Rochelle's Daily Wire

Differing with all four circuits that had held to the contrary, the Supreme Court ruled in a 6/3 decision on June 14 that chapter 11 debtors in 48 states who paid $326 million in unconstitutionally higher U.S. Trustee fees are not entitled to refunds.

The Supreme Court decided two years ago that the 2018 increase in U.S. Trustee fees paid by chapter 11 debtors was unconstitutional because it was not immediately applicable in the two states with Bankruptcy Administrators rather than U.S. Trustees. Siegel v. Fitzgerald, 142 S. Ct. 1770 (Sup. Ct. June 6, 2022). Siegel explicitly left open the question of whether debtors who had paid too much were entitled to refunds. To read ABI’s report, click here.

Justice Ketanji Brown Jackson wrote the opinion of the Court nixing the idea of refunds. The majority held that “prospective parity” was a sufficient remedy, because Congress had amended the statute in 2020 to ensure that fees would always be uniform in the future. Justice Neil M. Gorsuch penned a dissent joined by Justices Clarence Thomas and Amy Coney Barrett.

The Constitutional Violation in Siegel

The fees paid by chapter 11 debtors to the U.S. Trustee program increased in 2018, but the increase did not become effective for 10 months in the two states that have Bankruptcy Administrators rather than U.S. Trustees. In U.S. Trustee districts, the increase applied to pending cases, but the increase did not apply to pending cases in Bankruptcy Administrator districts. The circuits were split 2/2 on whether the increase violated the uniformity aspect of the Bankruptcy Clause of the U.S. Constitution.

Unanimously, the Supreme Court resolved the split in Siegel by finding a violation of the Bankruptcy Clause.

Before Siegel came to the Supreme Court, the Fourth Circuit had not reached the question of remedy because the appeals court had found no constitutional violation. Reversing and leaving open the question of remedy, the Court in Siegel remanded for the appeals court to consider the question of refunds.

Hammons Fall on Remand

Before Siegel came to the Supreme Court, the Tenth Circuit had ruled in Hammons Fall that the disparate fee increase was unconstitutional and called for a refund. Having lost in the circuit, the government had filed a petition for certiorari in Hammons Fall. One year ago, the Supreme Court granted the certiorari petition, vacated the judgment and “remanded for further consideration in light of Siegel.”

On remand in the Tenth Circuit, the government strenuously argued that the debtor was not entitled to a refund, because Congress had already supplied prospective relief by a technical amendment in 2020 that mandates fee uniformity going forward in U.S. Trustee and Bankruptcy Administrator districts.

Last August, the Tenth Circuit “reinstate[d] our original opinion,” which required the government to pay a refund based on what the debtor would have paid were it in a Bankruptcy Administrator district. The government filed another petition for certiorari, which the Supreme Court granted in late September. The Court heard oral argument on January 9. As we said in this space after argument, the justices “who spoke seemed skeptical about the idea that the remedy for a due process violation requires refunds to those who paid too much.”

‘Small’ Violations Don’t Merit a Refund

Justice Jackson carefully laid out the procedural history before turning to the merits.

“Across remedial contexts,” Justice Jackson cited the Court’s precedent to say that “‘the nature of the violation determines the scope of the remedy.’” Swann v. Charlotte-Mecklenburg Bd. of Ed., 402 U.S. 1, 16 (1971). Citing other precedent, she said that the Court tries to limit the solution to the problem when there is a constitutional flaw in a statute. Precedent therefore called for her to “bear down upon the particulars of the constitutional violation we identified in Siegel.”

Referring to the constitutional violation, Justice Jackson said that the flaw was in the lack of uniformity, not in higher fees. She then said that “the fee disparity at issue here was short lived” and “small.”

The disparity was “small,” Justice Jackson said, because lower fees were paid in only 2% of chapter 11 cases and that “98% of the relevant class of debtors still paid uniform fees.” She quickly drew the conclusion that “Congress likely would not have intended relief that is impractical or unworkable.” Instead, she said that “Congress would have wanted prospective parity, not a refund or retrospective raising of fees.”

Furthermore, Justice Jackson said that requiring refunds would cause “extreme disruption” and would “would significantly undermine Congress’s goal of keeping the U.S. Trustee Program self-funded.” She added that refunds would cost the government “approximately $326 million.” In short, refunds “would transform a program Congress designed to be self-funding into an enormous bill for taxpayers.”

Delving further into the facts, Justice Jackson cited the government for saying that 85% of the chapter 11 cases eligible for refunds had already been closed. Consequently, she said that the debtor offered “no meaningful path to reducing the small existing disparity through refunds.”

In sum, Justice Jackson said that “Congress would have wanted prospective parity, and that remedy is sufficient to address the small, short-lived disparity caused by the constitutional violation we identified in Siegel.”

Justice Jackson devoted the last four pages of her opinion to refuting the dissenters. Of perhaps principal significance, she answered the dissenters’ argument that refunds were required in view of the Court’s awards of refunds in tax cases. Analyzing the tax cases, she concluded that the debtor is “not entitled to relief under them.”

Justice Jackson reversed and remanded, holding that Congress’ requirement of uniform fees going forward “cures the constitutional violation, and due process does not require another result.”

The Dissent

Overall, Justice Gorsuch seemed concerned that the precedent being set by the bankruptcy opinion would deprive plaintiffs of remedies in other cases with constitutional violations. In the first paragraph of dissent, he said, “What’s a constitutional wrong worth these days? The Court’s answer today seems to be: not much.”

Seeing the majority as having departed from precedent, Justice Gorsuch said,

Never mind that a refund is the traditional remedy for unlawfully imposed fees . . . . As the majority sees it, supplying meaningful relief is simply not worth the effort. Respectfully, that alien approach to remedies has no place in our jurisprudence.

Failing to see the fee disparity as “small,” Justice Gorsuch noted that the debtor had paid $2.5 million in unconstitutionally excessive fees. He said that the Court’s “longstanding precedent should make short work of this case” and that “[t]raditional remedial principles” require monetary relief. For him, “the majority’s prospective remedy for a past injury is no remedy at all.” [Emphasis in original.]

Apart from traditional remedies given for constitutional violations, Justice Gorsuch said that the “this Court’s due process precedents would demand the same result.” He disputed the majority’s conclusion that “our due process precedents are limited to the tax context.”

Justice Gorsuch said that he “struggle[d] to understand why today the majority so readily dismisses any remedy in this case . . . . One possibility is that the majority views Bankruptcy Clause violations as less worthy of relief than other constitutional violations.”

The “other possibility,” Justice Gorsuch said, was the majority’s belief that “supplying relief isn’t worth the trouble because the constitutional violation at issue here was, as the majority puts it, “‘short-lived and small.’” How could it be “small,” he said, “when it cost [the debtor] $2.5 million and, as the majority itself emphasizes, cost others millions more?”

“Respectfully” dissenting, Justice Gorsuch ended his opinion by considering “what [the majority’s] kind of thinking could mean for those seeking retrospective relief for other consti­tutional violations.” He could imagine “today’s decision receiving a warm welcome from those who seek to engage in only a dash of discrimination or only a brief denial of some other constitutionally protected right.”

“The rest of us can only hope that the Court corrects its mistake before it metastasizes too far beyond the bankruptcy context,” Justice Gorsuch said in the last sentence of his dissent.

Observation

The opinion has implications for every debtor that was in chapter 11 when the U.S. Trustee fees increased. There is a class action pending in the Court of Federal Claims in Washington, D.C., aiming to recover refunds for debtors nationwide who paid too much. See Acadiana Management Group LLC v. U.S., 19-496 (Ct. Cl.). The plaintiff in the class action seems to be facing an uphill fight after the Supreme Court’s decision.

The plaintiff in Acadiana is not giving up, however. “We are accepting Justice Gorsuch’s invitation in footnotes 4 and 9 of his dissent to continue to litigate the class action,” Bradley Drell told ABI.

In footnote nine, Justice Gorsuch said, “Given the weight the majority places on [the debtor’s] inability to recover for all affected debtors, it’s far from clear what the impact of today’s decision is on [the Acadiana class] action.” Mr. Drell, from Gold, Weems, Bruser, Sues & Rundell in Alexandria, La., is counsel for the plaintiff in Acadiana.