In earlier posts, the Red Zone has discussed the Supreme Court’s ruling in Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022), which held that increased U.S. Trustee quarterly fees for large Chapter 11 debtors between 2018 and 2020 under the Bankruptcy Judgeship Act of 2017 (the “2017 Act”) were unconstitutional because of disparate treatment of Chapter 11 debtors in Bankruptcy Administrator (“BA”) districts, and subsequent judicial decisions determining the appropriate remedy for debtors who overpaid those fees. The Second Circuit, Tenth Circuit, and Eleventh Circuit Courts of Appeals, along with the Eastern District of Virginia Bankruptcy Court, have all held that the government must refund fees that were overpaid based on the holding in Siegel.
The Ninth Circuit Court of Appeals has now joined every other court to consider the issue by issuing its opinion in USA Sales, Inc., v. Office of the United States Trustee, No. 21-55643 (9th Cir. Aug. 10, 2023). The facts in USA Sales are straightforward. The debtor, a tobacco distributor, filed for Chapter 11 bankruptcy in 2016. After implementation of the fee increase under the 2017 Act in January 2018, the debtor’s quarterly U.S. Trustee fees increased dramatically from around $13,000 to $87,000 per quarter. By the time the debtor’s case was dismissed in November 2019, the debtor had paid almost $600,000 more in fees than a similarly situated debtor would have paid in a BA district.
The debtor sued the government for a refund, arguing both that the 2017 Act was unconstitutional and that the 2017 Act did not apply in cases filed prior to its enactment. The district court agreed with both arguments and ordered a refund. The government appealed to the Ninth Circuit. Subsequently, the Supreme Court decided Siegel.
The Ninth Circuit disagreed with the district court that the 2017 Act was impermissibly retroactive as to the debtor, because it only applied to disbursements made after the Act took effect, leaving the sole question of the appropriate post-Siegel remedy. As in other cases, the government argued that the prospective relief provided by Congress under the Bankruptcy Administration Improvement Act of 2020 — which mandated uniformity in the application of quarterly fees across U.S. Trustee and BA districts — was an adequate "remedy," and alternatively that if retrospective relief was required, rather than require refunds to debtors who overpaid, increased fees should be collected from debtors in BA districts who “underpaid” under the 2017 Act.
The Ninth Circuit largely followed the Eleventh Circuit’s reasoning in Mosaic Mgmt. to reject both of the government’s arguments and order a refund. Retrospective relief was necessary because, following Supreme Court precedent in taxation cases, the debtor was entitled to a refund because it appropriately sought “post-deprivation” relief. The government’s proposed form of retrospective relief — "clawbacks" from BA-district debtors — was both outside of the court’s power to order and would violate the core principle of finality in bankruptcy cases.
It is becoming increasingly likely that refunds will be the universal remedy ordered in post-Siegel litigation over quarterly fees. We will continue to monitor and report on significant decisions regarding U.S. Trustee fees.