Three circuits have now held that chapter 11 debtors are entitled to refunds for having paid more in U.S. Trustee fees between 2018 and 2021 than debtors were assessed in the two states with Bankruptcy Administrators rather than U.S. Trustees.
The June 23 opinion from the Eleventh Circuit is significant because the government filed a petition for certiorari in the Supreme Court on the very same day, raising precisely the same issue. Based on Supreme Court precedent, the Eleventh Circuit opinion by Circuit Judge R. Lanier Anderson, III refutes the government’s arguments aimed at persuading the high court that debtors are not entitled to refunds.
Judge Anderson said that “the long line of similar state tax cases [decided in the Supreme Court] are closely analogous to the instant case and provide strong precedent supporting the refund remedy urged upon us by the Debtors.”
There being no split of circuits, the Eleventh Circuit’s decision and its rationale lower the odds of a grant of certiorari by the Supreme Court. A class action pending in the Court of Federal Claims in Washington, D.C., might mean a refund for debtors nationwide. See Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.).
Siegel and the Decisions on Remedy
The Supreme Court held last term 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. To read ABI’s report, click here.
Siegel left open the question of whether debtors are entitled to refunds. Id. at 1783. In August and November 2022, 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 WL 3354682 (10th Cir. Aug. 15, 2022), reinstating 15 F.4th 1011, 1025-26 (10th Cir. 2021); and Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 53 F.4th 15, 29 (2d Cir. 2022), amending and reinstating 998 F.3d 56, 69-70 (2d Cir. 2021). To read ABI’s reports, click here and here.
A chapter 11 debtor in Florida had confirmed a plan in 2017 and filed a motion in 2019 protesting the increase in fees that became effective in 2018, but not in the two states with Bankruptcy Administrators. On direct appeal, the Eleventh Circuit upheld the bankruptcy court and found no constitutional violation. In re Mosaic Mgmt. Grp. Inc., 22 F.4th 1291 (11th Cir. 2022), vacated sub nom. Bast Amron LLP v. United States Trustee Region 21, 142 S. Ct. 2862 (2022). To read ABI’s report on the first decision from the Eleventh Circuit, click here.
The Florida debtor filed a petition for certiorari in the Supreme Court, which the Court held in abeyance pending the outcome in Siegel. Days after the Siegel decision, the Supreme Court granted certiorari, vacated the circuit court’s judgment and remanded for consideration in light of Siegel. Bast Amron LLP v. U.S. Tr. Region 21, 142 S. Ct. 2862 (2022).
Refund Directed on Remand
On remand, Judge Anderson said the circuit was tasked with finding “the appropriate remedy for the constitutional violation the Supreme Court found in Siegel.” He said there were two options: prospective relief or retrospective relief.
Sought by the government, prospective relief could take two forms: (1) The first form, equalizing the fees between U.S. Trustee and Bankruptcy Administrator districts, had been accomplished in January 2021 when Congress mandated that the fees be the same going forward; (2) the second form of prospective relief would entail collecting higher fees from debtors in Bankruptcy Administrator districts.
Neither form of prospective relief would mean recovery by the debtors that paid higher fees.
To remedy the equal-protection problem, the debtor in the Eleventh Circuit wanted retrospective relief in the form of a refund of overpayments.
Selecting the proper relief, Judge Anderson said, “should be guided by Congressional intent.” In that regard, he cited “a long line of Supreme Court cases holding that a state’s unequal taxation of comparable and competing taxpayers violates the Equal Protection Clause, and holding that the taxpayer who was required to pay the higher, discriminatory tax is entitled to a refund.”
Judge Anderson “readily rejected” the government’s idea that the court should order debtors in Bankruptcy Administrator districts to pay higher fees. He said that neither those debtors nor the Bankruptcy Administrators were before the court, giving the court no jurisdiction.
Citing Reich v. Collins, 513 U.S. 106 (1994), and Newsweek Inc. v. Florida Department of Revenue, 522 U.S. 442 (1998), Judge Anderson addressed the government’s “primary argument” that Congress had already given prospective relief by equalizing the fees in early 2021. He said that the government’s idea “has been squarely rejected by the Supreme Court” in those two cases. He paraphrased them to mean that “due process would not permit the state to insist on the predeprivation remedy to the exclusion of the postdeprivation refund remedy unless the exclusivity of the predeprivation remedy was clear such that reasonable persons would not be misled.”
“In other words,” Judge Anderson said, “except in the unusual context of a clear, exclusive predeprivation remedy, the past inequality must be accounted for and the disfavored taxpayer is entitled to appropriate refunds.” He added that the case before him was in precisely the same posture as the taxpayers in Reich and Newsweek.
By requiring refunds, Judge Anderson said he was “following the ‘normal rule of retroactive application’ of Supreme Court decisions,” citing Harper v. Va. Dept. of Taxation, 509 U.S. 86, 97 (1993).
Judge Anderson ended his opinion by noting how he reached the same result as the Second and Tenth Circuits. Although those courts “provided no rationale at all,” he said, “our sister circuit courts probably were thinking along the lines of the analysis we set out in this opinion.”
Reversing and remanding, Judge Anderson held that “the appropriate remedy in this case for the constitutional violation identified in Siegel is the refunds that the Debtors in this case seek.”
The Concurrence
Circuit Judge Andrew L. Brasher wrote a concurring opinion. When the case first came to the Eleventh Circuit, he wrote a six-page concurrence in the judgment that read like a dissent.
Originally, Judge Brasher concurred in the result given his belief that the debtor was not entitled to the remedy it sought: a refund of the overpayment. In his view, the “proposed remedy contravenes the intent of Congress.” Mosaic, id., 22 F.4th at 1329.
When the case returned to the appeals court, Judge Brasher said that he had “change[d] my bottom-line conclusion.”
“In a case like this one,” Judge Brasher said, the “due process clause commands that the government provide ‘meaningful backward-looking relief,’” because the debtor had “challenged the imposition of the fee at the earliest opportunity in the very bankruptcy case in which the fee was imposed.”
Similarly, Judge Brasher said that the court could not order debtors in the two Bankruptcy Administrator states to pay higher fees. He said that they “have their own due process rights that prevent us from retroactively assessing higher fees in those cases,” because “too much time has passed to increase the fees consistent with due process.”
Judge Brasher “respectfully” concurred in the result.
Observation
Be it coincidence or not, the Eleventh Circuit filed its opinion just minutes before 5:00 p.m. on June 23, which was also the last day for the government to file a petition for certiorari in John Q. Hammons Fall. Indeed, the government had filed its petition earlier in the day. See Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 22-1238 (Sup. Ct.).
Had the appeals court filed its opinion even a few hours earlier, the government might have revised the certiorari opinion to include a rebuttal of the Eleventh Circuit. As it now stands, the government will be devoting the bulk of its reply brief to the Eleventh Circuit opinion.
On the petition for certiorari, there are two glimmers of hope for the government. First, the Second and Tenth Circuit opinions lacked astute analysis of remedy. Second, the concurrence by Judge Brasher was based on the fact that the debtor sought a refund in its own bankruptcy case.
Acadiana is the class action in the federal Court of Claims seeking a refund for all debtors who overpaid U.S. Trustee fees. The government could argue that the debtors are not entitled to a refund under Judge Brasher’s analysis because they did not challenge the higher fees in their own bankruptcies.
It comes down to this: Granting the Hammons Fall petition for certiorari is unlikely, since there is no circuit split. In the Acadiana class action, the government might have a better chance of convincing the Court of Claims or the Federal Circuit to deny refunds because they were not being sought by the debtors in their own bankruptcies.
Three circuits have now held that chapter 11 debtors are entitled to refunds for having paid more in U.S. Trustee fees between 2018 and 2021 than debtors were assessed in the two states with Bankruptcy Administrators rather than U.S. Trustees.
The June 23 opinion from the Eleventh Circuit is significant because the government filed a petition for certiorari in the Supreme Court on the very same day, raising precisely the same issue. Based on Supreme Court precedent, the Eleventh Circuit opinion by Circuit Judge R. Lanier Anderson, III refutes the government’s arguments aimed at persuading the high court that debtors are not entitled to refunds.
Judge Anderson said that “the long line of similar state tax cases [decided in the Supreme Court] are closely analogous to the instant case and provide strong precedent supporting the refund remedy urged upon us by the Debtors.”
There being no split of circuits, the Eleventh Circuit’s decision and its rationale lower the odds of a grant of certiorari by the Supreme Court. A class action pending in the Court of Federal Claims in Washington, D.C., might mean a refund for debtors nationwide.