Joseph Parone
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff
In Office of the U.S. Trustee v. John Q. Hammons Fall 2006, LLC, the U.S. Supreme Court held that debtors seeking relief from overcharged fees from the 2017 bankruptcy fee statute—held unconstitutional in Siegel v. Fitzgerald [1]––were entitled to only prospective relief, not retrospective relief.[2] In other words, debtors who overpaid $326 million in U.S. Trustee fees would not be entitled to refunds.[3]
The federal bankruptcy system is broken down into two separate programs. The first is the U.S. Trustee Program, which is managed by the U.S. Department of Justice and holds 88 of the 94 federal bankruptcy districts.[4] The U.S. Trustee Program is funded by statutorily set fees paid by chapter 11 debtors on a quarterly basis into the United States Trustee System Fund (“UST Fund”).[5] The second is the Bankruptcy Administrator Program, which is managed by the Judicial Conference and holds the remaining six federal bankruptcy districts.[6] The Bankruptcy Administrator Program, unlike the U.S. Trustee Program, is Congressionally funded from the budget appropriation towards the Judiciary, with the remaining costs provided from debtor bankruptcy fees.[7] Despite these different structures, from 2001 to 2018, the associated fees of both programs were consistent.[8]
In 2017, Congress amended 28 U.S.C. § 1930(a)(7) (“2017 Amendment”) to increase debtor fees to offset the insufficient funding of the U.S. Trustee Program.[9] In January 2018, the U.S. Trustee Program applied the updated fee structure to all cases.[10] The Bankruptcy Administrator Program, on the other hand, did not adopt the updated fee structure until October 1, 2018, and only applied it to newly filed cases.[11] Prior to the Court’s decision in Siegel, Congress passed the Bankruptcy Administration Improvement Act of 2020 (“2021 Act”), which amended 28 U.S.C. § 1930(7) and required that the Judicial Conference impose fees equal to the U.S. Trustee Program.[12] In Siegel, the U.S. Supreme Court held that the 2017 Amendment was in violation of the uniformity requirement of the Bankruptcy Clause, and therefore unconstitutional.[13] This was because certain debtors were subject to higher fees depending on the district, creating an unequal burden between debtors.[14] However, the U.S. Supreme Court declined to decide on the issue of a remedy because it had not yet been raised during the lower court proceedings.[15]
In March 2020, 76 entities associated with John Q. Hammons Fall 2006 LLC (“Debtors”) moved for a refund of the $2.5 million excess fees paid under the unconstitutional fee statute.[16] The United States Bankruptcy Court for the District of Kansas denied the Debtors’ motion.[17] On appeal, the U.S. Court of Appeals for the Tenth Circuit reversed and found that the 2017 Amendment was unconstitutional because it violated the uniformity requirement of the Bankruptcy Clause.[18]
In a six-three vote, the U.S. Supreme Court held that remedies for the associated fees would be prospective, not retrospective.[19] Justice Jackson, writing for the majority, held that the Congressional intent of self-funded bankruptcy proceedings prevents retrospective relief (i.e. a refund), because that would require funding from taxpayers.[20] The Court found that the 2021 Act “evinced a clear desire to comply with the constitutional mandate of uniformity by requiring prospective parity, but it reasonably chose not to impose higher fees retrospectively in Bankruptcy Administrator districts.”[21] Further, the Court expressed concern that “the cost of the refund would greatly exceed the $200 million threshold Congress selected in 2017 to signal fiscal distress in the U.S. Trustee Program and trigger higher fees.”[22] Lastly, the Court characterized the fee disparity as “short lived and small,” and emphasized that the majority of debtors who would be eligible for a refund had already completed the bankruptcy process, and that some no longer exist.[23]
Justice Gorsuch, writing for the dissent, argued that the majority’s reliance on congressional intent was misguided, and that the Government’s failure to refund the overcharged fees was a violation of due process.[24] By denying debtors a refund, Justice Gorsuch stated that the Court was undermining a fundamental component of due process–the availability of remedy.[25] Justice Gorsuch additionally noted that the fiscal concerns associated with UST Fund refunds do not outweigh the availability of a remedy.[26]
This case demonstrates a clash between the interests of bankruptcy law and due process. The Court in John Q. Hammons Fall 2006, LLC illustrated a devotion to preserve the self-funded existence of the bankruptcy system, even when it is detrimental to fundamental due process concerns.
[1] See 596 U.S. 464, 481 (2022).
[2] See Office of the U.S. Trustee v. John Q. Hammons Fall 2006, LLC, 144 S.Ct. 1588, 1597 (2024).
[3] See id. at 1596–97 (“Respondents do not dispute that refunding all large Chapter 11 debtors . . . would cost approximately $326 million.”).
[4] See id. at 1592.
[5] See Siegel v. Fitzgerald, 596 U.S. 464, 469 (2022) (referencing 28 U.S.C. § 1930(a)) (“The fee varies according to the amount of funds paid out (‘disbursed’) from the bankruptcy estate to creditors, suppliers, and other parties during that quarter.”).
[6] See Office of the U.S Trustee, 144 S.Ct. at 1592.
[7] See id. at 1593 (citing § 1930(a)(7)).
[8] See id. (citing Siegel, 596 U.S. at 469–70 (2022) (From the adoption of both federal bankruptcy systems in 1986, Congress did not require that the Bankruptcy Administrator Program charge fees to debtors. However, after the Ninth Circuit declared the unequal fee structure unconstitutional, Congress enacted § 1930 which required the chapter 11 debtors to pay equal fees under both systems.).
[9] See Siegel, 596 U.S. at 470 (The condition was meant to be temporary but involved significant increases. If the UST Fund dropped to under $200 million, maximum quarterly fees were to be raised from $30,000 to $250,000).
[10] See id. at 470.
[11] See id. at 472.
[12] See Bankruptcy Administration Improvement Act of 2020, 134 Stat. 5088 (amending 28 U.S.C. 1930). Previously, the word “shall” in Sec. 1903(7)’s language read “may,” which afforded the Bankruptcy Administrator Program the opportunity to raise fees at the Judicial Conference’s own discretion. After this amendment, fees were uniform under both the U.S. Trustee Program and the Bankruptcy Administrator Program by April of 2021. See Office of the U.S. Trustee, 144 S.Ct. at 1594.
[13] See Siegel, 596 U.S. at 478 (holding that the 2017 amendment “non uniform fee increase violated the uniformity requirement”).
[14] See id. at 480 (“The Court holds only that the uniformity requirement of the Bankruptcy Clause prohibits Congress from arbitrarily burdening only one set of debtors with a more onerous funding mechanism than that which applies to debtors in other States.”).
[15] See id. at 481 (internal citations and quotations omitted) (“The court below, however, has not yet had an opportunity to address these issues or their relevancy to the proper remedy. . . this Court remands for the Fourth Circuit to consider these questions in the first instance.”).
[16] See Office of the U.S. Trustee v. John Q. Hammons Fall 2006, LLC, 144 S.Ct. 1588, 1603 (2024) (The Debtors filed for chapter 11 bankruptcy in the District of Kansas, which is a U.S. Trustee jurisdiction, in 2016. From the fee increase in 2017 to the statute being declared unconstitutional in 2020, the Hammons Debtors paid the later-declared excess fees to allow for the continuation of their chapter 11 proceedings).
[17] See In re John Q. Hammons Fall 2006, LLC, 618 B.R. 519, 526 (Bankr. D. Kan. 2020).
[18] See John Q. Hammons Fall 2006, LLC v. Office of the U.S. Trustee (In re John Q. Hammons Fall 2006, LLC), 15 F.4th 1011, 1025 (10th Cir. 2021) (holding that the 2017 Amendment was unconstitutional because “[t]he Bankruptcy Clause precludes increasing fees based just on the location of the bankruptcy court.”).
[19] See Office of the U.S Trustee, 144 S.Ct. at 1592.
[20] See id. at 1596 (“Congress would have wanted prospective parity, not a refund or retrospective raising of fees . . . . [t]his conclusion is clear from the intensity of Congress's commitment to raising fees in U. S. Trustee districts, the extreme disruption a refund would cause to the bankruptcy system, and Congress's own decision to remedy the wrong we face by imposing equal fees going forward.”).
[21] Id. at 1597.
[22] Id.
[23] See id. (“The Government estimates that 85% of the large Chapter 11 cases subject to higher fees in between January 2018 and April 2021 have closed, and some of those debtors have been liquidated or otherwise ceased to exist.”).
[24] See The Office of the U.S. Trustee, 144 S.Ct. at 1608 (Gorsuch, J., dissenting) (citing Newsweek, Inc. v. Florida Dept. of Revenue, 522 U.S. 442, 444–45 (1998)) (Justice Gorsuch alluded to the representation of refund and then refusal of U.S. Trustee debtors to “bait and switch” practices previously held by the Court in violation of due process. In those cases, the Court held that “if an individual ‘reasonable relie[s] on the apparent availability of a postpayment refund when paying’ a contested fee, the government may not later '‘declare, only after the disputed [fees] have been paid, that no such remedy exists.’”).
[25] See id. (“[W]here (as here), someone pays money—or has money withheld from him—because of invalid government action, the most appropriate remedy is monetary relief. Centuries of judicial practice confirm as much.”).
[26] See id. at 1611 (citing McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, Dept. of Business Regulation of Florida, et al., 496 U.S. 18, 51 n.35 (1990)) (“These concerns may be animated by prudent fiscal policy, but that is not how remedies work. . . . when a refund is ‘otherwise available’ as a matter of law, ‘the cost of [the] refund'’ cannot '‘justify a decision to withhold it.’”).
