January 9, 2024
A recent Law 360 story by Vince Sullivan, “Justices Examine Proposed Retroactive US Trustee Fee Fixes”, reports that the U.S. Supreme Court scrutinized competing proposals for fixing a bankruptcy fee structure that was applied unequally for several years to debtors in different jurisdictions, asking how refunds of overpaid U.S. Trustee's Office fees or clawbacks of underpaid fees could be applied. During oral arguments in Washington, D.C., justices focused on issues with the competing fixes proposed by the U.S. Trustee's Office and former debtor John Q. Hammons Hotels & Resorts, with some asking how it would be possible to claw back additional payments from debtors that paid lower fees for several years.
"This whole fight is about the clawback," Justice Sonia Sotomayor said when questioning the U.S. Trustee's Office counsel. "Do you get a pass on trying to get the money from people who benefited [from the disparate treatment], or can you keep the fees from the people who withheld it? That's the whole issue."
The application of the new fee structure led to disputes between the U.S. Trustee's Office and debtors in most of the country who paid the higher fees immediately, because debtors in North Carolina and Alabama don't utilize the trustee system and thus didn't pay the increased fees until a 2020 act of Congress brought the fee structure into uniformity nationwide, as required by the Constitution.
The U.S. Trustee's Office argued in its briefs that since that act of Congress brought the fee structure into uniformity, all that is needed for equality is to ensure the fees are equal going forward, regardless of whether a debtor's case is pending in a jurisdiction governed by the U.S. Trustee's Office or by a bankruptcy administrator. Failing that, the office argued, clawing back the difference in fees that would have been paid by debtors in the administrator districts is the way to go.
As this court has recognized time and again, the touchstone of a remedial inquiry is congressional intent," attorney Masha G. Hansford of the U.S. Solicitor General's Office, representing the U.S. Trustee's Office, said during the hearing. "Here, there's unusually strong evidence that Congress would choose to fix this constitutional violation by mandating uniformly higher fees." A 2017 law altered the U.S. Trustee's Office fee schedule in an attempt to bolster the account used to fund the trustee program, which is sustained mostly by fees paid by Chapter 11 debtors.
The increase initially applied to the 88 districts that employ the trustee system, which is funded by the U.S. Department of Justice primarily through the fees charged to Chapter 11 debtors. The hike was triggered in the first quarter of 2018 because the trustee fund balance dropped below the $200 million threshold established in the law. Bankruptcy administrator districts in North Carolina and Alabama are funded by the judiciary, so rules in place before the hike permitted — but did not require — the administrator districts to charge the same fees as trustee districts.
It wasn't until October 2018 that these six districts adopted the fee increase. Congress amended the governing statute in 2021 to require the same fee structure regardless of whether a debtor filed in a trustee or an administrator district. The trustee fees are charged based on the amount of disbursements made by a debtor to its creditors in a given quarter. Before the increase, a debtor's maximum fee bill could only be $30,000 per quarter, but the 2017 law raised that cap to $250,000 per quarter.
Alfred H. Siegel, the liquidating trustee of former electronics retailer Circuit City, challenged the increase all the way to the Supreme Court, successfully arguing the disparate treatment ran afoul of the constitutional requirement to enact bankruptcy laws uniformly. The justices, however, left it to the lower courts to determine the appropriate remedy for the constitutional violation.
During arguments, Justice Neil Gorsuch questioned the mechanics of ordering a clawback from about four dozen debtors in the administrator districts who paid lower fees than hundreds of debtors whose cases were pending in the trustee districts. "That's premised on the idea that a court can compel this clawback," Justice Gorsuch said. "Honestly, I haven't seen something like that before," he said.
Hansford said if the court rules in favor of the clawback remedy, then trustees could go back to the bankruptcy court and seek orders there that would essentially enable trustees to send debtors bills for the difference in fees. Daniel L. Geyser of Haynes & Boone LLP, representing Hammons, said a proposal for clawing back fees not already paid would be virtually impossible and would fly in the face of both Supreme Court precedent and the authority of Congress.
"It is stunning for the government to ask this court, without a hint of authority from Congress, to impose this kind of profound retroactive cost on dozens of bankruptcies and hundreds or thousands of stakeholders across two separate states," Geyser said. "That is a policy decision reserved for the political branches, and it is Congress' alone to make."
Justice Ketanji Brown Jackson asked whether Congress' subsequent action to bring all districts into uniformity by requiring the higher fees provided evidence of intent toward a remedy, and cut against the debtors seeking a refund.
Geyser said the 2020 amendment actually helps his case, because it sets out in the legislation itself that Congress believed the debtors in the administrator districts should have been paying the higher fees all along, but stopped short of requiring them to make retroactive payments to bring them in line. "You would expect, then, if Congress were fine with this retroactive implication, a retroactive clawback, the next sentence would be, 'And now they have to pay those fees,'" Geyser argued.
But no such remedy was suggested in the 2020 act, and Geyser said the U.S. Trustee Office's clawback proposal would run afoul of several provisions of the Bankruptcy Code, including protections for final and unappealable confirmation orders.