We have previously discussed the growing list of judicial decisions addressing the appropriate remedy for overpayment of U.S. Trustee (“UST”) quarterly fees.  In U.S. Tr. Region 21 v. Bast Amron LLP (In re Mosaic Mgmt. Grp., Inc.), No. 20-12547, 2023 WL 4144557 (11th Cir. June 23, 2023), the Eleventh Circuit Court of Appeals joined the Second Circuit, Tenth Circuit, and Eastern District of Virginia Bankruptcy Court by ordering the government to refund quarterly fees that were deemed to be unconstitutional under the Supreme Court’s decision in Siegel v. Fitzgerald, 142 S.Ct. 1770 (2022).

A brief refresher is in order.  Congress established the United States Trustee Program (“USTP”), part of the Department of Justice, as a pilot program in 1978 to separate administrative functions, including appointment and oversight of bankruptcy trustees, from judicial functions in the bankruptcy system.  In 1986, Congress sought to expand the USTP nationwide; however, political pushback in Alabama and North Carolina ultimately led to a compromise dual system under which the USTP’s administrative functions are performed in the six districts in those two states by bankruptcy administrators (“BAs") employed by the federal judiciary. 

The USTP is funded through bankruptcy system user fees paid into the U.S. Trustee System Fund; quarterly fees paid by Chapter 11 debtors comprise the bulk of those fees.  In 2017, to help make up for a shortfall in the System Fund, Congress enacted a temporary, but significant increase in the fees paid by the largest Chapter 11 debtors.  But Congress did not initially make the fee increase mandatory in BA districts, and although debtors in BA districts also pay quarterly fees, and in spite of a Judicial Conference standing order mandating parity, the fee increase was not implemented in the BA districts until the third quarter of 2018, and only as to newly filed cases.  In USTP districts, the fee increase took effect in the first quarter of 2018 as to all pending and newly filed cases.  As a result, similarly situated debtors in BA districts overall paid lower quarterly fees than those paid by debtors in USTP districts, until Congress in 2020 enacted a “fix” to require identical fees across all districts. 

Litigation followed, and the Supreme Court eventually held that the fee increase violated the Constitution’s Bankruptcy Uniformity Clause, which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies” (emphasis added), because comparable debtors received arbitrarily disparate treatment based on geography. Siegel, 142 S. Ct. at 1780.  The Court declined to fashion a remedy, leaving that question for lower courts. Id. at 1783.

The Mosaic quarterly fee litigation started back in 2019.  After Bast Amron, the trustee for an investment trust established under the debtors’ confirmed chapter 11 plan (the “Investment Trustee”), found partial success in the bankruptcy court, on direct appeal the Eleventh Circuit held that the fee increase did not violate the Bankruptcy Uniformity Clause.  In re Mosaic Mgmt. Grp., Inc., 22 F. 4th 1291 (11th Cir. 2022). The Investment Trustee filed a petition for certiorari in the Supreme Court, which was pending when Siegel was decided, and the Eleventh Circuit’s judgment was summarily vacated and remanded for determination of the appropriate remedy. Bast Amron LLP v. U.S. Tr. Region 21, 142 S. Ct. 2862 (2022).

On remand, the Investment Trustee sought a refund of the differential between the quarterly fees it paid and those that a comparable debtor in a BA district would have paid over the same time period.  The UST argued (1) that Congress had already remedied the constitutional defect in the 2017 fee increase by, in 2020, mandating the fee increase in the BA districts, and (2) alternately, that an appropriate monetary remedy would be to retroactively collect the increased fees from debtors in the BA districts.

The Eleventh Circuit quickly rejected the UST’s alternate argument, because neither the BA-district debtors that would be subject to retroactive fee collections, nor the Judicial Conference that would have authority to order such “claw backs,” were before the court. Mosaic Mgmt. Grp., Inc., 2023 WL 4144557 at *4. Further, only Congress or the Judicial Conference would have the authority to order such retroactive payments. Id. Finally, it would be impracticable to implement that remedy retroactively across cases in which substantial distributions had already likely been made, or that were closed. Id.

As for the UST’s primary argument that the “prospective-only remedy” implemented by Congress in 2020 was adequate, the court found that Supreme Court precedent holding that taxpayers who relied on available “post deprivation” procedures to challenge taxes already paid and later held to be unconstitutional were entitled to refunds was controlling. Mosaic Mgmt. Grp., Inc., 2023 WL 4144557 at *5.  Judge Brasher wrote separately to concur in the remedy because, although applying the increase retroactively to debtors in BA districts would be preferable from an equal treatment standpoint, granting the Debtors a refund was necessary because the Debtors challenged the increased fee at the earliest possible opportunity and paid it only under protest, and because it would deprive BA-district debtors of their own due process rights to retroactively seek increased fees. Id. at 10.

The Eleventh Circuit’s decision joins two other circuit decisions and reflects that courts are coalescing around refunds as the appropriate remedy for Chapter 11 debtors that paid unconstitutionally increased quarterly fees between 2018 and 2020.  We will continue to monitor quarterly fee refund cases and report on these decisions.