Supreme Court Won’t Rule on Remedies for Overpayments and Violation of Rule 3002.1

In the term to begin this coming October, the Supreme Court will not be hearing cases raising two bankruptcy questions.

The Court will not decide (1) whether a refund is the proper remedy for a chapter 11 debtor who paid higher U.S. Trustee fees that were held unconstitutional by the Court on June 6, and (2) whether bankruptcy courts may impose contempt sanctions for violations of Bankruptcy Rule 3002.1, the rule that requires lenders to give notice within 180 days of fees or expenses being charged to a chapter 13 debtor.

John Q. Hammons Fall

Reversing the majority opinion from the Fourth Circuit, the Supreme Court ruled unanimously on June 6 that the increase in fees payable to the U.S. Trustee system in 2018 violated the uniformity aspect of the Bankruptcy Clause of the U.S. Constitution because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees. Siegel v. Fitzgerald, 21-441, 2022 BL 194063, 2022 US Lexis 2681 (Sup. Ct. June 6, 2022). To read ABI’s report, click here.

Although remedy had been a focus of questions from the justices during oral argument in Siegel, the Court pointedly remanded for the lower court to determine the proper remedy, because the Fourth Circuit had not been required to rule on remedy. The government has been contending in the lower courts and in the Supreme Court that chapter 11 debtors are not entitled to a refund of overpayments.

The certiorari petition in Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 21-1078 (Sup. Ct.), raised the remedy question that the Supreme Court ducked in Siegel.

The Tenth Circuit had ruled in John Q. Hammons Fall that the U.S. Trustee fee increase was unconstitutional and that a refund was the proper remedy. John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 15 F.4th 1011 (10th Cir. Oct. 5, 2021). To read ABI’s report on the circuit’s decision in John Q. Hammons Fall, click here.

In John Q. Hammons Fall, the Supreme Court could have denied certiorari, in which event the remedy of refund would have been binding precedent in the Tenth Circuit and influential elsewhere.

Instead, the Supreme Court granted certiorari in an order on June 13, vacated the judgment and “remanded to the United States Court of Appeals for the Tenth Circuit for further consideration in light of Siegel v. Fitzgerald, 596 U.S. ___ (2022).” For the Supreme Court’s docket in John Q. Hammons Fall, click here.

The Tenth Circuit will surely cite Siegel and affirm its ruling that the fee increase was unconstitutional. It is not certain, however, that the Tenth Circuit will reflexively uphold its prior decision on remand. To read the tea leaves, the judges on the Tenth Circuit will likely read the transcript of oral argument in Siegel, in hopes of divining how the Supreme Court might rule on remedy.

Even if the Tenth Circuit again upholds refund as the remedy, it’s unlikely that the Supreme Court will grant certiorari immediately to rule on remedy, in this writer’s view. The issue of remedy is not well developed among the circuits, and a class action now pending in the Federal Circuit raises the issue starkly.

The Federal Court of Claims dismissed a class action, believing (incorrectly, as it turns out) that the disparate fees did not violate the Bankruptcy Clause. Acadiana Management Group LLC v. U.S., 19-496, 151 Fed. Cl. 121 (Ct. Cl. Nov. 30, 2020). The debtor-plaintiff appealed and is asking the Federal Circuit to reinstate the complaint. Oral argument in the Federal Circuit was postponed pending the outcome in Siegel. Acadiana Management Group LLC v. U.S., 21-1941 (Fed. Cir.). For ABI’s report on Acadiana, click here.

The complaint in Acadiana will be reinstated, based on Siegel. Liability seems to be established by Siegel, but whether the Court of Claims certifies a class is another question. If a class is certified, the question of remedy will remain for the Court of Claims and the Federal Circuit to decide.

Rule 3002.1

Last year, the Second Circuit held in PHH Mortgage Corp. v. Sensenich (In re Gravel), 6 F.4th 503 (2d Cir. Aug. 2, 2021), that bankruptcy courts may not impose contempt sanctions for violating Bankruptcy Rule 3002.1. Rather, the majority ruled over a vigorous dissent that a debtor may only recover compensatory damages, which often will be nominal. To read ABI’s report on Gravel, click here.

One month later, a bankruptcy judge in Texas disagreed with the Second Circuit’s majority and held that a debtor can mount a claim for sanctions and punitive damages under Bankruptcy Rule 3002.1(i)(2) when a lender violates Rule 3002.1(b) and (c) by failing to give notice of changes in the payment, charges, fees and expenses claimed by a secured lender. Blanco v. Bayview Loan Servicing LLC (In re Blanco), 633 B.R. 714 (Bankr. S.D. Tex. Sept. 14, 2021). To read ABI’s report, click here.

The debtor filed a petition for certiorari in Gravel. Sensenich v. PHH Mortgage Corp., 21-1322 (Sup. Ct.). A group of law professors and retired bankruptcy judges, along with the National Association of Chapter 13 Trustees, filed amicus briefs urging the Court to grant certiorari and reverse the Second Circuit.

In an unsigned order on June 13, the Supreme Court denied the Sensenich certiorari petition. Supreme Court review may not occur until there is a circuit split on the precise issue under Rule 3002.1. Otherwise, the Supreme Court would be wading into the murky area regarding a bankrupt court’s inherent power and jurisdiction to impose punitive sanctions.

For the Supreme Court’s docket in Sensenich, click here.

The certiorari petitions were Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 21-1078 (Sup. Ct.); and Sensenich v. PHH Mortgage Corp., 21-1322 (Sup. Ct.).