You know the government’s going to lose when the Ninth Circuit asks in the first paragraph of an opinion, “can the government take the money and run?”
And so it was that the Ninth Circuit joined three other circuits in ruling that chapter 11 debtors are entitled to refunds for overpayments to the U.S. Trustee System for fees that were unconstitutional because they were not uniform throughout the U.S.
There being no circuit split, the Ninth Circuit’s August 10 opinion is further indication that the Supreme Court will not grant certiorari to decide whether refunds are the proper relief for the constitutional violation identified by the Court in 2022.
In Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022), the Court unanimously held 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 on Siegel, click here.
The Debtor’s Overpayment
Under the “old” fee schedule, a chapter 11 debtor in California had been paying $13,000 a quarter in fees to support the U.S. Trustee System. In 48 states, Congress raised the fees in January 2018, requiring the debtor to pay $87,000 a quarter, a “dramatically increased” amount, Ninth Circuit Judge John B. Owens said.
The increase came into effect in 48 states, but not in the two states with Bankruptcy Administrators. The fees finally rose in Bankruptcy Administrator districts in October 2018, but not in pending cases.
By the time the debtor’s chapter 11 case ended in structured dismissal, the debtor had paid almost $600,000 more than it would have paid were it in a Bankruptcy Administrator district, Judge Owens said in his August 10 opinion for the Ninth Circuit.
The debtor sued in district court for a refund, alleging that the increase was unconstitutional because the fees were not uniform. The district court sided with the debtor, ordering a refund while holding that the increase was unconstitutional and not applicable to pending cases. USA Sales Inc. v. Office of the U.S. Trustee, 532 F. Supp. 3d 921 (C.D. Cal. April 1, 2021). To read ABI’s report, click here.
The district court entered a stay pending appeal. While the appeal was pending, the Supreme Court handed down Siegel but explicitly left open the question of remedy.
The Ninth Circuit’s Opinion
Refund being the only issue on appeal, Judge Owens began his discussion of the merits by observing that “every court to address the proper remedy (including the district court here) has held that the government must refund the excess money it collected.”
Bucking the trend, the government was contending that prospective relief was sufficient, that is, it was enough to rule that fees must be identical in the future. Alternatively, the government wanted someone to collect the larger fees from debtors in the two states that had paid less.
Judge Owens quoted the Second Circuit’s decision requiring refunds by saying that “‘[prospective] relief alone provides no relief.’” Like the Eleventh Circuit, he required refunds by analogy to remedies for unconstitutionally discriminatory taxes. “Each of these cases,” he said, “held that the state owed the taxpayer retrospective relief even though it had already fixed the constitutional problem going forward.”
Judge Owens was equally “not persuaded” by the argument that relief should come in the form of requiring debtors in the two states to pay higher fees.
As a court of “limited jurisdiction,” Judge Owens said he had “no power to order districts in the Fourth and Eleventh Circuits to collect fees from debtors who may have closed their cases long ago.”
“In short,” Judge Owens said, “the [U.S. Trustee] cannot avoid providing refunds because the 2020 Act fixed the constitutional problem prospectively by raising fees in [Bankruptcy Administrator] districts.” He affirmed the district court and ordered a refund.
The Cert Petition and the Other Circuit Decisions on Refund
Hoping the Supreme Court would take up the question of remedy, the U.S. Solicitor General filed a petition for certiorari on June 23 in Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 22-1238 (Sup. Ct.). To read ABI’s report on the Tenth Circuit’s decision in 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) (10th Cir. Oct. 5, 2021), click here.
Like the Tenth Circuit, the Second Circuit ordered a refund in 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 report on Clinton Nurseries, click here.
Originally, the Eleventh Circuit found no constitutional violation. On remand after Siegel, the Eleventh Circuit required a refund. U.S. Trustee Region 21 v. Bast Amron LLP (In re Mosaic Management Inc.), 71 F.4th 1341 (11th Cir. June 23, 2023). To read ABI’s report, click here.
Debtors that didn’t sue for a refund won’t be left out, assuming the Supreme Court denies certiorari and the Federal Circuit doesn’t create a split. There is a class action pending in the Court of Federal Claims in Washington, D.C., seeking a refund for debtors nationwide. See Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.). Briefing on a motion for class certification will be completed this fall.
You know the government’s going to lose when the Ninth Circuit asks in the first paragraph of an opinion, “can the government take the money and run?”
And so it was that the Ninth Circuit joined three other circuits in ruling that chapter 11 debtors are entitled to refunds for overpayments to the U.S. Trustee System for fees that were unconstitutional because they were not uniform throughout the U.S.
There being no circuit split, the Ninth Circuit’s August 10 opinion is further indication that the Supreme Court will not grant certiorari to decide whether refunds are the proper relief for the constitutional violation identified by the Court in 2022.