MEMORANDUM OPINION AND ORDER REGARDING POST-CONFIRMATION UNITED STATES TRUSTEE'S QUARTERLY FEES

Relates to ECF No. 4307, 4346

Mark X. Mullin, United States Bankruptcy Judge.

On July 17, 2019, the Court held a hearing on two motions dealing with a statutory amendment to 28 U.S.C. § 1930(a)(6), which increased the United States Trustee quarterly fee schedule effective January 1, 2018. In the first motion,1 the Life Partners Position Holder Trust ("PHT") requests an order finding that the amendment (a) does not apply to Chapter 11 cases that were filed prior to the effective date of the amendment, or (b) is unconstitutional. In the second motion,2 the U.S. Trustee asks for an order granting summary judgment and dismissing the PHT's motion, arguing that the PHT motion seeks relief that can be sought only through an adversary proceeding.

For the reasons explained below, the Court grants the PHT's motion because the statutory amendment does not apply to these Life Partners Chapter 11 cases, and even if the amendment does apply, it is unenforceable because it is unconstitutional. The Court also grants the U.S. Trustee's motion in part and converts this contested matter to an adversary proceeding for the balance of the contested issues.

I. JURISDICTION AND VENUE

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This matter is a core proceeding pursuant to 28 U.S.C. § 157(b). Venue is proper pursuant to 28 U.S.C. § 1409(a).

II. BACKGROUND FACTS

A. Bankruptcy filing and plan confirmation

Life Partners Holdings, Inc. ("LPHI") filed a voluntary Chapter 11 petition on January 20, 2015. On May 19, 2015, pursuant to this Court's April 7, 2015 authorization,3 H. Thomas Moran, II, Chapter 11 trustee (the "Chapter 11 Trustee"), initiated Chapter 11 bankruptcy cases for two subsidiaries of LPHI (the "Subsidiary Debtors"). Thereafter, the LPHI case and the Subsidiary Debtors' cases (collectively, the "Life Partners Chapter 11 Cases") were ordered jointly administered for procedural purposes.4

On October 27, 2016, the Chapter 11 Trustee, the Subsidiary Debtors, and the official committee of unsecured creditors (the "Creditors' Committee") (collectively, the "Plan Proponents") filed their Revised Third Amended Joint Plan of Reorganization of Life Partners Holdings, Inc. et. al., Pursuant to Chapter 11 of the Bankruptcy Code (the "Plan").5

On November 1, 2016 (the "Plan Confirmation Date"), this Court confirmed the Plan and entered its Order Confirming Revised Third Amended Joint Plan of Reorganization of Life Partners Holdings, Inc., et al. Pursuant to Chapter 11 of the Bankruptcy Code (the "Confirmation Order").6

On December 9, 2016, the Plan Proponents filed their notice that the Plan became effective as of such date (the "Effective Date").7

Under the Plan, the PHT was established, in part, to administer the portfolio of life insurance policies for the benefit of thousands of investors.8 Michael J. Quilling was appointed as successor Trustee of the PHT (the "Position Holder Trustee") by the Life Partners Governing Trust Board pursuant to the provisions of the Plan and Position Holder Trust Agreement.9

The Confirmation Order provides that all fees due under 28 U.S.C. § 1930 "shall be paid on the Effective Date" and that "the Position Holder Trustee shall (a) continue to pay all fees due and payable pursuant to [section 1930] until the closing, conversion, or dismissal of the Chapter 11 cases, and (b) provide the required post-confirmation reporting to the U.S. Trustee until the Chapter 11 Cases are closed."10 As required under the Plan, the Position Holder Trustee files the Post Confirmation Quarterly Operating Reports and pays the assessed U.S. Trustee's fees owing for each of the Life Partners Chapter 11 Cases.

When the Plan was confirmed in 2016, § 1930 of title 28 provided that the payment of quarterly fees to the U.S. Trustee would range between $6,500 and $30,000. In no event would the quarterly fee ever exceed $30,000 regardless of the amount of the disbursements for any given calendar quarter.11

In accordance with the existing U.S. Trustee fee regime in place on the Plan Confirmation Date, the Life Partners Chapter 11 Cases were assessed, and the Position Holder Trustee paid, the following U.S. Trustee fees during 2017:

B. Dramatic increase in United States Trustee quarterly fees

In October 2017, Congress amended 28 U.S.C. § 1930(a)(6) (the "2017 Amendment") to increase the U.S. Trustee quarterly fees when (i) a Chapter 11 debtor's disbursements equal or exceed $1 million during a quarter, and (ii) the United States Trustee System Fund balance was below $200 million in the most recent fiscal year.12 From January 1, 2018 onward, the U.S. Trustee has assessed and continues to assess fees based upon the increased fee schedule in all open Chapter 11 cases that are subject to the U.S. Trustee program, regardless of when such cases were filed.

The details of the 2017 Amendment, and the history of the statute, are detailed in In re Buffets, LLC13 and In re Circuit City Stores, Inc.14 As those opinions note, the U.S. Trustee argues that in districts that are part of the U.S. Trustee program (the "U.S. Trustee districts"), the increased fees apply to all Chapter 11 cases, regardless of when they were filed. In contrast, in the six federal judicial districts in Alabama and North Carolina that operate under the Bankruptcy Administrator Program (the "BA districts"), the increased fees apply only to Chapter 11 cases that are filed on or after October 1, 2018.

As a result, for the first three quarters of 2018, the U.S. Trustee assessed the Life Partners Chapter 11 Cases (which are filed in a U.S. Trustee district) the following amounts for U.S. Trustee fees:15

By comparison, had the Life Partners Chapter 11 Cases been filed in a BA district, the fee increase would not have applied to the Life Partners Chapter 11 Cases because they were filed prior to October 1, 2018. So the maximum fees the Life Partners Chapter 11 Cases could have been assessed in a BA district was $30,000 for each quarter in 2018 and beyond until the cases are closed.

III. PROCEDURAL POSTURE

On February 19, 2019, the PHT filed its Position Holder Trust's Motion to Determine Liability for Post-Confirmation United States Trustee's Quarterly Fees and to Partially Disgorge Trustee Quarterly Fees Paid in 2018 with Brief in Support (the "PHT Motion").16 The PHT Motion requests an order finding that (a) the 2017 Amendment does not apply to the Life Partners Chapter 11 Cases since each of the cases was filed prior to the enactment of the amendment, or (b) the 2017 Amendment is unconstitutional. Also on February 19, 2019, the PHT filed its Notice of Constitutional Question under Fed. R. Civ. P. 5.1.17

On April 26, 2019, the U.S. Trustee filed his United States Trustee's Motion for Summary Judgment on Position Holder Trust's Motion to Determine Liability for Post-Confirmation United States Trustee's Fees and to Partially Disgorge Trustee Quarterly Fees Paid in 2018 (the "U.S. Trustee Motion").18 Through this motion, the U.S. Trustee asks for an order granting summary judgment and dismissing the PHT Motion, arguing that the PHT Motion seeks relief that can be sought only through an adversary proceeding.

The Court held a hearing on both motions on July 17, 2019. The Court has considered the PHT Motion, the U.S. Trustee Motion, and each party's oral arguments, briefs, responses, replies, and supplemental papers.19

IV. ANALYSIS

Although the legal issues in dispute concerning the 2017 Amendment are relatively new, the Court has the benefit of the Buffets and Circuit City decisions. Rather than re-creating the wheel, the Court adopts in this Order the legal analysis and conclusions in those opinions, except where noted below.

A. It is questionable whether the relief requested in the PHT Motion—as limited by the parties at the hearing—requires an adversary proceeding, but the Court will convert this contested matter to an adversary proceeding out of an abundance of caution for the balance of the contested issues.

Citing Bankruptcy Rule 7001, the U.S. Trustee argues that an adversary proceeding is required for this matter because the PHT seeks (i) to "recover" money from the United States, (ii) to determine the validity of the government's "interest in property," and (iii) a declaratory judgment on those matters.20 The PHT argues, in contrast, that Bankruptcy Rule 2020 governs this contested matter.21

At the July 17, 2019 hearing, the parties argued the merits of the PHT Motion without pressing the issue of whether an adversary proceeding is required. In addition, the parties agreed to continue for another day the determination of the U.S. Trustee fees owed for each of the Life Partners Chapter 11 Cases and whether and how the PHT could recover previous overpayments, if any, to the United States. It thus appears that the Court can resolve the ripe contested issues addressed in this Memorandum Opinion and Order based on uncontested facts and legal interpretation of the law.

Out of an abundance of caution, although this Memorandum Opinion and Order resolves the statutory and constitutional issues regarding the 2017 Amendment, the Court will convert this contested matter to an adversary proceeding for the balance of the contested issues—that is, the appropriate calculation of U.S. Trustee fees owed for the Life Partners Chapter 11 Cases, and whether and how the PHT can recover any previously paid excess quarterly fees.

B. The 2017 Amendment does not apply to Chapter 11 cases filed in U.S. Trustee districts before the amendment's enactment.

Although the Buffets and Circuit City decisions are both well-reasoned, the Court finds the Buffets opinion more persuasive on the issue of whether the 2017 Amendment—by its terms—applies to cases that were already pending in U.S. Trustee districts on October 26, 2017, when the 2017 Amendment was enacted. For the reasons stated in the Buffets opinion, while the increase applies only to disbursements made on or after January 1, 2018, nothing in the statute or legislative history indicates that Congress intended the 2017 Amendment to apply to pending cases as of the amendment date.

The U.S. Trustee criticizes Buffets for this conclusion, noting that the statute applies "[d]uring each of fiscal years 2018 through 2022"22 and applies to "disbursements made in any calendar quarter that begins on or after the date of enactment" of the amendment.23 But those statutory quotes simply beg the question: Disbursements in which cases?

The U.S. Trustee also points to an October 12, 2017 Congressional Budget Office estimate analyzing the proposed legislation that would increase quarterly fees paid by "businesses involved in ongoing Chapter 11 bankruptcy cases."24 But does the term "ongoing" cases necessarily include pending cases? The term "ongoing" cases just as plausibly could mean open (i.e., non-closed) cases. But which open cases? Open cases filed after the amendment date? Or pending open cases as well? The CBO estimate is not so clear.

Congress certainly knows how to be crystal clear when it wants quarterly-fee amendments to apply to pending cases. Before 1996, § 1930(a)(6) required the payment of quarterly fees "in each case under chapter 11 of title 11 for each quarter (including any fraction thereof) until a plan is confirmed or the case is converted or dismissed, whichever occurs first."25 On January 27, 1996, Congress enacted the Balanced Budget Downpayment Act (the "1996 Amendment"),26 which amended § 1930(a)(6) to require the payment of quarterly fees "in each case under chapter 11 of title 11 for each quarter (including any fraction thereof) until the case is converted or dismissed whichever occurs first."27 The 1996 Amendment removed the words "until a plan is confirmed."28

Based on the 1996 Amendment and its legislative history, some courts held that the amendment imposed quarterly fees upon all Chapter 11 debtors, including those whose plans of reorganization had already been confirmed.29 Other courts, on the other hand, held that the imposition of quarterly fees upon a case with a plan confirmed before January 27, 1996 would be improper retroactive legislation.30

Apparently in response to this split in the cases interpreting the 1996 Amendment, Congress enacted the Omnibus Consolidated Appropriations Act on September 30, 1996. This legislation was explicit in making the 1996 Amendment applicable to debtors whose plans were confirmed before and after the prior amendment's effective date. Section 109(d) of that Act reads:

In contrast, the 2017 Amendment contains no such express language making the increased fees payable regardless of when a case is filed and regardless of when a plan is confirmed. Given the 833% increase in maximum quarterly fees under the 2017 Amendment to this same statute, the Court would expect Congress to have made its intent explicit—as it did in September 1996—had it intended the increased fees to apply to pending cases.

Indeed, in the very same legislation32 that amended § 1930 to increase U.S. Trustee fees, Congress enacted amendments to Chapter 12 of the Bankruptcy Code, and those amendments expressly apply to cases filed after enactment of the amendment and to certain cases filed before enactment of the amendment:

Again, Congress knows how to be crystal clear when it wants bankruptcy legislation to apply to all pending cases (as it did in September 1996 concerning U.S. Trustee fees) or to certain pending cases (as it did in 2017 concerning Chapter 12 of the Bankruptcy Code). No such clear language exists for the 2017 Amendment regarding U.S. Trustee fees. The lack of such clear language is striking.

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. Therefore, based on the well-reasoned analysis in Buffets, which this Court adopts, the Court concludes that the 2017 Amendment does not apply to the Life Partners Chapter 11 Cases.

C. Even if the 2017 Amendment applies to the Life Partners Chapter 11 Cases, the statute is unconstitutionally non-uniform because Chapter 11 debtors in BA districts are not required to pay the higher quarterly fees unless their cases were filed on or after October 1, 2018.

Even if Congress intended for the 2017 Amendment to apply to Chapter 11 cases that were filed prior to its enactment, the 2017 Amendment is unenforceable because it is unconstitutionally non-uniform. For the reasons stated in Buffets and Circuit City, whether the quarterly fees are viewed as a tax or as a user fee, the 2017 Amendment violates the Uniformity Clause34 and the Bankruptcy Clause35 of the U.S. Constitution because Chapter 11 debtors in U.S. Trustee districts will be forced to pay the higher quarterly fees regardless of when their cases were filed, but Chapter 11 debtors in BA districts will pay the higher quarterly fees only if those debtors filed their bankruptcy cases on or after October 1, 2018.36

In support of the 2017 Amendment, the U.S. Trustee makes three additional arguments that are not specifically addressed in Buffets and Circuit City. None of the arguments are persuasive.

First, the U.S. Trustee argues that the increased fees are uniform because 28 U.S.C. § 1930(a)(7) mandates that any fees charged in the BA districts must be the same as those prescribed in (a)(6) for U.S. Trustee districts. According to the U.S. Trustee, any ultra vires failure of the Judicial Conference to enforce § 1930(a)(7) does not violate the Bankruptcy Clause because the Bankruptcy Clause requires only uniform laws, not uniform implementation.

Contrary to the U.S. Trustee's argument, § 1930(a)(7) is not mandatory. That subsection 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."37 The statute does not say that the Judicial Conference "shall" or "must" require BA district debtors to pay uniform fees. It says the Judicial Conference "may" require BA district debtors to pay uniform fees. Congress's use of the permissive word "may" in subsection (a)(7) contrasts with the legislators' use of the mandatory word "shall" six other times in § 1930(a)(1)-(6).38 And in a nod to the permissive language in subsection (a)(7), the Judicial Conference did not require uniform fees for cases filed before October 1, 2018. As previously noted, if the Life Partners Chapter 11 Cases had been filed in a BA district rather than in a U.S. Trustee district, the increased fees would never apply to the Life Partners Chapter 11 Cases because they were filed in 2015.

Second, the U.S. Trustee argues that even if there were a statutory difference in quarterly fees, such a difference would not violate the Bankruptcy Clause because it is rationally justified. Citing In re Prines,39 the U.S. Trustee argues that any difference in bankruptcy fees is rationally justified because the only lack of uniformity is between districts over which the U.S. Trustees have authority and those over which they do not. That argument made sense in Prines but not here. The Prines court was reviewing Congress's decision to make Chapter 11 debtors in U.S. Trustee pilot districts pay quarterly fees a year sooner than Chapter 11 debtors in non-pilot U.S. Trustee districts. The court concluded that Congress was rationally justified in providing that different treatment because Chapter 11 debtors in pilot districts began receiving U.S. Trustee supervision and support a year sooner than did Chapter 11 debtors in non-pilot districts.40 In other words, Congress was rationally justified in (a) making Chapter 11 debtors in U.S. Trustee pilot districts pay for the services the U.S. Trustee was providing in those districts, while (b) not charging Chapter 11 debtors in non-pilot U.S. Trustee districts until they received the same supervision and support. The Prines court did not address the issue this Court now faces: Whether Chapter 11 debtors that filed bankruptcy in U.S. Trustee districts before October 1, 2018 should pay significantly higher fees for the duration of their cases (which could last years) while Chapter 11 debtors that filed bankruptcy in BA districts before October 1, 2018 will continue to pay the significantly lower fees for the duration of their cases, all for the functionally equivalent support and supervision.41 Congress has provided no justification—rational or otherwise—for that different treatment.

Third, the U.S. Trustee argues that § 1930 is not a law "on the subject of Bankruptcies" within the meaning of the Bankruptcy Clause, but instead is merely a judicial administration funding mechanism for bankruptcy matters. The Court disagrees. 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.'"42 The fees required by § 1930 are granted administrative claim status in bankruptcies, so 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.43

In addition, the Court agrees with the Ninth Circuit, which rejected the argument that the U.S. Trustee system is merely administrative in nature and not subject to the Bankruptcy Clause. Section 1930 is critical to funding the U.S. Trustees, who have "extensive discretion to appoint interim and successor trustees, monitor and supervise bankruptcy proceedings, examine debtors, advise the bankruptcy courts, and even, in some circumstances, to seek dismissal of cases."44 This statute thus has an effect on the rights and liabilities of both creditors and debtors.45

Taken to its logical extreme, the U.S. Trustee's argument would permit Congress to amend § 1930(a)(3) and (a)(6) to increase the filing fee for Chapter 11 debtors in South Dakota to $1 million (leaving it at $1,167 in the other forty-nine states), or to increase maximum Chapter 11 quarterly fees only for Chapter 11 debtors in Texas to $500 million, effectively killing bankruptcy relief in those states. The Bankruptcy Clause and Uniformity Clause would not permit such extreme non-uniform legislation, just as they do not permit the less extreme—but still significant— non-uniform legislation at issue before this Court. For all these reasons, the Court concludes that § 1930 is a law on the subject of bankruptcies within the meaning of the Bankruptcy Clause.

D. Even if the 2017 Amendment is constitutionally uniform, the amendment's application to cases that were filed prior to the enactment of the amendment violates the Due Process Clause.

For the reasons stated in Buffets, the amendment's possible application to cases that were filed prior to the enactment of the 2017 Amendment also violates the Due Process Clause. If the fee increase were a modest increase (or even anything close to a modest increase) as it has been in the past, the Court would be more inclined to agree with the U.S. Trustee that Chapter 11 debtors have no constitutional right to insist that quarterly fees will remain static. But Congress crossed the line when (as the U.S. Trustee interprets the amendment) it applied an 833% increase in maximum quarterly fees to the Life Partners Chapter 11 Cases after the creditors and parties in interest heavily negotiated the terms of the Plan, after the Plan was confirmed, and after the three successor entities under the Plan—including the PHT—were charged with monetizing the reorganized Debtors' remaining assets and making distributions to creditors. "With the knowledge of the increased fees, future debtors may select pre-packaged plans or choose to restructure debts out-side of bankruptcy to avoid the quarterly fees. The Reorganized Debtors in this case had no such opportunity."46 Therefore, the Court concludes that the 2017 Amendment violates the Due Process Clause.

V. CONCLUSION

For the reasons stated above, the Court ORDERS as follows:

1. The U.S. Trustee quarterly fees applicable in these Life Partners Chapter 11 Cases are those fees in effect prior to the 2017 Amendment.

2. This contested matter is hereby converted to an adversary proceeding for the balance of the contested legal and factual issues. The Clerk of the Court is directed to open an Adversary Proceeding number for this proceeding.

3. Although this Order disposes of fewer than all claims of the parties, this Order is a final and immediately appealable order and judgment because there is no just reason for delay.