As previously discussed and anticipated in prior blog posts,[1] the United States Supreme Court’s decision in Siegel v. Fitzgerald, 596 U.S. 464, 142 S.Ct. 1770, 213 L.Ed.2d 39 (2022), which struck down as unconstitutional the United States Trustee System Fund (Pub. L. 115-72, Div. B, 131 Stat. 1229) (the “2017 Act”) on the basis that the disparate treatment between the fees charged under the U.S. Trustee System[2] and the fees charged in the six Bankruptcy Administrator Districts violated the uniformity requirement of the Bankruptcy Clause in Article I, § 7, cl. 4 of the United States Constitution, resulting in hundreds of millions of dollars in overpayments of U.S. Trustee quarterly fees made by chapter 11 debtors, left unresolved the appropriate remedies available to these debtors.

On June 14, 2024, in a much-anticipated decision, the Supreme Court, in a 6-3 majority opinion, put the issue to bed by holding that the Office of the United States Trustee (“UST”) was not required to refund overpayments of U.S. Trustee quarterly fees made by chapter 11 debtors under the 2017 Act. In Office of the United States Trustee v. John Q. Hammons Fall 2006, LLC, No. 22-1238 (June 14, 2024), the debtor sought a refund of approximately $2.5 million in overpayments made to the U.S. Trustee System throughout the duration of the bankruptcy case.  As the Court noted:

Having found a constitutional wrong, we then faced the question of how to remedy it. We acknowledged three options: (1) refund fees for those charged more in U.S. Trustee districts, (2) retroactively extract higher fees from those charged less in Bankruptcy Administrator districts, or (3) require only prospective parity. See Siegel v. Fitzgerald, 596 U.S. 464, [ ] 480. The final option, we noted, was already in effect: By the time Siegel reached our Court, Congress had replaced the permissive “may” in the fee statute with a mandatory “shall,” resulting in equal fees for U. S. Trustee and Bankruptcy Administrator districts as of April 2021. Id., at 471 (quoting Pub. L. 116–325, §3(d)(2), 134 Stat. 5088). But, because the remedial question had not been passed on below, we remanded for the Fourth Circuit to address it in the first instance. See Siegel, 596 U. S., at 481.

In coming to its decision that “retrospectively lowering fees for all relevant debtors” was not an appropriate remedy given nature of the Constitution violation (i.e., short-lived, small fee disparity between the U.S. Trustee program and the Bankruptcy Administrator program rather than high fees), the Supreme Court considered Congress’s “intensity of commitment” to the more broadly applicable rule (i.e., legislative intent), and the degree of potential disruption to the statutory scheme that would occur if the Court were to extend the exception.  The majority reasoned that the intentions of Congress were to impose equal fees in all districts and “Congress would have wanted prospective parity, not a refund or retrospective raising of fees.”  The Court concluded that “[t]he best evidence that Congress would not want such a remedy is that Congress itself chose not to pursue that course [when amending the fee statute in 2021]. “[R]etrospectively raising fees in Bankruptcy Administrator districts would do nothing to achieve Congress’s goal of keeping the U.S. Trustee program self-funding.”

Notably, the majority concluded that Congress designed the U.S. Trustee program to be “self-funded” and that there should be “no cost to the taxpayer.”  The majority also highlighted the disruption in having an exception to the rule and retroactively lowering the fees for applicable chapter 11 debtors. The U.S. Trustee estimated that if the Supreme Court were to conclude that the decision should be applied retroactively, it would have to pay more than $326 million in refunds to debtors in approximately 2,100 cases, which would further be complicated due to the fact numerous bankruptcy cases have closed and debtors have been liquidated so there is no meaningful path to equality.  Conversely, the dissent, instead of analyzing Congressional intent, focused on the remedy available to the debtors and reasoned that courts, for centuries, have held “the appropriate remedy for duties or taxes erroneously or illegally assessed is … restitution or compensation.”

Consistent with its earlier decision, on June 24, 2024, the Supreme Court remanded three cases to address U.S. Trustee fee discrepancy that was paid by chapter 11 debtors.  Namely, William K. Harrington v. Clinton Nurseries Inc. was remanded to the U.S. Court of Appeals for the Second Circuit; US Trustee Region 21 v. Bast Amron LLP to the U.S. Court of Appeals for the Eleventh Circuit; and US Trustee v. USA Sales Inc. to the U.S. Court of Appeals for the Ninth Circuit.

The Supreme Court’s decision brings finality to the saga created by Congress’s unforeseen consequences of passing unconstitutional legislation to bring more money into the U.S. Trustee program, resulting in a massive victory for the U.S. Trustee by saving the Government more than $326 million.  It is impossible to quantify or know the exact number of debtors who were prejudiced and possibly forced into liquidation due to deprivation of their ability to use funds that would have otherwise been available but for the increased fees under the now-unconstitutional 2017 Act.  Similarly, countless creditors are shut out as beneficiaries of refunds for overpayments made to the U.S. Trustee System under the 2017 Act. Conversely, had the Supreme Court determined that refunding overpayments was the appropriate remedy, the burden of paying $326 million would likely come with a fee increase in future bankruptcies and may have (although unlikely) fallen on the taxpayers, who according to Congress, should not have to bear this burden.  And as the Supreme Court noted, there were certainly complexities in providing refunds, particularly where countless bankruptcy cases had been closed and debtors had been liquidated.  Ultimately, the Supreme Court was tasked with an incredibly difficult decision, with no obvious remedy to correct Congress’s initial oversight in creating this unconstitutional fee scheme. 

[1] See Keith C. Owens, “The Circuit City Landmine (Siegel v. Fitzgerald): Supremes Declare Bankruptcy Fee Hike Under United States Trustee Program Unconstitutional –What Happens Next?” (Fox Rothschild, InSolvency Blog (June 9, 2022)), The Circuit City Landmine (Siegel v. Fitzgerald): Supremes Declare Bankruptcy Fee Hike Under United States Trustee Program Unconstitutional –What Happens Next? | In Solvency (foxrothschild.com); Keith C. Owens, “The Aftermath of Siegel v. Fitzgerald: The Tenth Circuit Orders United States Trustee Program to Refund Chapter 11 Debtors’ Overpayment of United States Trustee Fees” (Fox Rothschild, InSolvency Blog (Sept. 6, 2022)), The Aftermath of Siegel v. Fitzgerald: The Tenth Circuit Orders United States Trustee Program to Refund Chapter 11 Debtors’ Overpayment of United States Trustee Fees | In Solvency (foxrothschild.com); Keith C. Owens, “The Post-Siegel Fallout Continues: The Supreme Court Has Accepted Certiorari to Determine Whether a Refund of Overpayments Made by Chapter 11 Debtors in Accordance with the Unconstitutional Fee Hike Under the United States Trustee Program is an Appropriate Remedy” (Fox Rothschild, InSolvency Blog (Oct. 2, 2023)), The Post-Siegel Fallout Continues: The Supreme Court Has Accepted Certiorari to Determine Whether a Refund of Overpayments Made by Chapter 11 Debtors in Accordance with the Unconstitutional Fee Hike Under the United States Trustee Program is an Appropriate Remedy | In Solvency (foxrothschild.com).

[2] The 2017 Act increased quarterly fees for disbursements of $1 million or more during any one quarter from a maximum of $30,000 to $250,000, “regardless of whether the debtor’s case was newly filed or already pending when the increase too effect.”

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