15,000,000 .... The fee shall be payable on the last day of the calendar month following the calendar quarter for which the fee is owed.15

28 U.S.C. § 1930(a)(6) (2012).

Due to a decline in bankruptcy filings, by the mid-2010s, the UST program funding was no longer being offset by debtor-paid fees. See Buffets , 979 F.3d at 371. Therefore, in late 2017, Congress amended 28 U.S.C. § 1930(a)(6) by striking "(6) In" and inserting "(6)(A) Except as provided in subparagraph (B)" and adding the following subparagraph:

(B) During
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    ...after the court concluded that Congress did not prescribe the reach of the 2017 Amendment in the first step of the Landgraf analysis. 532 F.Supp.3d 921, 934, 936-37 (C.D. Cal. 2021). We conclude the opposite on the first step of the analysis for the reasons stated above and thus do not need......
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