As discussed in our prior blog post entitled, “The Circuit City Landmine (Siegel v. Fitzgerald): Supremes Declare Bankruptcy 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 (Jun. 6, 2022), that Congress’s 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 Fund (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 Bankruptcies throughout the United States.”  The Circuit City Landmine (Siegel v. Fitzgerald): Supremes Declare Bankruptcy Fee Hike Under United States Trustee Program Unconstitutional –What Happens Next? | Fox Rothschild LLP – JDSupra.

As previously noted, the Office of the United States Trustee, which monitors bankruptcy cases in 48 states, temporarily raised its fees in 2018 to make up for its budget shortfall.  However, the fee hike 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 “Bankruptcy Administrator Districts”).  The disparity between the fees charged under the United States Trustee system and the fees charged in Bankruptcy Administrator Districts resulted in several lawsuits, culminating in the Supreme Court’s ruling in Siegel that the fee hikes were unconstitutional.  The United States Trustee had asserted that there are approximately $324 million in over-payments at stake.

The Supreme Court in Siegel resolved a circuit split by unanimously holding that the fee increase violated the Bankruptcy Clause because it was not immediately applicable in the Bankruptcy Administrator 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 United States Trustee system, leaving that issue to be addressed by the lower courts in light of the Siegel holding.  Many commentators opined that the decision, which affects United States Trustee quarterly 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 Office of the United States Trustee.

John Q. Hammons Fall 2006 LLC, et al. v. Office of the U.S. 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 U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 15 F.4th 1011 (10th Cir. 2021), which held that the disparate fee increase under the United States Trustee system was unconstitutional, and ordered the Office of the United States (“U.S. Trustee”) to refund to the debtor more than $2.5 million representing the portion of the U.S. Trustee’s fees that the debtor had paid in excess of those fees that would have been paid over the same time period had the case been pending in a Bankruptcy Administrator District.  The United States filed a petition for certiorari, which was granted on June 13, 2022.  The Supreme Court vacated the judgment and remanded to the Tenth Circuit for further consideration in light of Siegel, which expressly declined to address the appropriate remedy available to debtors that 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 the appeal.

In its brief, the U.S. Trustee argued that the remedy of refund was not available because: (1) “prospective relief alone is the appropriate remedy for systemic equal-treatment violations where, as here, appellants had an adequate opportunity to challenge the fees before payment had they wished to do so”; and (2) “even if backward-looking relief were needed, there are multiple ways to effectuate a retrospective equalization of fees, and the choice among them turns on congressional intent” which preferred “a good-faith effort to collect higher payments in the six [Bankruptcy Administrator Districts] rather than to issue refunds in the 88 UST districts, thereby potentially resurrecting the very funding problem that Congress was explicitly trying to solve in the 2017 Act.”  U.S. Trustee’s Suppl. Br., p. 2.  The U.S. Trustee argued that prospective relief had already been granted by Congress when it passed the 2020 amendments that mandated fee uniformity prospectively.  Interestingly, the U.S. Trustee argued that if the Tenth Circuit found that retrospective relief was appropriate, the proper remedy would be the collection of higher payments in the Bankruptcy Administrator Districts rather than to require refunds in the United States Trustee districts.  As the U.S. Trustee noted:

Pursuing equalizing collections in the six [Bankruptcy Administrator Districts] would not only honor Congress’s intention to ensure adequate funding for the U.S. Trustee Program, but also minimize the universe of cases requiring action. The 88 UST districts accounted for the vast majority—more than 97%—of chapter 11 filings nationwide in 2018. To the extent that any retrospective leveling is required, it is far more practicable to act upon the outlier set of cases—the (likely modest) number of debtors with quarterly disbursements exceeding $1 million who were among the 3% of chapter 11 filings that occurred in [Bankruptcy Administrator Districts]—than upon relevant debtors in the remaining 97% of cases nationwide.

U.S. Trustee Suppl. Br., at p.8.

The Debtors argued in their supplemental brief that the Tenth Circuit should reaffirm its prior ruling that the overpayments should be refunded because:  (1) Siegel provided certainty that the 2017 Amendment was unconstitutionally non-uniform, and had no impact on the Tenth Circuit’s opinion beyond affirming that the 2017 Amendment was unconstitutional; (2) the Tenth Circuit already determined the issue of remedy after briefing and argument, and should uphold its prior ruling that the monetary remedy of refund was the sole legal and practical remedy available, which is consistent with existing precedent; and (3) the U.S. Trustee’s proposal to impose fee increases upon the Bankruptcy Administrator jurisdictions exceeded the Tenth Circuit’s authority, was impossible to implement and did not ameliorate the Debtors’ harm.  See Debtors’ Supplemental Br., passim.

The Tenth Circuit disagreed with the U.S. Trustee’s argument, and reinstated its original opinion requiring the U.S. Trustee to refund to the debtor the amount that it overpaid had the debtor filed Chapter 11 in a Bankruptcy Administrator District.  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. Aug. 15, 2022).

Unresolved Issues

Although the Tenth Circuit’s Order and Judgment on remand is not precedential, its prior published decision, which was reaffirmed, is now the law in the Tenth Circuit.  The Tenth Circuit decision in Hammons is relevant for former Chapter 11 debtors because, as noted in my prior blog post, there is a class action case pending in the Federal Court of Claims entitled Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.) . On January 18, 2022, the Court of Appeals for the Federal Circuit granted the U.S. Trustee’s 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 proceedings not inconsistent with Siegel.

If the Federal Circuit follows the Tenth Circuit’s decision in Hammons, chapter 11 debtors throughout the country may be entitled to refunds.  As suggested by the U.S. Trustee in its opening brief in Siegel, the U.S. Trustee 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 shortfalls of the estimated $324 million at issue.

Certain issues remain unresolved including whether a chapter 11 debtor that paid excess fees to the U.S. Trustee during the relevant time period but failed to object will be found to have waived its right to recover despite the Supreme Court’s determination that the fee structure itself violates the Bankruptcy Clause of the Constitution.  Also, it is not clear who might be entitled to refunds of excess fees (e.g., creditors or the reorganized debtor) in cases where a plan of reorganization has been confirmed, thereby vesting all remaining assets in the reorganized debtor.  The vesting language of the plan will need to be examined to determine who is entitled to any excess fees.

Until there is a legislative solution, it will be interesting to see how courts in other circuits address the remedy for overpayment of U.S. Trustee fees in light of Siegel.