Supreme Court Seems Disinclined to Pay Refunds for Overpayment of U.S. Trustee Fees

The Supreme Court heard oral argument on January 9 in Office of the U.S. Trustee v. John Q. Hammons Fall 2006 LLC, 22-1238 (Sup. Ct.), to decide whether chapter 11 debtors are entitled to refunds for overpayment of fees for the U.S. Trustee system that the Court unanimously found unconstitutional in Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022).

Several justices were quiescent at oral argument. Those who spoke seemed skeptical about the idea that the remedy for a due process violation requires refunds to those who paid too much. The theory for no retrospective remedy is this: Compelling the payment of higher fees from those who underpaid is largely impossible, and refunds won’t go to everyone who overpaid.

As Justice Ketanji Brown Jackson said late in the argument, “If it’s hard to do or impossible to do, then we can just go prospective,” by which she meant to say that payments going forward must be uniform throughout the country in both U.S. Trustee and Bankruptcy Administrator districts.

Justice Jackson was the most active questioner. Don’t be surprised if she’s the author of Hammons Fall.

Siegel

Siegel came to the Supreme Court because the circuits were split on whether the 2018 increase in payments 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. For the unanimous Court, Justice Sonia Sotomayor held that the lack of uniformity violated the Bankruptcy Clause of the Constitution. To read ABI’s report on Siegel, click here.

In Siegel, the Court explicitly left open the question of remedy. In lawsuits around the country, debtors who paid too much were asking for refunds. The government contended that prospective relief was sufficient. In other words, the government believes it is enough for the Court to have ruled that fees must be uniform throughout the country in the future.

Uniformly, the government lost. Four circuits required refunds for overpayments. Despite the lack of a circuit split, the Solicitor General filed a petition for certiorari on behalf of the government. On September 29, the Court granted the petition and agreed to hear the government’s appeal.

The outcome in Hammons Fall has significance beyond the handful of debtors that have sued for refunds. In a class action pending in the Court of Federal Claims in Washington, D.C., the plaintiff wants refunds for debtors nationwide who paid too much. See Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.).

The Government’s Argument

As petitioner, the government argued first via Assistant Solicitor General Marsha G. Hansford. She said that refunds would cost the government $326 million, even though those debtors paid “exactly what Congress intended.” Throughout, the government harped on the idea that Congress has always intended for the U.S. Trustee system to fund itself with assessments on chapter 11 debtors and without assistance from taxpayers.

Every justice who addressed the issue seemed to agree that Congress meant for the system to be self-funding.

If the due process violation requires a retrospective remedy, the government argued that “leveling up” was the proper remedy. In other words, the government said that the Court should order the 48 debtors in the two states to pay the higher fees amounting to $3.8 million. Once the government moves to collect from debtors in the two states, the Solicitor General said that the debtors in 48 states who paid too much “would be made entirely whole.”

Justice Sotomayor was skeptical. She said that the idea of a “clawback” from those who underpaid “doesn’t seem quite right.”

If retrospective relief is required, Justice Amy Coney Barrett said that the question is whether to require a “level up” or “level down.” In other words, should there be leveling down by paying refunds, or leveling up by asking for payments from debtors in the two states who paid too little?

Justice Barrett saw more practical problems with leveling down, because 2,100 debtors would be entitled to refunds, while leveling up would ask for payments from only 48 debtors. She said that “practical problems are actually much worse with a refund remedy.”

If leveling up were required, Justice Neil M. Gorsuch had difficulty envisioning the remedy. Would the Court order the Judicial Conference to pursue underpayments? However, he observed that the Judicial Conference was not a party to the case.

Furthermore, Justice Gorsuch said that leveling up would demand payments from some debtors whose cases are closed. “I just haven’t heard of anything like that before,” he said twice.

In response to questions by Justice Jackson, the government said that the preferred remedy is no remedy at all. In other words, the government believes that the Court rectified the constitutional violation by demanding that payments henceforth must be uniform in U.S. Trustee and Bankruptcy Administrator districts.

The Solicitor General said that Congress intended to collect an additional $330 million by raising the fees in 2018 and had succeeded in collecting $326 million. Ms. Hansford said that there were underpayments in only 2% of cases, representing a shortfall of just 1% in payments.

The government believes that a prospective-only remedy satisfies due process requirements because debtors at the time had a “pre-deprivation” remedy where they could have withheld payments, escrowed payments or sued the U.S. Trustee.

The Debtor’s Argument for a Refund

Daniel L. Geyser from the Dallas office of Haynes & Boone LLP took up the cudgels for the debtor seeking a refund. He contended that “prospective-only relief is insufficient to address a past monetary injury.” He said there was no pre-deprivation remedy that was both “clear and certain.”

Justice Clarence Thomas seemed skeptical about the idea that there was no pre-deprivation remedy. In the same vein, Justice Sotomayor said, “Nobody stopped you from getting prospective relief.”

Justice Jackson prevailed on the debtor to concede that Congress intended for all debtors to pay the higher fees. She “didn’t see anything in the legislative history” to suggest that Congress would want refunds.

Focusing on the idea that Congress wants the system to be self-funding, Justice Elena Kagan said there was a “pretty strong case” that the remedy should be collection from debtors who underpaid.

Among debtors who underpaid, Justice Sotomayor said that “10 big companies are still in bankruptcy” and that recoveries from them would cover 31% of all underpayments. On “bad debt,” she said, 31% would be a “great recovery.”

Justice Kavanaugh observed that “there’s not going to be perfection” because “the refunds will not get to everyone” and underpayments can’t be recovered from every debtor in the two states. He also said that requiring $326 million in refunds “would be inconsistent with the usual principle that bankruptcy pays for itself.”

To the same effect, Justice Kagan said, “Everything we know about Congress not wanting to impose bankruptcy costs on taxpayers suggests that if it’s at all possible, it should be done by collection.”

Near the end of the hour’s argument, Justice Jackson noted how both leveling up and leveling down appeared impossible. “If it’s hard to do or impossible to do, then we can just go prospective,” she said.

To read the transcript of oral argument, click here. To read the transcript, click here.

Observations

For chapter 11 debtors hoping for refunds, all is not lost. For the debtor, oral argument also didn’t go well in Siegel.

Arguably, ruling for the government would create a conflict with three or four Supreme Court precedents and upset the assumption that constitutional violations will be addressed with meaningful relief, not precatory proclamations alone.

If the Court decides in Hammons Fall that no monetary relief is required to remedy the constitutional violation, the door will open for violators in the future to contend that retrospective relief isn’t required when relief is difficult to fashion. Without assurance of monetary relief, plaintiffs will be disinclined to pursue constitutional violations, and the Constitution won’t be rigorously enforced.

One potentially significant fact was not raised at argument. In the Acadiana class action, the plaintiff is asking for payment from the federal Judgment Fund pursuant to 28 USC § 2517 and 31 USC § 1304, not from the resources of the U.S. Trustee system. If the Judgment Fund provides refunds, the U.S. Trustee system would not lose $326 million, alleviating concern about thrusting the cost of bankruptcy onto the taxpayer.

Furthermore, the U.S. Trustee did not cause the constitutional violation. The violation resulted from a faulty act of Congress, suggesting that the cost of relief should be imposed on the federal government generally.

The government should not be shielded from the consequences of its own misdeeds by hiding behind the idea that the U.S. Trustee system should pay refunds, when the U.S. Trustee system did not cause the problem in the first place.

For the Solicitor General, Marsha Hansford made the best argument this writer has heard in the Supreme Court. She answered difficult questions instantly, in complete sentences and complete paragraphs. It seemed as though she had anticipated and memorized answers to every question thrown her way.