Add the bankruptcy court in Delaware to the list of courts (including four circuit courts) holding 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.
The September 14 opinion by Bankruptcy Judge Mary F. Walrath is significant because she held that the claims for repayment were not time-barred.
We should know by early October whether the Supreme Court will review a decision by the Tenth Circuit requiring a refund.
The Question Left Open in Siegel
The debtor filed a chapter 11 petition in 2018 and confirmed a plan in early 2021. In late 2022, the liquidating trust created under the plan filed a complaint in bankruptcy court seeking a refund of about $1 million, which it claimed was an overpayment of fees for the U.S. Trustee System.
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 Court explicitly left open the question of remedy.
The trust and the government filed cross motions for summary judgment. Holding that the trust was entitled to a refund, Judge Walrath granted the trust’s motion and denied the government’s motion.
Judge Walrath is not alone. Aside from lower courts, the Ninth Circuit most recently called for a refund in USA Sales Inc. v. Office of the U.S. Trustee, 76 F.4th (9th Cir. Aug. 10, 2023). To read ABI’s report, click here. Similar decisions came from the Tenth Circuit 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. Oct. 5, 2021) [to read the report, click here]; the Second Circuit 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 the report click here]; and the Eleventh Circuit in 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 the report, click here].
Government’s Arguments Rejected Again
The government contended that prospective relief was an adequate remedy. Judge Walrath rejected that argument and followed the Eleventh Circuit, which, she said, was a “similar case.” She said that “the prospective application of equal fee requirements to the [Bankruptcy Administrator] Districts does not remedy the harm suffered by these estates which had to pay greater fees than similarly situated [Bankruptcy Administrator] District debtors between January 2018 and January 2021.”
Judge Walrath added that “[n]umerous other courts have addressed this same issue and so far have unanimously decided against the position of the UST ruling that a refund of excess fees is due to debtors in UST Districts.”
Like the Ninth and Eleventh Circuits, Judge Walrath nixed the idea of requiring debtors in Bankruptcy Administrator districts to pay increased fees retroactively. The bankruptcy court, she said, “does not have the jurisdiction or authority to provide that remedy.”
The government contended that there should be no remedy because the debtor had not protested payment of the increased fees. Judge Walrath said that the debtor could not refuse to pay “without risking conversion or dismissal of their cases.” In addition, she said that “the estates effectively had no pre-deprivation remedy for the assessment of the increased quarterly fees.”
Holding that the plan trustee was entitled to a refund, Judge Walrath said that “the only appropriate action the Debtors or Liquidation Trustee could have taken was to comply with the increased fees and seek a refund after the fact.”
Statute of Limitations
Among other claims, the trustee’s complaint had made a claim to avoid an unauthorized post-petition transfer under Section 549(d). Accordingly, the government argued that the claim was time-barred by the statute’s two-year statute of limitations.
Judge Walrath ruled that “any expiration of the statute of limitations under that section is not relevant” because “the Liquidation Trustee is not required to avail itself of section 549 to obtain that relief.”
Judge Walrath said that the trustee was entitled to judgment for “all the quarters in which fees paid by these estates exceeded the fees paid by similarly situated [Bankruptcy Administrator] District debtors.”
Judge Walrath directed the parties to submit a proposed judgment after reconciling exactly how much the trustee was entitled to receive in a refund. Although the trustee was claiming $971,000, the government said that the overpayment might be $250,000 more.
The judgment against the government, Judge Walrath said, would be payable only after her order becomes final and non-appealable.
The ‘Cert’ Petition
The government filed a petition for certiorari from the Tenth Circuit’s decision requiring a refund. Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 22-1238 (Sup. Ct.).
The last brief on the petition was filed in August, and the petition is scheduled for consideration by the justices at the so-called long conference on September 26. There being no disagreement among lower courts, much less a split of circuits, a grant of the petition seems unlikely. The Court could enter an order granting or denying the petition in early October. If the Court relists the petition for consideration at a later conference, the odds for a “grant” would increase.
Add the bankruptcy court in Delaware to the list of courts (including four circuit courts) holding 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.
The September 14 opinion by Bankruptcy Judge Mary F. Walrath is significant because she held that the claims for repayment were not time-barred.
We should know by early October whether the Supreme Court will review a decision by the Tenth Circuit requiring a refund.