IN RE: CLINTON NURSERIES, INC.; CLINTON NURSERIES OF MARYLAND, INC.; CLINTON NURSERIES OF FLORIDA, INC.; and TRIEM LLC, DEBTORS. CLINTON NURSERIES, INC.; CLINTON NURSERIES OF MARYLAND, INC.; CLINTON NURSERIES OF FLORIDA, INC.; and TRIEM LLC, PLAINTIFFS v. WILLIAM K. HARRINGTON, UNITED STATES TRUSTEE, REGION 2, DEFENDANT.
Case No. 17-31897 (JJT), Case No. 17-31898 (JJT), Case No. 17-31899 (JJT), Case No. 17-31900 (JJT) (Jointly Administered under Case No. 17-31897 (JJT))
UNITED STATES BANKRUPTCY COURT DISTRICT OF CONNECTICUT HARTFORD DIVISION
August 28, 2019
APPEARANCES
Eric A. Henzy, Esq. Attorney for the Movants/Plaintiffs
Zeisler & Zeisler, P.C.
10 Middle Street, 15th Floor
Bridgeport, CT 06604
Robert J. Schneider, Jr., Esq. Attorneys for the Respondent/Defendant
Kim L. McCabe, Esq.
Steven E. Mackey, Esq.
Department of Justice
Office of the United States Trustee, Region 3
One Newark Center
1085 Raymond Boulevard, Suite 2100
Newark, NJ 07102
RULING AND ORDER CONVERTING CONTESTED MOTION TO ADVERSARY PROCEEDING AND MEMORANDUM OF DECISION DISMISSING ADVERSARY PROCEEDING FOR FAILURE TO STATE CLAIMS UPON WHICH RELIEF CAN BE GRANTED
I. INTRODUCTION
In his famous Lochner dissent, Justice Holmes wrote:
This case is decided upon an economic theory which a large part of the country does not entertain. If it were a question whether I agreed with that theory, I should desire to study it further and long before making up my mind. But I do not conceive that to be my duty, because I strongly believe that my agreement or disagreement has nothing to do with the right of a majority to embody their opinions in law. . . . Some . . . laws embody convictions or prejudices which judges are likely to share. Some may not. But a Constitution is not intended to embody a particular economic theory . . . . It is made for people of fundamentally differing views, and the accident of our finding certain opinions natural and familiar, or novel, and even shocking ought not to conclude our judgment upon the question whether statutes embodying them conflict with the Constitution of the United States.
Lochner v. New York, 198 U.S. 45, 75–76 (1905) (Holmes, J., dissenting).1 Although those words concerned a different law passed in a different era that was struck down under a different part of the Constitution, they are apt here.
The related debtors, Clinton Nurseries, Inc.; Clinton Nurseries of Maryland, Inc.; Clinton Nurseries of Florida, Inc.; and Triem LLC (collectively, “Debtors”) filed a Motion to Determine Amount of United States Trustee Fees Pursuant to
The United States Trustee for Region 2, William K. Harrington (“UST”), filed two
The Court has studied the Motion, the Objections, and the parties’ reply briefs (“Reply,” ECF No. 743; “Sur-Reply,” ECF No. 773). After a scrupulous review of the statute in question, along with governing precedent, and the record of the hearing, the Court determines that: (1) Triem LLC, as alleged, has no standing to pursue these matters; (2) the Court will convert the Motion to an Adversary Proceeding and treat the UST’s Substantive Objection as a motion to dismiss under
II. JURISDICTION
The Court has jurisdiction over this matter pursuant to
III. DISCUSSION
A. Triem LLC Does Not Have Standing; Clinton Nurseries of Maryland, Inc., Has Limited Standing; No Debtor Has Standing Concerning 2019 Fees
The Court must first address the threshold issue of standing. Among other things, standing requires that a party seeking relief have an “injury in fact” that is “concrete and particularized[.]” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992) (citations and internal quotation marks omitted). While pointing out that the Debtors combined pay substantially increased fees, the Debtors’ allegations in the Motion make clear that not every Debtor was affected every quarter. As alleged, Triem LLC paid the exact same fees in each quarter of 2018 as it would have paid under the prior version of
The Debtors’ prayer for relief in the Motion seeks “an order determining that US Trustee fees payable by the Debtors in these cases will be calculated based on the pre-amendment
B. The Court Converts This Matter to an Adversary Proceeding
The Court next addresses the UST’s Procedural Objection, which also poses threshold issues, but, as will be discussed, not jurisdictional issues. The UST argues that under Federal Rule of Bankruptcy Procedure (“FRBP”) 7001, the Debtors can only seek relief in an Adversary Proceeding. The Debtors maintain that FRBP 3012, rather than FRBP 7001, governs the issues and that, even if this matter should have been filed as an Adversary Proceeding, the UST has not been prejudiced, the Court could apply Part VII rules, or the Court could convert the matter to an Adversary Proceeding. The Court agrees with the UST that the issues raised in the Motion require an Adversary Proceeding, but the Court uses its powers under
1. FRBP 7001 Applies to This Matter
The parties principally disagree about which FRBP has been invoked by the issues raised in the Motion.5 The UST argues that FRBP 7001 applies because the Debtors seek “to determine the validity . . . [of an] interest in property” and seek “to obtain a declaratory judgment relating to any of the foregoing[.]” Fed. R. Bankr. P. 7001(2) and (9). The UST also argues
The UST is correct that the Debtors seek “to determine the validity . . . [of an] interest in property,” Fed. R. Bankr. P. 7001(2), namely, money that is otherwise property of the Debtors’ estates. FRBP 7001(2) does exempt from its definition “proceeding[s] under Rule 3012.” FRBP 3012 states, in relevant part, that “the court may determine . . . the amount of a claim entitled to priority under § 507 of the Code[,]” and that such “may be made by motion[.]” Fed. R. Bankr. P. 3012. The advisory committee notes make clear, however, that “[a]n adversary proceeding is commenced when the validity, priority, or extent of a lien is at issue as prescribed by Rule 7001.
That proceeding is relevant to the basis of the lien itself” while FRBP 3012 is meant for valuation purposes.7 Id.
The Debtors here do not merely seek to value what is owed to the UST. Their allegations make clear that they know how much they would owe for 2018 under the current and former versions of
FRBP 2020 is also inapplicable to this matter. Although the Rule applies to “proceeding[s] to contest any act or failure to act by the [UST,]” according to the advisory committee notes, it “does not provide for advisory opinions in advance of the act.” Fed. R. Bankr. P. 2020. Because the Debtors seek determinations both for the fees already assessed and those to be assessed in the future, FRBP 2020 does not help the Debtors.8
2. The Court Can Convert the Motion to an Adversary Proceeding
Having determined that FRBP 2020 and FRBP 3012 do not apply to this matter, the Court is left with only FRBP 7001. That, however, does not mean that the Court must deny the Motion and have the Debtors start over by filing an Adversary Proceeding. As the Debtors noted, this Court may convert the matter to an Adversary Proceeding. Unlike other cases where this Court has ordered that the Debtor file an Adversary Proceeding, the parties in this matter have fully briefed what they both consider, at this point at least, purely legal issues. In the interests of efficiency and judicial economy, the Court finds that the parties have had their full and fair
opportunity to address the
Instead of doing that, the Court will instead exercise its prerogative to sua sponte convert the contested matter to an Adversary Proceeding. The Bankruptcy Code allows this Court “to issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the Bankruptcy Code.
3. The Court Treats the Substantive Objection as a Motion to Dismiss
This procedure of converting a contested matter to an Adversary Proceeding was used in the face of this precise argument made by the UST in In re Circuit City Stores, Inc., No. 08-35653, 2019 WL 3202203, at *3–4 (Bankr. E.D. Va. July 15, 2019), and this Court readily acknowledges using the same authorities and logic to convert this matter as well. The Circuit
City court decided that because “there were no material facts in dispute and that the matters raised in the pleadings were purely dispositive questions of law, the Court entertained the pleadings as cross-motions for summary judgment under Bankruptcy Rule 7056 and proceeded thereon.” Id. at *4 n.19.
This Court is wary of proceeding under FRBP 7056. Although the parties do not seem to have any factual disputes at this point, this Court, unlike the Circuit City court, is faced with the argument that the Debtors’ quarterly fees are takings, violating the Fifth Amendment. That claim, for reasons discussed in part III.D of this Memorandum, is ordinarily a fact-intensive exercise, and the Debtors have requested that the Court rule first on the legal cognizability of the claim before any discovery on it proceeds. Therefore, the Court will instead entertain the Debtors’ Motion as a complaint; the UST’s Substantive Objection as a motion to dismiss under
The Court turns to the following applicable legal standard.
Under
Federal Rule of Civil Procedure 8(a)(2) , a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” As the Court held in [Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)], the pleading standard Rule 8 announces does not require “detailed factual allegations,” but it
demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation. Id., at 555 (citing Papasan v. Allain, 478 U.S. 265, 286 (1986)). A pleading that offers “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” 550 U.S., at 555. Nor does a complaint suffice if it tenders “naked assertion[s]” devoid of “further factual enhancement.” Id., at 557.
To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” Id., at 570. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Id., at 556. The plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully. Ibid. Where a complaint pleads facts that are “merely consistent with” a defendant’s liability, it “stops short of the line between possibility and plausibility of ‘entitlement to relief.’” Id., at 557 (brackets omitted).
Two working principles underlie our decision in Twombly. First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Id., at 555 (Although for the purposes of a motion to dismiss we must take all of the factual allegations in the complaint as true, we “are not bound to accept as true a legal conclusion couched as a factual allegation” (internal quotation marks omitted)). Rule 8 marks a notable and generous departure from the hypertechnical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss. Id., at 556. Determining whether a complaint states a plausible claim for relief will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. . . . But where the well-pleaded facts do not permit the court to infer
more than the mere possibility of misconduct, the complaint has alleged—but it has not “show[n]”—“that the pleader is entitled to relief.” Fed. Rule Civ. Proc. 8(a)(2) .In keeping with these principles a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.
Ashcroft v. Iqbal, 556 U.S. 662, 677–79 (2009) (citation omitted). Having reached this point, the Court finally considers the merits.11
C. The 2017 Amendments Do Not Violate the Bankruptcy Clause
must at least apply uniformly to a defined class of debtors.” Id. at 473. Thus, if a bankruptcy law applies with geographic uniformity to a particular class of debtors, it will pass muster.
The UST Program, a division of the Department of Justice, was established as a pilot program in conjunction with the adoption of the Bankruptcy Code in 1978. See Pub. L. 95-598, Title II, § 224(a), 92 Stat. 2662. The program became permanent in 1986 and now serves every district except those in Alabama and North Carolina. See Pub. L. 99-554, Title I, § 111(a)–(c), 100 Stat. 3090, 3091. The six districts
Under
In response to Victoria Farms, the Judicial Conference asked Congress for permission to charge fees in BA districts “comparable” to those in UST districts. Report of the Proceedings of the Judicial Conference of the United States 10 (Mar. 1996). In 2000, Congress added subsection (7) to
Judicial Conference began imposing quarterly fees in BA districts “in the amounts specified” in
The constitutionality of the 2017 Amendments was first addressed in In re Buffets, LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019), appeal docketed, No. 19-90020 (5th Cir. Aug. 16, 2019). In Buffets, the court held that the Judicial Conference’s late implementation of quarterly fee increases under
The Bankruptcy Judgeship Act of 2017 violated the Constitution when it increased quarterly fees only in the UST
program. “Under any standard of review, when Congress provides no justification for enacting a non-uniform law, its decision can only be considered to be irrational and arbitrary.” [Victoria Farms], 38 F.3d at 1532. While the quarterly fees now apply in BA districts from October 1, 2018, forward, the increased fees ostensibly owed by the Reorganized Debtors during the first three quarters of 2018 violate the Uniformity Clause.
Id. at 595.15 The Court then determined that the debtors in that case were “not required to pay the $250,000 in fees for the first three quarters of 2018, but rather the uniform quarterly fee of $30,000.” Id. at 596.16
More recently, the aforementioned Circuit City court adopted the Buffets rationale when it held the 2017 Amendments unconstitutional. 2019 WL 3202203, at *6–7.17 The court there noted that for the first three quarters of 2018, “increased quarterly fees [were] assessed against chapter 11 debtors in only 88 of the 94 federal judicial districts throughout the country. It was not until October 1, 2018, that the [Judicial Conference] approved the imposition of quarterly fees on chapter 11 debtors in the BA Districts ‘in the amounts specified in 28 U.S.C. § 1930(a)(6)(B).’ . . . The Bankruptcy Judgeship Act offered no justification for excluding the BA Districts from the fee step-up.” Id. at *6 (citation omitted). The court also observed that debtors with cases pending when the fee increases went into effect in UST districts are charged the increased fees, but those in BA districts are not. Id. “As the BA Districts do not apply section 1930(a)(6)(B)’s fee increase to pending cases, the fee increase cannot constitutionally be applied
to pending cases outside of the BA Districts. The Court holds that section 1930(a)(6)(B) remains unconstitutionally non-uniform as applied to pending cases.” Id. at *7 (emphasis added). The court further held that “[a]s the amendment to section 1930(a)(6) does not apply uniformly both to chapter 11 debtors with pending cases in BA districts and to chapter 11 debtors with pending cases in U.S. Trustee districts, it is unconstitutional under the Bankruptcy Clause.” Id. The court, similar
The Debtors here filed their cases in 2017. As Connecticut is served by the UST, the Debtors have been paying higher fees than they would have paid in BA districts, not only for the three quarters between the respective dates of implementation in UST and BA districts, but also because the BA districts have only applied the fees to debtors whose cases were filed on or after October 1, 2018. The Debtors, therefore, claim that this double non-congruence creates non-uniform bankruptcy law as each pertains to fees. The UST, on the other hand, argues that the non-uniformity stems only from the implementation of a law that is uniform on its face. The Court readily acknowledges that nothing distinguishes the Debtors here from the debtors in Buffets, Circuit City, or Life Partners on this issue. Nevertheless, the Court agrees with the UST.
1. 28 U.S.C. § 1930 is a Bankruptcy Law Subject to the Bankruptcy Clause
As a threshold matter to determining whether the 2017 Amendments to
The UST’s argument is wholly without merit. The Supreme Court has not defined bankruptcy so narrowly. Gibbons does indeed say that bankruptcy is the “subject of the relations between an insolvent or nonpaying or fraudulent debtor and his creditors extending to his and their relief[,]” but in the very same sentence, which the UST omits, states that “[t]he subject of bankruptcies is incapable of final definition[.]” Gibbons, 455 U.S. at 466 (citations and internal quotation
The subject of bankruptcies is incapable of final definition. The concept changes. It has been recognized that it is not limited to the connotation of the phrase in England or the States, at the time of the formulation of the Constitution. An adjudication in bankruptcy is not essential to the jurisdiction. The subject of bankruptcies is nothing less than “the subject of the relations between an insolvent or nonpaying or fraudulent debtor, and his creditors, extending to his and their relief.”
304 U.S. at 513–14 (citations and footnotes omitted). That passage does not quote Moyses, as the UST states, but In re Reiman, 20 F. Cas. 490, 497 (S.D.N.Y. 1874) (No. 11,673),20 although Moyses does cite to Reiman approvingly without any exposition of it. 186 U.S. at 187. Moyses also cites In re Klein, 42 U.S. (1 How.) 277, 14 F. Cas. 716 (C.C.D. Mo. 1843) (No. 7,865), an opinion from the Circuit Court for the District of Missouri that was written by Justice Caton riding circuit.21 186 U.S. at 186. Klein states that Congress’s bankruptcy jurisdiction “extends to all cases where the law causes to be distributed, the property of the debtor among his creditors; this is its least limit.” 42 U.S. (1 How.) at 281, 14 F. Cas. at 718 (emphasis added). Moyses quotes this line verbatim. 186 U.S. at 186.
What is evident, then, is that the Bankruptcy Clause does pertain to the debtor–creditor relationship, but at the very least. The Supreme Court has also said that “as [Congress] is authorized ‘to establish uniform laws on the subject of bankruptcies throughout the United States,’ it may embrace within its legislation whatever may be deemed important to a complete and effective bankrupt system.” United States v. Fox, 95 U.S. 670, 672 (1878) (emphasis added). The Supreme Court later said that “[f]rom the beginning, the tendency of legislation and of judicial interpretation has been uniformly in the direction of progressive liberalization in respect of the operation of the bankruptcy power.” Cont’l Ill. Nat’l Bank & Tr. Co. v. Chicago, RockIsland & Pac. Ry. Co., 294 U.S. 648, 668 (1935).22 Likewise, almost two months after Continental Bank was decided, the Supreme Court refused to countenance a narrow definition of bankruptcy, stating that “[i]t is true that the original purpose of our bankruptcy acts was the equal distribution of the debtor’s property among his creditors; and that the aim of
Understanding that the Bankruptcy Clause is not as narrow as the UST would lead the Court to believe, the Court now examines the history of
amendment to the Bankruptcy Code and related laws under title 28. Pub. L. 99-554, Title I, § 117, 100 Stat. 3095. It, therefore, seems disingenuous for the UST—an office that only exists to administer bankruptcy cases—to claim that
2. 28 U.S.C. § 1930 Is Uniform on Its Face
Having established that
Given the flexibility of the Bankruptcy Clause, it is not so astonishing that the Supreme Court has struck down a bankruptcy law on uniformity grounds on only one occasion. In Gibbons, the Court considered a law that Congress adopted after a regional railroad company failed in its reorganization, a law that had certain employee protection provisions. 455 U.S. at 459–64. After determining that the law was an exercise of Congress’s
By its terms, [the law] applies to only one regional bankrupt railroad. Only [the company’s] creditors are affected by [the law’s] employee protection provisions, and only employees of the [company] may take benefit of the arrangement. . . . [T]here are other railroads that are currently in reorganization proceedings, but
these railroads are not affected by the employee protection provisions of [the law]. The conclusion is thus inevitable that [the law] is not a response either to the particular problems of major railroad bankruptcies or to any geographically isolated problem: it is a response to the problems caused by the bankruptcy of one railroad. The employee protection provisions of [the law] cover neither a defined class of debtors nor a particular type of problem, but a particular problem of one bankrupt railroad. Albeit on a rather grand scale, [the law] is nothing more than a private bill such as those Congress frequently enacts under its authority to spend money.
Id. at 470–71 (citations and footnotes omitted). The Court determined that the law was “not within the power of Congress to enact[,]” noting that “[a] law can hardly be said to be uniform throughout the country if it applies only to one debtor and can be enforced only by the one bankruptcy court having jurisdiction over that debtor.” Id. at 471 (citation omitted). The Court grounded this holding in the history before the Constitution, when states enacted private bills that provided relief to specific individual debtors. Id. at 472. This practice rendered uniformity impossible and was subject to abuse, leading the Court to reason that “the Bankruptcy Clause’s uniformity requirement was drafted in order to prohibit Congress from enacting private bankruptcy laws.” Id. (citation omitted). Finally, the Court held that “[t]he uniformity requirement . . . prohibits Congress from enacting a bankruptcy law that, by definition, applies only to one regional debtor. To survive scrutiny under the Bankruptcy Clause, a law must at least apply uniformly to a defined class of debtors.” Id. at 473.
Turning now to the subsection in question here,
In districts that are not part of a United States trustee region as defined in section 581 of this title, 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. Such fees shall be deposited as offsetting receipts to the fund established under section 1931 of this title and shall remain available until expended.
(emphasis added). The Debtors argue that the use of the word “may” provides the Judicial Conference with discretion to impose different fees. Congress also used the word “shall” in the same subsection, which the Debtors argue in the Reply, citing Anderson v. Yungkau, 329 U.S.
482, 485 (1947), is an indication “that each is used in its usual sense—the one act being permissive, the other mandatory.” (citation omitted). The UST notes that the statute also says that the Judicial Conference “may require . . . fees
Although it is true that “may” ordinarily connotes discretion, while “shall” connotes something that is mandatory, this is not always true. “May” means “have permission to[,]” but it also means “shall, must—used esp[ecially] in deeds, contracts, and statutes[.]” May, 2 Webster‘s Third New International Dictionary 1396 (1966); see also May, Webster‘s New International Dictionary 1517 (2d ed. 1934) (“Where the sense, purpose, or policy of a statute requires it, may as used in the statute will be construed as must or shall; otherwise may has its ordinary permissive and discretionary force.“); May, American Heritage Dictionary of the English Language 1086 (5th ed. 2011) (Among other things, “may” defined as: “To be obliged, as where rules of construction or legal doctrine call for a specified interpretation of a word used in a law or legal document.“); May, Black‘s Law Dictionary 993 (7th ed. 1999) (At time of
Words of obligation and their various “alternative interpretations are as old as the jurisprudence of [the Supreme] Court.” Nat‘l R.R. Passenger Corp. v. Bos. & Me. Corp., 503 U.S. 407, 419 (1992) (citing McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 413 (1819)). The Court, therefore, considers each of the three constructions that the text of
The third possible construction, which would allow the Judicial Conference to charge either equal fees or no fees, fails for the same reasons as the second: a fee of $0 is not equal. This construction also contradicts the very reason why
Therefore, the only plausible construction of
“The [Supreme] Court‘s charitable interpretation of ‘uniformity’ encouraged Congress
3. The Debtors’ “As-Applied” Challenge Must Fail
Having determined that
a. The UST Cannot Violate the Bankruptcy Clause Itself
The Court first addresses an issue not raised by either party, but which could be dispositive over whether the Debtors may challenge the application of
In Gonzales v. Raich, 545 U.S. 1, 23–33 (2005), the Supreme Court upheld Congress‘s ability to regulate cannabis grown for personal use that would never enter interstate commerce. Relevant here, the plaintiffs in Raich framed their challenge to the statute in question as unconstitutional as applied to them, but the Court analyzed whether the statute was a valid exercise of Congress‘s commerce powers on its face. Id. at 8, 15–33. The Court noted that it has “often reiterated that [w]here the class of activities is regulated and that class is within the reach of federal power, the courts have no power to excise, as trivial, individual instances of the class.” Id. at 23 (citations and internal quotation marks omitted).
At least one commentator has suggested that the effect of Raich is that “a Commerce Clause challenge cannot be ‘as-applied.‘” Nicholas Quinn Rosenkranz, The Subjects of the Constitution, 62 Stan. L. Rev. 1209, 1279 (2010). Rosenkranz reasoned that because Congress and not the President is the subject of the Commerce Clause, the President cannot violate it, id. at 1277–78, and that, if Congress did violate the Constitution, it did so when it made the law. Id. at 1279. Rosenkranz then extended this reasoning to all of Congress‘s enumerated powers because they all have the same subject: Congress. Id. at 1281.
This Court does not go so far as to say that all “as-applied” challenges to statutes under Congress‘s enumerated powers are noncognizable. The Court reiterates, however, that both Gibbons and Victoria Farms were both decided on facial grounds. But, as Rosenkranz himself acknowledged, what makes a challenge “facial” versus “as-applied” is “muddled.” 62 Stan. L. Rev. at 1273. Unlike Rosenkranz, this Court will not be so bold as to say that the executive (or the judiciary) cannot violate the Constitution by failing to enforce validly enacted laws, but the Court does understand the barest point that Rosenkranz makes as applied to this case: the UST cannot violate the Bankruptcy Clause; only Congress can. That said, the Court holds that to the extent that the Debtors have argued that the UST has violated the Bankruptcy Clause, such is not cognizable because that Clause is a part of Article I, which only applies to Congress.
b. The Non-Uniform Application of 28 U.S.C. § 1930(a)(6) Is Not Unlawful as to the Debtors
The Judicial Conference is comprised of the Chief Justice of the United States, the Chief Judges of the thirteen circuit Courts of Appeals, the Chief Judge of the Court of International Trade, and judges from District Courts of each geographic circuit.
Most bankruptcy administration work, however, has been delegated to the UST Program, which is under the purview of the Department of Justice, which in turn is a part of the Executive Branch. In light of this dichotomy, which the Debtors do not challenge, the Court must consider whether the UST has properly applied the statute. Because the Court has already held that
i. 28 U.S.C. § 1930 Covers This Case
The first as-applied challenge is dealt with easily. In this type of challenge, the statute in question is facially valid, but a literal interpretation would include examples that would intrude on the powers of other entities, like the states. See, e.g., Bond v. United States, 572 U.S. 844, 856–66 (2014). In this case, however, the Debtors sought protection under Chapter 11 of the Bankruptcy Code. With Chapter 11 cases come quarterly fees. There is no reading of
ii. The UST Is Not Misapplying the Law
The Debtors’ argument that the application of
A. The Court Cannot Order the UST to Violate the Law
Under the United States Constitution, the President must “take Care that the Laws be faithfully executed[.]”
Likewise, this Court, like all justices and judges of the United States, must take an oath to “faithfully and impartially discharge and perform all the duties incumbent upon [it] . . . under the Constitution and laws of the United States.”
B. Even If the UST Were Violating 28 U.S.C. § 1930 , Such Is Not Unconstitutional
Even if this Court assumed that the UST violated the statute, the Court could not then conclude that its actions were unconstitutional. The Supreme Court has said that its “cases do not support the proposition that every action by the President, or by another executive official, in excess of his statutory authority is ipso facto in violation of the Constitution. On the contrary, we have often distinguished between claims of constitutional violations and claims that an official has acted in excess of his statutory authority. . . . If all executive actions in excess of statutory authority were ipso facto unconstitutional, . . . there would have been little need . . . for our specifying unconstitutional and ultra vires conduct as separate categories.” Dalton v. Specter, 511 U.S. 462, 472 (1994) (citations omitted). In Dalton, the plaintiffs sought to enjoin the Secretary of Defense and President from closing a military base pursuant to statute. Id. at 464.
That statute, Pub. L. 101-510, Div. B, Title XXIX, § 2901 et seq., 104 Stat. 1808, was passed pursuant to Congress‘s powers to raise and maintain the armed forces,
The Court fails to see how Dalton‘s logic does not extend to this case. Therefore, if the UST has misapplied the law—which the Debtors have not claimed, in any regard—such might warrant relief as unlawful, but would not render
c. The Debtors Have No Standing to Challenge Any Misapplication of the 2017 Amendments by the Judicial Conference
Because the Court has held that the UST has not misapplied the law, that can only mean that the Debtors believe that the Judicial Conference has. The problem with any assertion to this effect is that the Court possesses no power to order the Judicial Conference to do anything in this case. The Debtors filed this Motion against the UST; the Judicial Conference is not a party to it. In order to rope the Judicial Conference into this case, however, the Debtors need to have standing to do so. They do not. As noted above, standing requires that a plaintiff have an “injury in fact.” Lujan, 504 U.S. at 560 (citations and internal quotation marks omitted). It also required that “the injury has to be fairly . . . trace[able] to the challenged actions of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court.” Id. (emphasis added; citation and internal quotation marks omitted).
The Judicial Conference is not before this Court. Any claim of injury is not rooted in the UST‘s actions, but rather the Judicial Conference‘s actions. Moreover, had the Judicial Conference implemented the quarterly fees in BA districts without any change in the UST‘s actions, the Debtors would have nothing to complain of under the facts alleged. In other words, the Judicial Conference‘s delay in implementing the fee increases and decision not to apply the increases to pending cases has had no effect on the fees assessed in this case; the Debtors’ quarterly fees would be the same as they are now. Therefore, there is no injury traceable to the UST‘s actions.32
In an 1893 article, Harvard law professor James Bradley Thayer contended that courts “can only disregard the Act when those who have the right to make laws have not merely made a mistake, but have made a very clear one,—so clear that it is not open to rational question.” James B. Thayer, The Origin and Scope of the American Doctrine of Constitutional Law, 7 Harv. L. Rev. 129, 144 (1893). Thayer‘s point, highlighted eloquently by Justice Holmes in his Lochner dissent and less so in his letter to Harold Laski, is taken here. Perhaps maintaining the dual system of USTs and BAs is a mistake. There certainly have been consequences of that dual system that seem unfair to the Debtors in this case, who are paying the fees they are, while their carbon copies in Alabama and North Carolina would not. But that concern is not properly before this Court and, moreover, the remedy does not lie in striking down the law or forcing the UST to disregard the law as written. Whatever mistake was made is not inherent in the text of the statute. But, whatever errors the Judicial Conference may have committed, this Court, for jurisdictional reasons, cannot fix them.
In sum, the Court holds that
D. The Debtors’ User Fee Claim Fails to Allege Legally Sufficient Facts That the Increase in Chapter 11 Quarterly Fees Is an Unconstitutional Taking
The Debtors’ second claim is that the increase in Chapter 11 fees are an unconstitutional user fee.33 Specifically, the Debtors allege in the Motion that their quarterly fees would total an amount that “may be not much less than, if not more than, the attorneys’ fees for the Debtors in these sometimes very active cases.” To illustrate this, the Debtors show the discrepancy between what they actually paid in quarterly fees and what they would have paid under the old scheme.34 The UST argues that the user fees imposed are
The Supreme 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.‘” United States v. Sperry, 493 U.S. 52, 60 (1989) (citation omitted); cf. FCC v. Fla. Power Corp., 480 U.S. 245, 253 (1987) (“So long as the rates set are not confiscatory, the Fifth Amendment [Takings Clause] does not bar their imposition.” [citations omitted]). The Court has also upheld a flat user fee “without regard to the actual use . . . , so long as the fee is not excessive.” Evansville–Vandenburgh Airport Auth. Dist. v. Delta Airlines, Inc., 405 U.S. 707, 715 (1972) (citations omitted).36
“It is beyond dispute that . . . user fees . . . are not takings.” Koontz v. St. Johns River Water Mgmt. Dist., 570 U.S. 595, 615 (2013) (citation and internal quotation marks omitted). This, of course, presumes that the user fee is reasonable.37 Sperry, 493 U.S. at 63. “[T]he challenger has the burden of proving that the fee is ‘unreasonable in amount for the privilege granted.‘”38 N.H. Motor Transp. Ass‘n v. Flynn, 751 F.2d 43, 47 (1st Cir. 1984) (Breyer, J.) (citing Evansville–Vandenburgh, 405 U.S. at 716); see also Sperry, 493 U.S. at 60.
The determination of reasonableness is a fact-intensive exercise. See Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 98 (2d Cir. 2009) (Selevan I); see also Connolly v. Pension Ben. Guar. Corp., 475 U.S. 211, 224 (1986) (The Supreme Court has “eschewed
In determining whether a fee “is based on some fair approximation of the use of the facilities,” the Second Circuit has directed a court “to consider whether the . . . policy at issue reflects rational distinctions among different classes . . . , so that each user, on the whole, pays some approximation of [its] fair share[.]” Selevan v. N.Y. Thruway Auth., 711 F.3d 252, 259 (2d Cir. 2013) (Selevan II) (citations and internal quotation marks omitted). As for excessiveness, the Second Circuit has upheld a District Court‘s conclusion that user fees were not excessive “based on evidence regarding . . . costs and expenditures,” and that “any revenues collected did not exceed proper margins[.]” Id. at 260 (citations omitted).
The Second Circuit, in Selevan I, has also admonished courts that “whether [a] fee represents a fair approximation of [a party‘s] use . . . [is] an inquiry that is too fact-dependent to be decided upon examination of the pleadings.” Selevan I, 584 F.3d at 98 (citing Nw. Airlines, 510 U.S. at 369). Despite this admonition, this Court holds that the Debtors’ legal theories underlying their claim of harm, as alleged in the Motion, are not cognizable on their own.
First, the Debtors’ allegations concerning the overall percentage of Chapter 11 cases nationwide and the contributions made by Chapter 11 debtors to the UST System cannot, without more, form the basis for the Debtors’ takings claim.39 See Connolly, 475 U.S. at 224; cf. Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 540–45 (2005) (An inquiry into whether a law “substantially advances” government interests “is logically prior to and distinct from the question whether a regulation effects a taking, for the Takings Clause presupposes that the government has acted in pursuit of a valid public purpose[,]” but is “untenable as a takings test” because it could “demand heightened means-ends review of virtually any regulation of private property.“).
Second, the Debtor‘s contention that there is no correlation between the quarterly fees charged and the presumed amount of time the UST has spent working on the main case cannot, even read with the national statistics, form the basis for the Debtors’ takings claim. Specifically, the Debtors, who also lay out the amount of quarterly fees that have been and would have been charged in 2018, allege the following:
In these cases, . . . assuming the Debtors are able to close their cases by the end of the third quarter of 2019, US Trustee fees under the amended fee schedule would total approximately $560,000, which may be not much less than, if not more than, the attorneys’ fees for the Debtors in these sometimes very active cases. At a blended rate of $350 (assuming 50% of time spent by a trial attorney at $475 per hour, which is [the Debtors’ lead counsel‘s] rate, and 50% of time spent by an analyst at $225 per hour), that would translate to 1,600
hours. Given the volume of cases that the US Trustee oversees and the level of activity of the US Trustee in these cases, it is impossible that the US Trustee has spent even fifty percent of that time on these cases. While the fit between the fee and the benefit conferred or cost of services used need not be perfect, “the discrepancy here exceeds permissible bounds.” See [Bridgeport & Port Jefferson Steamboat Co. v. Bridgeport Port Auth., 567 F.3d 79, 86 (2d Cir. 2009)]. The fees charged to these Debtors under the amended fee structure are a “forced contribution to general government revenues . . . not reasonably related to the costs of using the courts,” Webb‘s Fabulous Pharmacies, 449 U.S. at 163, an “exaction for public purposes” rather than compensation for private benefit or for services used.
The Debtors’ references to Bridgeport Steamboat do not help them on the facts alleged. In that case, the Second Circuit held that the fees the Bridgeport Port Authority charged ferry passengers were not a fair approximation of the services provided. 567 F.3d at 88. The Court held this because “the passenger fees were supporting the entirety of the [Bridgeport Port Authority‘s] operating budget and that this budget was supporting some [of their] activities of no benefit to the ferry passengers[.]” Id. at 87. The Court, however, did not hold the fees excessive. Id. at 88. It merely upheld the District Court‘s finding of modest damages for the passengers, nominal damages for the ferry company, and an injunction prohibiting the collection of a fee “that exceeded what was necessary to pay for benefits to the ferry passengers.” Id. at 81, 85, 88.
What differentiates this case from Bridgeport Steamboat is that the fees in that case clearly went beyond what was necessary because the fees necessarily were covering other services. To reach this, the District Court had “to make particularized inquiries as to the various [Bridgeport Port Authority] expenditures” to determine what did and did not benefit passengers. Id. at 87. Here, the Debtors’ more concrete allegations regarding the amount of time the trial attorneys and analysts have spent on the main case, however, are too narrow because they fly in the face of the Supreme Court‘s statement that the government does not “need to record invoices and billable hours to justify the cost of its services.” Sperry, 493 U.S. at 60.40 The UST, even as it relates to this case, consists of more than the trial attorneys and analysts.
The Court does not mean to say that neither national statistics concerning the UST nor analyses of the UST‘s time expended are not pertinent to this issue; both certainly are highly relevant. The Court only means to say that the user fee analysis is too fact-intensive to consider anything less than a totality of the circumstances, which needs to be alleged, and the Supreme Court has foreclosed the extremes alleged from being cognizable on their own. Nevertheless, given the authorities
The Court, therefore, DISMISSES the user fee claim, but without prejudice42 to the Debtors filing an amended complaint that meets the standards laid out in Rule 8 of the Federal Rules of Civil Procedure.43
IV. CONCLUSIONS AND ORDER
The Court having considered the pleadings and related arguments at the hearing on August 14, 2019, it is hereby ORDERED:
- That the Triem LLC claim is DISMISSED from this action for its lack of standing;
- That the UST‘s Procedural Objection (ECF No. 725) is OVERRULED;
- That the Debtors’ Motion to Determine (ECF No. 672) be deemed an Adversary Proceeding complaint;
- That the Clerk is DIRECTED to promptly open an Adversary Proceeding docket, placing ECF Nos. 672, 725, 726, 743, 773, and this Memorandum within that docket;
- That the Debtors are DIRECTED to pay the requisite Adversary Proceeding filing fee within seven (7) days of this Memorandum issuing;
- That the UST‘s Motion to Dismiss (ECF No. 726) is GRANTED with prejudice as to the uniformity claim and without prejudice as to the user fee claim;
- That the Debtors may replead the user fee claim in an Amended Complaint filed within twenty-one (21) days, which may include a claim of Triem LLC should it allege cognizable damages to support its standing; and
- That the Debtors may seek to add any new claims as additional counts to an Amended Complaint by filing a motion under Rule 15 of the Federal Rules of Civil Procedure within twenty-one (21) days.
James J. Tancredi
United States Bankruptcy Judge
District of Connecticut