Two circuits have now held that a chapter 11 debtor is entitled to a refund of overpayments of fees to the U.S. Trustee system in the wake of the Supreme Court’s decision last term in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022).
On November 10, the Second Circuit basically reissued the appeals court’s original decision from May 2021 by again holding that the chapter 11 debtor in the case on appeal is entitled to a refund from the U.S. Trustee.
In August, the Tenth Circuit took the same action by reinstating the appeals court’s original decision from October 2021 and remanding the case for “a refund of overpayment consistent with our original decision.” In 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), the Tenth Circuit had held that the government must pay a refund to the chapter 11 debtor based on what the debtor would have paid over the same time were the case in a Bankruptcy Administrator district. To read ABI’s report on the circuit’s original decision in John Q. Hammons Fall, click here.
The Circuit Split
In 2018, Congress raised the fees that chapter 11 debtors pay to the U.S. Trustee system. For almost two years, the increase did not come into effect in the two states that retained Bankruptcy Administrators and do not have U.S. Trustees. Lawsuits were filed by debtors who were paying more than similar debtors in the two states with Bankruptcy Administrators.
The result of the lawsuits was a circuit split about the constitutionality of the 2018 increase. Siegel resolved the split, but the Supreme Court did not decide whether the debtor was entitled to a refund. The government has consistently taken the position that prospective relief is enough. To read ABI’s report on Siegel, click here.
Before Siegel came down, the Second Circuit had ruled that the disparate fees violated the uniformity aspect of the Bankruptcy Clause of the Constitution. The appeals court directed the U.S. Trustee to make a refund. Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2d Cir. May 24, 2021). To read ABI’s report on the original Second Circuit decision, click here.
Of course, the government had filed a petition for certiorari in Clinton Nurseries. After Siegel came down, the Supreme Court granted certiorari on October 11, vacated the Second Circuit’s decision and remanded for reconsideration in light of Siegel. Remand and reconsideration rather than outright affirmance were proper because the Supreme Court had not ruled on remedy, but the Second Circuit had.
Following remand, the Second Circuit did not hold further argument, nor did it even call for further briefing on remedy. Rather, the appeals court said in its new opinion on November 10 that “the parties had an opportunity to brief that issue [remedy] when this appeal initially came before us, and we decided that question.”
The Second Circuit went on to say that there was “nothing in Siegel that calls into doubt our earlier holding, so we reaffirm that, to the extent that [the chapter 11 debtor] has already paid the unconstitutional fee increase, it is entitled to a refund of the amount in excess of the fees it would have paid in a [Bankruptcy Administrator] District during the same period.”
The Second Circuit was careful to say that “our ruling is limited to the particular debtors who brought this appeal.”
The Class Action
Bradley Drell, a foresightful lawyer from Louisiana, brought a class action in the Court of Federal Claims in Washington, D.C. See Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.). The suit is seeking a refund on behalf of all chapter 11 debtors around the country who paid the increase.
Originally, the Court of Claims sided with the government and dismissed the suit, believing there was no constitutional violation. Siegel came down while Mr. Drell’s appeal was pending in the Federal Circuit.
On September 16, the Federal Circuit vacated the lower court’s decision and remanded for further proceedings in light of Siegel.
At the end of September, Mr. Drell filed a motion for partial summary judgment, asking the Court of Claims to rule that the class members are entitled to refunds. The government filed a cross motion to dismiss.
The amount in controversy “ain’t hay,” as they say. According to Mr. Drell, the possible recovery for the class is $320 million.
Needless to say, the decisions by the Second and Tenth Circuit’s mandating refunds will be helpful for the class plaintiffs in Acadiana. Even if the Court of Claims decides that a refund is proper, there are other hurdles, such as class certification. And likely as not, the government will file a petition for certiorari if the Court of Claims and the Federal Circuit require refunds to the class.
Stay tuned!
Two circuits have now held that a chapter 11 debtor is entitled to a refund of overpayments of fees to the U.S. Trustee system in the wake of the Supreme Court’s decision last term in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022).
On November 10, the Second Circuit basically reissued the appeals court’s original decision from May 2021 by again holding that the chapter 11 debtor in the case on appeal is entitled to a refund from the U.S. Trustee.
In August, the Tenth Circuit took the same action by reinstating the appeals court’s original decision from October 2021 and remanding the case for “a refund of overpayment consistent with our original decision.” In 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), the Tenth Circuit had held that the government must pay a refund to the chapter 11 debtor based on what the debtor would have paid over the same time were the case in a Bankruptcy Administrator district.