The Fox Rothschild In Solvency blog previously covered the Supreme Court’s decision in Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022), in which the 2017 amendment to 28 U.S.C. § 1930(a)(6) increasing quarterly fees payable to the United States Trustee was deemed unconstitutional.
For background, 28 U.S.C. § 1930(a)(6) provides for payment of quarterly fees to the United States Trustee based on disbursements made to creditors during the quarter. The 2017 amendment increased the quarterly fees for disbursements of $1 million or more during any one quarter from a maximum of $30,000 to $250,000, “regardless of whether the debtor’s case was newly filed or already pending when the increase too effect.” The fees provide an important source of funding for the United States Trustee program.
The fee increase was implemented in 2017 in both pending and newly filed cases in the in the 88 of the 94 judicial districts of the United States that fall under the United States Trustee program (the “UST Program”), which is a division of the U.S. Department of Justice. The remaining six judicial districts, all located in Alabama and North Carolina, are overseen by the Bankruptcy Administrator Program (the “BA Program”), which is part of the judicial branch and is overseen by the Administrative Office of the United States Courts. Despite a standing order entered by the Judicial Conference in 2001 (the “2001 Standing Order”) providing that districts under the BA Program are to charge quarterly fees equal to those districts under the UST Program, the BA Program did not implement the fee increase until October 1, 2018, and it was applied only to cases filed after that date. Due to the inconsistent application of the fee increase between districts in the UST Program and districts in the BA Program, the Supreme Court determined in Siegel that the amendment to 28 U.S.C. § 1930(a)(6) violated the uniformity requirement of the Bankruptcy Clause of the Constitution, noting that “the uniformity requirement of the Bankruptcy Clause prohibits Congress from arbitrarily burdening only one set of debtors with a more onerous funding mechanism than that which applies to debtors in other states.” 142 S. Ct. at 1782-83. The Supreme Court, however, did not opine on a remedy to address the U.S. Trustee’s collection of unconstitutional fees, leaving it to lower courts to address.
Since Siegel, several courts, including two circuit courts of appeals[1] and the bankruptcy court in Siegel (“Circuit City”[2]), have found that the appropriate remedy is for the U.S. Trustee to refund the overpayments. A bankruptcy court in Delaware in the VG Liquidation, Inc. case, recently followed suit. See adv. pro. no. 22-50416 (JTD) (Bankr. D. Del. May 18, 2023) (the “Circuit City Opinion“).
In the VG Liquidation case, the liquidating trustee filed an adversary proceeding against the United States Trustee seeking a refund of at least $1,239,526.47 in fee overpayments. The U.S. Trustee moved to dismiss for failure to state a claim under Fed.R.Civ.P. 12(b)(6). The U.S. Trustee advanced various arguments that a refund was an inappropriate remedy or should otherwise be limited, all of which were rejected by Judge Dorsey of the bankruptcy court:
First, the U.S. Trustee argued that a refund is not available as a matter of law and that prospective relief is the appropriate remedy (i.e. that the excess fee will not be charged going forward). The court, however, disagreed. Citing Circuit City, the court agreed that “[p]rospective relief alone provides no relief. Prospective relief, by itself, would serve instead to cement the unconstitutional treatment.” Circuit City Opinion at 7. The court added that “[i]t is no remedy for this Trustee’s injury that future trustees will not be similarly harmed.” Id. In effect, fixing a violation going forward does not provide relief addressing the injury already suffered by the liquidating trust in the case. In addressing this point, the court also distinguished two Supreme Court decisions cited by the U.S. Trustee because those cases did not involve monetary injuries.[3] Id. at 8-9.
The U.S. Trustee next argued that if retrospective relief is required, it should be in the form of collecting additional fees from districts in the BA Program, rather than refunding overpayments in districts in the UST Program. The court, again citing to Circuit City, noted that it lacked jurisdiction to command districts in the BA Program to retroactively assess fees. In effect, the trustee in this case would be relying on the BA Program districts to take affirmative acts of imposing and collecting retroactive fees without any assurance of if and when such acts will be taken. Citing to Circuit City, “[t]he trustee should not remain injured simply because the Defendants may one day seek to force BA Districts to retroactively impose greater fees.” Id. at 10.
The court also found that in addition to the previously noted cases directing the U.S. Trustee to refund overpayments, there is Supreme Court precedent for ordering a refund as a remedy. In McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, 496 U.S. 18, 35 (1990), the Supreme Court ordered a refund of unconstitutional liquor excise fees. The U.S. Trustee attempted to distinguish the opinion, arguing that the liquidating trustee had not made the overpayments under duress (unlike the payments in McKesson). The court, however, disagreed, observing that the liquidating trustee had a fiduciary duty to act in the best interests of the trust, and thus could not simply refuse to pay the overpayment and challenge the constitutionality of the fees without risking harm to the trust, including potential dismissal or conversion of the case.
Lastly, the U.S. Trustee argued that if the liquidating trustee is entitled to a refund it should not include amounts paid during the first three quarters of 2018, because the BA Program was in violation of the 2011 Standing Order by not collecting equal fees during that time. The court, however, again citing to Circuit City, found that the issue was not what the BA Program did, but that “Congress passed a statute that allowed for non-uniform fees. That unconstitutional statute – not the actions of the Judicial Conference – is what the Supreme Court identified as the source of the constitutional injury … Any non-uniform fees paid as a result of that statute are a constitutional injury suffered by the Trustee. This is just as true for the overpayments in the first three quarters of 2018 as it is for the remainder of the overpayments.” Id. at 12.
While it was not clear in the immediate wake of Siegel how courts would address the unconstitutional overpayments to the U.S. Trustee program under 2017 amendment to 28 U.S.C. § 1930(a)(6), particularly given the U.S. Trustee’s programs reliance on the fees, a trend appears to be emerging among courts finding that refunding the overpayments it the appropriate remedy. As such, more actions by debtors and liquidating trusts to recover overpayments are likely to follow.
[1] See Clinton Nurseries, Inc. v. Harrington, 53 F.4th 15, 29 (2d Cir. 2022); John Q. Hammons Fall 2006, LLC v. Office of the U.S. Trustee, 15 F.4th 1011, 1026 (10th Cir. 2021), rev’d, 213 L. Ed. 1036, 142 S. Ct. 2810 (2022), reinstated, 2022 WL 3354682, at *1 (10th Cir. Aug. 15, 2022).
[2] See Siegel v. United States Tr. Program (In re Circuit City Stores, Inc.), 2022 WL 17722849 (Bankr. E.D. Va. Dec. 15, 2022).
[3] The cases cited by the U.S. Trustee are Sessions v. Morales-Santa, 582 U.S. 47 (2017) and Barr v. Am. Ass’n of Pol. Consultants, 140 S. Ct. 2335 (2020) (plurality opinion).