Last term, the Supreme Court held in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022), that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee System was unconstitutional because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees.
The Supreme Court left open the question of whether debtors are entitled to refunds. Id. at 1783. To read ABI’s report on Siegel, click here. Now, three courts have held that chapter 11 debtors are entitled to refunds.
In August and November, the Tenth and Second Circuits summarily granted refunds to debtors who had challenged the increase. See John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 20-3203, 2022 BL 284318, 2022 US App Lexis 22859, 2022 WL 3354682 (10th Cir. Aug. 15, 2022); and Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 53 F.4th 15 (2d Cir. Nov. 10, 2021). To read ABI’s reports, click here and here.
After the reversal and remand from the Supreme Court in Siegel, the Fourth Circuit in turn remanded the case to Bankruptcy Judge Kevin R. Huennekens in Richmond, Va., to determine the proper remedy.
In the most comprehensive opinion so far on remedy, Judge Huennekens held that “[i]t is a core duty of the federal courts to provide remedies for legal injuries.” In an opinion on December 15, he ruled that the debtor is entitled to a refund, “the only relief [the court] has power to provide.”
The Procedural Posture
The debtor in Judge Huennekens’ court was Circuit City Stores, which had been in chapter 11 a decade before the increase in U.S. Trustee fees. Indeed, the debtor had confirmed a plan with a liquidating trust.
For the period in question after the increase, the liquidating trust paid $632,500 in fees. Had there been no increase, the fees during the period would have been only $56,400. After paying the increase, the liquidating trustee sued to recover the overpayment for being in violation of the uniformity aspect of the Bankruptcy Clause of the Constitution.
Bankruptcy Judge Huennekens held the increase to be unconstitutional. On a certified appeal, the Fourth Circuit reversed 2/1. Siegel, of course, reversed the Fourth Circuit, putting the question of remedy back in Judge Huennekens’ lap.
The Proper Remedy
Judge Huennekens stated the question: “[W]hat is the appropriate remedy to redress the Unconstitutional Overpayment?”
The government argued that prospective relief was sufficient because Congress soon had amended the statute to mandate the same higher fees in Bankruptcy Administrator districts. Judge Huennekens distinguished two Supreme Court opinions finding prospective relief to be sufficient for certain types of constitutional violations.
Judge Huennekens cited other Supreme Court authority for the idea that mandating equal treatment is the remedy when the plaintiff was seeking equal treatment.
Alternatively, the government argued that the courts should pursue debtors in the two Bankruptcy Administrator states to force them to pay the higher fees. According to Judge Huennekens, the government “concede[d] that any such collection attempts may be unsuccessful.”
Judge Huennekens observed that he had no power to compel payments by debtors in other states. Even if there were jurisdiction, he said that “impotently ordering collection in BA Districts is far too speculative and ineffective to accord proper relief to the [liquidating] Trustee.”
There was “ample precedent,” Judge Huennekens said, for ordering a refund; relief already had ordered by the Second and Tenth Circuits. He therefore granted “the only relief [the court] has the power to provide — a refund.”
Judge Huennekens ruled that the liquidating trustee was entitled to a refund for the first three quarters of 2018, when the fees were higher.
Section 549(a) Relief
Section 549(a) permits avoidance of unauthorized post-petition transfers. Citing the section, Judge Huennekens said that the “Bankruptcy Code also provides a means of recovery of the Unconstitutional Overpayment.”
Although the court had authorized the payment, Judge Huennekens said that he had not authorized the payment of unconstitutional fees. Likewise, the Bankruptcy Code does not authorize payment of unconstitutional fees.
Because the liquidating trustee transferred property during the case that was not authorized, Judge Huennekens said that the trustee could avoid the transfers and recover the overpayments.
The government has filed an appeal.
Good News for the Class Action Plaintiffs
The decision by Judge Huennekens is particularly good news for the class plaintiffs in the Court of Federal Claims in Washington, D.C., in Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.). The suit seeks 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 the class plaintiffs’ appeal was pending in the Federal Circuit. In September, the Federal Circuit vacated the lower court’s decision and remanded for further proceedings in light of Siegel.
By late September, the class plaintiffs had filed a motion for partial summary judgment, asking the Court of Claims to rule that class members are entitled to refunds. Like the defendants in the case before Judge Huennekens, the government filed a cross motion to dismiss, contending there is no relief available.
On the cross motions, briefing should be completed in the Court of Claims early in the first quarter of 2023.
Last term, the Supreme Court held in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022), that the 2018 increase in fees paid by chapter 11 debtors to the U.S. Trustee System was unconstitutional because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees.
The Supreme Court left open the question of whether debtors are entitled to refunds. Id. at 1783. To read ABI’s report on Siegel, click here. Now, three courts have held that chapter 11 debtors are entitled to refunds.
In August and November, the Tenth and Second Circuits summarily granted refunds to debtors who had challenged the increase. See John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 20-3203, 2022 BL 284318, 2022 US App Lexis 22859, 2022 WL 3354682 (10th Cir. Aug. 15, 2022); and Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 53 F.4th 15 (2d Cir. Nov. 10, 2021). To read ABI’s reports, click here and here.
After the reversal and remand from the Supreme Court in Siegel, the Fourth Circuit in turn remanded the case to Bankruptcy Judge Kevin R. Huennekens in Richmond, Va., to determine the proper remedy.
In the most comprehensive opinion so far on remedy, Judge Huennekens held that “[i]t is a core duty of the federal courts to provide remedies for legal injuries.” In an opinion on December 15, he ruled that the debtor is entitled to a refund, “the only relief [the court] has power to provide.”