As discussed in our previous blog post titled, “The Circuit City Landmine (Siegel v. Fitzgerald): Supremes Declare Fally Fee Hike Under United States Trustee Program Unconstitutional -What Happens Next?”, the United Supreme Court held in Siegel v. Fitzgerald, 596 U.S. ___ , 2022 WL 1914098 (June 6, 2022), that Congress enactment of a temporary increase in the fee rates applicable to large Chapter 11 cases in 2017 to address a shortfall in the United States Trustee System (Pub. L. 115-72, Div. B, 131 Stat. 1229) (the “2017 Act”), violated the uniformity requirement of the Bankruptcy Clause set forth in -Article I, § 7, cl. 4 of the United States Constitution, which empowers Congress to establish “uniform Laws on the subject of Bankruptcy throughout the United States.” Circuit City Landmines (Siegel v. Fitzgerald): Supremes Declares Bankruptcy Fee Hike Under US Trustee Program Unconstitutional – What’s Next? | Fox Rothschild LLP – JDSupra.
As previously noted, the US Trustee’s Office, which monitors bankruptcy cases in 48 states, temporarily raised its fees in 2018 to make up for its budget shortfall. However, the fee increase did not apply to cases in Alabama and North Carolina, two states where bankruptcies are monitored by bankruptcy administrators working under the Judicial Conference of the United States (the “Districts of -Bankruptcy Administrator”). The disparity between the fees charged under the US Trustee system and the fees charged in District Bankruptcy Trustees has resulted in several lawsuits, culminating in the decision of Supreme Court in Siegel that the fee increases were unconstitutional. The US Trustee had asserted that there are approximately $324 million in overpayments involved.
The Supreme Court in Siegel resolved a divided circuit by unanimously holding that the fee increase violated the Bankruptcy Clause because it was not immediately applicable in Bankruptcy Trustee Districts. However, the Supreme Court was careful not to decide what remedies are available to Chapter 11 debtors for overpayments of quarterly fees paid to the US Trustee system, leaving that issue to be addressed. by the lower courts in light of the Siegel holding. Many commentators (myself included) opined that the decision, which affects quarterly US Trustee fees paid by Chapter 11 debtors between January 1, 2018 and January 1, 2021 , opened the door to refund actions across the country, potentially resulting in the evaporation of millions of dollars from the coffers of the US Trustee’s Office.
John Q. Hammons Fall 2006 LLC, et al. v. Office of the United States Trustee (In re John Q. Hammons Fall 2006 LLC).
Last month, the Tenth Circuit Court of Appeals issued an unpublished Order and Judgment reaffirming its original decision in John Q. Hammons Fall 2006 LLC, et al. v. Office of the United States Trustee (In re John Q. Hammons Fall 2006 LLC), 15 F.4th 1011 (10th Cir. 2021), which held that the differential fee increase under the Trustee’s system of -The United States was unconstitutional, and ordered the Office of the United States (“United States Trustee”) to reimburse the debtor more than $2.5 million representing the portion of the United States Trustee’s fees that the debtor had paid more than those fees that would have been paid during the same period of time if the case had been pending in a Bankruptcy Administrator’s district. The United States filed a petition for certiorari, which was granted on June 13, 2022. The Supreme Court vacated the judgment and remanded the Tenth Circuit for further consideration in light of Siegel, which it expressly declined to address. the appropriate remedy available to debtors who overpaid fees to the United States Trustee system. After the case was remanded, the Tenth Circuit ordered the parties to file supplemental briefs addressing the impact of Siegel on appeal.
In its brief, the United States Trustee argued that the refund remedy was unavailable because: (1) “prospective relief alone is the appropriate remedy for systemic violations of equal treatment where, as here, the appellants had an adequate opportunity to challenge the fees earlier. payment if they wished to do so”; and (2) “even if a retroactive exemption were required, there are several ways to effect a retrospective equalization of fees, and the choice among them turns on congressional intent” which preferred “a good faith effort to collect higher fees in the six [Bankruptcy Trustee Districts] rather than issuing refunds in the 88 UST districts, thus potentially raising the very funding problem that Congress was explicitly trying to solve in the Bankruptcy Act 2017.” U.S. Trustee’s Suppl. Br., p. 2. The U.S. Trustee argued that the prospective exemption had already been granted by Congress when it passed the 2020 amendments that provided for uniformity of fees prospectively Interestingly, the United States Trustee argued that if the Tenth Circuit found that retrospective relief was appropriate, the appropriate remedy would be the collection of higher fees in Bankruptcy Administrator Districts rather than require refunds in US Trustee districts.As the US Trustee noted:
Pursuing equalization collections in the six [Bankruptcy Trustee Districts] not only honors the intent of Congress to ensure adequate funding for the United States Trustee Program, but also minimizes the universe of cases requiring action. UST’s 88 districts accounted for the vast majority—over 97%—of chapter 11 filings nationwide in 2018. modest) number of debtors with quarterly payments exceeding $1 million that were among the 3% of chapter 11 filings that occurred in [Bankruptcy Administrator’s Districts]—out of relevant debtors in The remaining 97% of cases are nationwide.
U.S. Trustee Suppl. Br., at p.8.
The Debtors argued in their supplemental brief that the Tenth Circuit should reaffirm its earlier decision that the overpayments must be refunded because: (1) Siegel provided certainty that the 2017 Amendment was unconstitutional not uniform, and had no impact on the Tenth Circuit’s opinion beyond. affirming that the 2017 Amendment was unconstitutional; (2) the Tenth Circuit has already determined the issue of remedy after briefing and argument, and should uphold its previous decision that the monetary remedy of refund was the only legal and practical remedy available, which is consistent with -existing precedent; and (3) the United States Trustee’s proposal to impose fee increases on the Bankruptcy Administrator’s jurisdictions exceeded the Tenth Circuit’s authority, was impossible to implement and did not remedy the injury of the Debtors. See Br. Debtors’ Supplement, passim.
The Tenth Circuit disagreed with the United States Trustee’s argument, and reinstated its original opinion requiring the United States to refund the debtor the amount it overpaid if the debtor filed the Chapter 11 in a District Bankruptcy Trustee. See John Q. Hammons Fall 2006 LLC, et al. v. Office of the U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 20-3203 [Dkt. No. 010110724770] (10th Cir. August 15, 2022).
Although the Tenth Circuit’s Order and Judgment on remand are not precedential, its previously published decision, which has been reaffirmed, is now the law in the Tenth Circuit. The Tenth Circuit’s decision in Hammons is relevant to former Chapter 11 debtors because, as noted in my previous blog post, there is a class action entitled Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.) pending in the Federal Court of Claims. On January 18, 2022, the Court of Appeals for the Federal Circuit granted the United States’ motion to reschedule oral argument, and ordered the parties to file a status report within 30 days after the Supreme Court’s decision in Siegel. On July 5, 2022, the parties filed a joint status report requesting that the Federal Circuit vacate its orders and remand the case to the United States Court of Federal Claims for further proceedings. inconsistent with Siegel.
If the Federal Circuit follows the Tenth Circuit’s decision in Hammons, chapter 11 debtors nationwide will be entitled to refunds. As suggested by the US Trustee in its opening brief in Siegel, the US Trustee’s system may not be sufficiently funded to pay all such claims at once. Accordingly, additional taxes may need to be levied to address any such deficiencies of the $324 million estimate in question. Until there is a legislative solution, it will be interesting to see how courts in other circuits address the United States Trustee’s fee overpayment remedy in light of Siegel.
